For many, it’s time to consider cashing out in order to preserve capital. For others, the time to have gotten out was 2 years ago. Now flush with cash, these folks aren’t worried and are awaiting signs of a market bottom to jump back in...unless the US dollar collapses. For those who remain fully invested, what’s going to happen next? They’ve got losses but are hopeful for a return to economic expansion and growth. Yet, if the market collapses, all of that hope could translate into losses of greater magnitude.
No matter how anyone is “playing” the market’s volatility, taxpayers are in for a very unpleasant surprise, according to Casey Research, which has examined the California State Teachers’ Retirement System (CalSTRS)—the second-largest public pension fund in the U.S.—that manages ~$191B for 868k of California’s public teachers.
First: Imagine the loss CalSTRS must have sustained! Probably in the billions.
Second: To protect their assets, those officers want to invest that ~$20B in assets that “will perform well if the markets tumble.” That means cutting losses by “playing it safe”--investing in US treasuries--or, more likely, “hedging” to make $$$s whether the market is up or down on any given day. Yes, they’re going to dance with those much-maligned “hedge fund” operators.
However, with their backs up against a wall, CalSTRS officers confront a very serious problem, namely, they can’t possibly keep the promises they have made to the California legislature about the future performance (8%/year). Why? The answer isn’t market volatility...that’s what’s causing CalSTRS officers to move 12% of their $$$s out of the market. The truth is that states, like California, have underfunded those public pensions by 78% as legislators have robbed St. Peter (the state treasury) to pay St. Paul (all of those entitlement programs). The guarantor of those promises are each state’s taxpayers, estimated by State Budget Solutions to be $4.7T (or $15k for every US man, woman, and child).
The world’s largest asset manager, BlackRock, estimates that state and local pensions are likely to earn < 4%/year moving forward. Last year, the average public pension earned 3.4%. Bloomberg Business reports that in 2014 CalPERS earned only 2.4%. That’s 1/3rd less than its 7.5% target! Where’s all of those lost $$$s to come from?
Any guess concerning who will be stuck footing the bill? Yep, each state’s taxpayers. For a family of 4, how is that $60k bill going to factor into the household budget?
And that’s to say nothing about the nation's $18T debt.
Let the discussion begin…
To read the Casey Research report, click on the following link: