Additional References
EWFF, May 2005
With respect to pension funds, Jane Bryant Quinn reports: "Fresh Worries on Pensions" - Newsweek, May 23, 2005
After United Airlines "dumped its plan" in the largest pension default ever, "a collective shiver went down the backs of 36 million working stiffs," writes Quinn. A similar rush of pension fund anxiety hit in late 2002 when the first leg of the bear market was in force and the media suddenly realized that most firms' pension funds, as well as the Pension Benefit Guaranty Corp., the federal government's pension insurance fund, were underfunded. According to news accounts at the time, many retirees suddenly faced the realization that they were being "unretired." The countertrend rally may have helped re-retire a few, but the March-April drop in stocks has quickly triggered deeper worries about a "pension fund implosion." The Kansas City Star now reports, that the government's pension insurance plan is "going broke" and will need a savings and loan type bailout. Of course, it grossly underestimates the scope of the problem, saying, "The agency will run out of money in 2021." The reality is that the PBGC cannot meet obligations to its current pensioners, let alone those of workers from the newly bankrupt firms that are now falling into its paper-thin safety net. As the economy contracts, PBGC will be quickly overwhelmed.
EWFF, October 2004
The Pension Wind Reverses
A wave of concern is shaking other former bull market bastions as well. Remember back in the bull market when pension funds were considered to be overfunded and corporations were using the surplus stock gains to pump up their earnings? And whatever happened to the rising wall of baby boomer retirements that was supposed to drive stock prices higher until at least 2008? In late August, Alan Greenspan blew the whistle on the pension “miracle.” According to one account, the “most famous economist in the country put out a red flag” and declared that “increasingly stark choices” must be made to avoid a boomer-induced meltdown. “We must recalibrate our public programs.” The President and Treasury Secretary parroted Greenspan with compatible public statements.
The clips on page 6 show that Greenspan’s comments were just the leading edge of a wave of agitation over “pension woes” and revelations about the pension Benefit Guaranty Corp.’s wobbly finances. With the government’s pension insurance fund already running a deficit of $9.7 billion and the airline industry on the verge of raising its obligations by another $31 billion, the threat of “one or more generations retiring in poverty” looms. On September 14, the agency’s former economist called the fund “the ultimate Ponzi scheme” in The New York Times. His projections show that the pension Guaranty Corp. will go under even if the airlines don’t. This inevitability is explored in Chapter 11 of Conquer the Crash, which includes this excerpt:
"In in recent weeks, the government suspended state pension payments to 1.4 million retired state employees. It had no money to pay because times got tough, and it had never saved when times were good. The same thing could happen to many governments around the world, whether national, state or local, which pay billions of dollars annually in pensions. All of them are dependent either upon wealth transfer or upon managed funds that may or may not be properly invested. "
The potential for exponential growth in pension turmoil is clear from the travails of the City of
San Diego , where a $1 billion pension fund shortfall is finally being addressed. For 16 months, a whistle blower’s effort to expose the “ticking time bomb” was ignored. “When people finally started listening,
San Diego became engulfed in a scandal that now threatens to push the country’s seventh-largest city into bankruptcy.” The latest reports reveal that
San Diego is “far from unique.” In fact, it is widely considered to be a “model of fiscal probity.” As more cities which have strayed into exotic and illiquid venture capital and real estate partnerships measure their obligations against their investments, the damages will rise rapidly. Long-time readers should be safely protected already, but you may want to use the emerging crisis as a reminder to review retirement accounts as discussed in Chapter 13 of Conquer the Crash. Know everything there is to know about their structure, sponsors and penalties for liquidation. As the depression develops, be prepared to forego any tax advantages for the safety of a rock-solid annuity, government bills or bank account.
Third waves are “recognition” waves in which investors grasp the implications of the dominant trend. pension-dependent seniors are prime candidates to lead the charge out of stocks because they have more immediate needs and at least some experience with the ferocity of a bear market. The potential for several more years of bear market is no stretch to older investors because they experienced a bear market that lasted from 1966 to 1982. 81% of pension funds are already underfunded, so retirees will probably opt to beat the boomers to the punch and bail out. In an article headlined, “Older Investors Jittery as U.S. Markets Disappoint,” The New York Times reports that many “who thought that 2004 would repeat last year’s 26 percent rise in the S&P are beginning to face the fact that their expectations will not be met.” For the first time in years, there are reports that “some investors may finally be dumping the shares they have held so patiently.” In a rare moment of lucidity, a 70-year old
Florida retiree confessed to selling a stock: “I just held on too long. I had Lucent when it was up to $62 a share. I sold it at $3.” Self-preservation is a powerful, non-rational instinct. The wave count depicts a market that is a tightly wound. As a few more investors “face the fact that their expectations will not be met,” a chain reaction of limbic-inspired selling should ensue.
EWFF, December 2002
Bull Market Machinery Breaks Down
Merrill Lynch has warned that 98 percent of the 346 companies in the S&P 500 that offer defined-benefit pension plans will find their plans underfunded by the end of this year, pension funds have become the “hot-button” accounting issue that will be a drag on earnings for years (just as the EWFF suggested in November 1999), and the state of New Jersey is suing four public companies for more than $150 million in state pension system losses. The suit will take the finger pointing EWFF has been chronicling since the outset of the bear market to a whole new level, but we can also see that the wave of recrimination still has a way to go. No one has yet noticed that the amount New Jersey is suing for is just a small fraction of the $20 billion
New Jersey taxpayers have lost over the past three years. In the third quarter alone, the state lost $6 billion. By the end of the decline, the pension funds themselves will be under the gun for being in stocks in the first place, not to mention staying exposed to them as the market spiraled relentlessly lower.
The long-term repercussions of the bear market’s devastating impact on pensions are finally starting to register among pensioners. A front-page USA Today article says, “Un-retirement is under way, with many seniors putting together resumes for the first time in decades and heading back to work.” When counselors at a senior citizens’ expo set up a job placement booth, they were amazed at the crush of retirees that lined up for advice. Most are heading back because they got “blind sided” by the stock market declines.
In a related miscalculation, annuities with investment guarantees based on the performance of the stock market are turning out to be far less than the industry “saviors” they were claimed to be. “Given what we now see the market can do,” an actuary says, insurers who earlier were inexplicably blinded to 300 years of stock market history, are eliminating the product from their sales mix. CIGNA Corp. will take a loss of $720 million stemming from “its failure to take into account a steep stock market decline.” “CIGNA guaranteed benefits while expecting the stock market to continue to rise.”
The decline in stock-based annuities, pension fund stock market allocations and insurance company involvement in the stock market all show that long-term structural support is being torn away from the stock market. History shows that there is lots of room for further reductions. In 1950, the end of the last Supercycle-degree bear market in inflation-adjusted terms, notes Bob Djurdjevic of Annex Research (http://www.djurdjevic.com/index.htm), state and federal pension funds were not even allowed to play the stock market. Private pension funds accounted for only $1.1 billion, or 1% of the total value of equities. In the third quarter of 2001, pension funds accounted for $2.7 trillion, or 20% of equities (12% private, 8% government). When the bear market is over, pension fund involvement in the stock market will be closer to the levels of 1950 than 2001.
EWFF, October 2002
Pension
Fund
School Is In Session
Investors’ biggest problem is that they cannot accept losses. This is the first thing most traders must learn to do. In fact, a common event in the careers of many great traders is a big early mistake that wipes them out. Market Wizards, Jack Schwager’s book of interviews with top traders, shows that big, early failure is a rite of passage in the career of many successful traders. In just about every interview, champion traders tell about the catastrophes that helped launch them on their way. Schwager reports that one “remarkably successful professional” lost money for a decade before he hit his stride. In many cases, these lessons are preceded by quick gains that turn out to be a set up for the initial
Most pension fund investors are still working on that first trade. They went long on stocks a decade or more ago and then just kept adding to that initial position. As the boom intensified, and even now as it turns to bust, pension funds have upped the ante with riskier and riskier moves into junk bonds, foreign stocks and real estate. This reckless pyramiding of pension fund assets is one of the big ingredients in At the Crest of the Tidal Wave’s case for a Grand Supercycle degree peak. In addition to the lack of experience, At the Crest argues that the potential for disaster is signaled by the urgency behind the trade:
"Today’s pitifully uninformed investor, who insists he cannot abide anything less than a double-digit return on his investments, has proclaimed, ‘Give me yield…and give me death!’ For the promise of a high yield, either by coupons or by capital gain, he has bought stocks, which will fall 90%, he has bought municipal and junk bonds, whose issuers will default, and he has bought second and third world stocks and bonds, the perceived value of which hardly in fact exists. To some degree, these are acts of desperation over declining CD yields, weak household finances and fear of future costs of college and retirement. Acts of desperation by the unknowledgeable usually result in far greater catastrophes than they thought they were facing before they acted.”
Another theme that Schwager’s subjects continually return to is that trades motivated by anxiety or need are almost always doomed from the start. As super trader Paul Tudor Jones says, the most important thing for the average trader to focus on is protecting what they have rather than making money. Obviously, this is even more important when it comes to retirement assets. But the one-way rise of the 1990s has robbed many pension fund holders of any selling instincts. This is why the response to an average hit of 50% in so many pension fund portfolios has been so extremely passive. Suddenly, those who have held on for so long are realizing that they can no longer afford to retire. Every day brings another story about a huge reversal of retirement fortunes. Since the end of 2000, Delta Air Lines pension fund has swung from a surplus of $1.14 billion to a deficit of $2.36 billion. Since 1999, General Motors’ fund has gone from a $7 billion surplus to a $9 billion deficit. The growing list extends to municipalities and states, which are already reaching into taxpayers’ pockets to fund spiraling shortfalls. Some stories reveal that the losses will weigh on profits just as they drove them higher in the bull market. This flip-flop to an “enormous weight on growth” is exactly what EWFF said to expect when the surpluses were pumping up profits in October 1999. The September 20 issue of The Economist says, “Governments are not the only ones feeling the strain over the rising cost of pensions. Falling stock markets are increasing the pressure on companies’ pension schemes. Only a rebound in equity markets or an increase in the retirement age are likely to bring relief.”
The implausibility of relief is signaled by a shift in pension fund management that is supposed to be the “good news” for many corporations. Over the course of the last 20 years, companies have established 401(k) plans that place the money management responsibilities in the hands of retirees. In passing these duties on to their employees, many companies (ours excluded!) have continually counseled the importance of staying in the market for the long haul. Most pensioners have followed this advice. This comment from a production manager for Business Week magazine reveals the impotence pensioners feel in the face of falling prices: “I know things could change, but if they keep going this way, we’ll be eating cat food in our golden years.” Some will finally abandon the buy-and-hold ideology. But since they have no idea how to cut their losses efficiently, they will take their cues from one another and thus contribute mightily to the nightmare that they so dearly wish to avoid.
The Elliott Wave Theorist, June 2002
Scandals Shred Investors’ Faith,” declares a front-page headline. Begins the article, “A drumbeat of corporate misdeeds has helped crush stock prices and eviscerate pension plans.”
The Enron scandal did not “discourage investors” or “shred investors’ faith” one bit. Their level of faith rose during the scandals. It did not “crush stock prices and eviscerate pension plans,” either. Stock prices rose during the scandals. All the hand wringing and ink spilling on this presumption has been a waste of time and energy.
To make a subtler point, “corporate misdeeds” are not even to blame for the bear market that preceded the eruption of the Enron scandal. Corporate misdeeds were in full flower throughout the 1990s, yet no scandals erupted. In fact, those very misdeeds Ponzi-like accounting practices can be credited with raising stock prices and fattening pension plans to the same extent that they can be blamed for crushing and eviscerating them. The proper amount of credit for both trends in stock prices is zero. The credit goes to a change in mass psychology. Various accounting irregularities were in place for years, and they were reported from time to time, sometimes in major journals, but during the bull market, few cared. There was consistent misbehavior for a decade, but there was no scandal until well after the trend changed. While the trend was up, people ignored the phony accounting; when the trend turned down, they began to investigate it. When the trend was up, psychology supported the illusion of corporate health; when the trend turned down, psychology caused corporate health to deteriorate rapidly. Again, the formulation of causality is the opposite of the conventional belief: Corporate misdeeds did not crush stock prices; crushed stock prices finally drew back the curtain on corporate misdeeds.
Conquer the Crash, 2002
If you have money in an employee retirement plan, investigate the rules that pertain to cashing out and decide your next course of action.
EWFF, September 2000
The same practices that goosed the numbers on the way up will drag them down in a bear market. The latest revelations concern the “magic” of pension fund accounting. A quarter of the firms in the S&P applied gains from pension fund increases to their 1999 earnings. “If the stock market were to go down dramatically and the surpluses were to disappear, the impact on reported earnings would be very dramatic and very adverse.”
EWFF, October 1999
Bookkeeping breakthroughs are padding profits with gains from stocks in corporate Pension funds. In 1998, earnings from Pension surpluses inflated the earnings of the S&P 500 by 3%. Stock options are another huge expense that has not been deducted from earnings. The flip side of these papered-over cracks in the fundamentals is that in a bear market they will be an enormous weight on growth. Combined with the unprecedented global economic dependence on a rising stock market, the likelihood is that they will exert their drag with stunning speed. For most of the third quarter, for instance, the S&P 500 has been going down, which means all those Pension fund gains that were pumping up the bottom line will turn to losses on the September 30 quarterly statements. Despite all these shenanigans and all this risk, the only danger that economists see is that the economy might overheat! The only clear parallel to the dependence of today's prosperity upon the stock market is 1929.
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