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Forbidden Fruit and a Pension Problem
Bonner Private Research founder Bill Bonner takes a look at the 'original sin' behind today's stock prices, and looks ahead at where we're headed next.
Bill Bonner, reckoning today from Baltimore, Maryland...
Our hoary president was in the news yesterday. CBSNews:
Biden promotes plan to protect millions of workers' pensions
WASHINGTON — President Joe Biden on Wednesday traveled to Ohio to highlight his administration’s work to prevent cuts to millions of workers’ pensions as his approval rating continues to sag ahead of the midterm elections.
Biden’s visit was tied to the launch of a program launch of a program created under the American Rescue Plan that provides assistance to struggling multi-company pension plans, ensuring that as many as 3 million workers and retirees will receive their full benefits.
This morning, the Wall Street Journal adds that pension funds will be able to use up to a third of the $90 billion in free money to gamble in the stock market.
Republicans allegedly maligned these pension bailouts as ‘rat holes.’ Of course, they were right. But the rats vote, and Joe will take votes from wherever he can get them.
And here’s an earlier WSJ note showing us what a big hole the rats dug for themselves. In Pasadena, California…
The local police and fire pension plan has been closed for nearly 50 years. Pension recipients have dwindled to fewer than 180. But the city still owes about $135 million in bond debt on the plan. Payments on it are expected to be about $6 million in 2022.
Local governments made pension commitments that they couldn’t afford. Employees must have known it. So did fund managers. But such was the connivance between them that neither wanted to ask questions. They hoped for the best… and waited for the bailout.
Our pen pal, MN Gordon, adds this:
According to a Municipal Market Analytics analysis of Bloomberg data, more than 100 city, county, state, and other governments borrowed for their pension funds last year. This is twice the highest number that did so in any prior year.
Standing behind these pension funds are state and local taxpayers – that’s you, acting as the ATM. Moreover, when the investment returns of public pension funds fall short, governments are primarily responsible for filling the void. This means cutting other spending and services or increasing taxes.
Behind the local pensions stand the local governments. And behind the local governments stand the state governments. And behind them all stands the US federal government. And the US government is us.
So, where do the citizens of Dubuque get the money to pay the pensions of garbage collectors in Baton Rouge? The question is rarely asked, because the money was… until recently… almost free and unlimited. Governments could borrow… and then rollover their debt at an even lower rate.
But now, bonds are falling, consumer prices are rising, and the question marks are coming out. And we have an answer that will delight the wokesters. They won’t have to worry about defunding the police… or the trash collectors. All current services will be defunded in order to fund past ones.
And by the way, that is the way of all debt. The money must be taken from the future to make good on yesterday’s promises. Or, the promises must be broken.
We will not dwell on the coming disaster in the pension world. It is the debt disaster in the larger world that interests us.
We have the worst inflation in 41 years.
The worst stock market in 52 years.
The worst bond market in 224 years.
The worst consumer sentiment… and the worst performance for a balanced 60-40 portfolio… since record keeping began.
So what gives?
We’re glad you asked. And hope you don’t expect a short answer.
A full accounting of ‘what is going on’ would take more time and space than we have available. You can go as deep as you care to – all the way to the Big Bang, if you want. After all, had not Adam gotten together with Eve, there would be no Jerome Powell today. And had not the naked lady eaten the forbidden fruit – thus bringing evil into the world – there would be no US Federal Reserve.
But we will spare you the Original Sin interpretation and just give you the Dummies Guide version. And in the spirit of ‘diversity, access and inclusion,’ we will begin at the ‘functioning moron’ level and head down on the freight elevator from there.
Here at Bonner Private Research, we usually stop at the ‘smoked-too-much-weed-in-college’ explanation; it’s about all we can handle. Exceptionally, we will keep going down… examining the sedimentary layers as we go… and let you decide where to get off.
What’s going on? The simplest answer is: it’s a stock market selloff.
Stocks go up. Then they go down. They went up, with brief interruptions, for 39 years… from August 1982 to November 2021. Since then, the Dow has lost about 5,000 points. If recent history is anything to go on, it will lose another 7,000 points before it hits bottom.
We doubt that recent history will do us much good, however. Something very important has changed. Inflation; we haven’t seen so much of it since Rod Stewart was singing, “Da Ya Think I’m Sexy.” So, we will go down another level and take a look.
Bonds go up and down too – typically in very long cycles. The 10-year T-bond yield, the basic brick of the entire capital structure, hit a low in August 2020. Before that, the previous low came around the time we were born – in the late 1940s. Bottom to bottom took more than seven decades.
So, it’s a big deal when these things turn around. And that’s what appears to be happening now. After 42 years of rising prices, bonds just suffered their worst loss since George Washington was President.
But what does that mean? Why is it so important? Tomorrow, we head down further…closer to bedrock…to see if we can figure it out.