Sunday, January 7, 2018

Handwriting on the Wall

 One of the delights of my work in the capital markets is the tireless (and often, thankless) effort to educate investors on the dynamics of capital markets.  Behind this effort is a long-standing commitment to be part of a solution to the opacity that has been profligate since the birth of the industrial rent extracting economy dominance in the late 18th century.  In the dominant socioeconomic model, “understanding” money and markets is too elusive for the average citizen who is coerced and seduced into trading their time for money and surrogating their later (“non-productive”) years to the professional management of investments in the form of pensions, life-insurance and other annuities. 

I recently received an e-mail from a reader of my blog who offered a “gotcha” moment critique of a post I wrote in December 2015 in which I stated:

And the deeper reality remains that our economic illusion of unfunded pensions – that ominous Depression-level event in 2017 – that will destroy nearly 23% of the discretionary spending of American seniors in 5-6 fiscal quarters poses a far greater threat to our actual living than does the U.S. and Chinese reckless fossil fuel emissions.

The reader astutely pointed out that 2017 ended the year with the markets soaring.  Therefore, the thought was, my ‘prediction’ must be off.  And, if Donald Trump and the Republican Congress have their way, this reader – like hundreds of millions of others – will take the bait and fall for the illusion that my December 2015 post was wrong and the headlines are right.

Unfortunately, the observation (not prediction) I made in 2015 played itself out.  And we’re now living in the cartoon reality when Wile E Coyote runs off the cliff onto the air and keeps running… until he looks down!  Throughout 2017, the public was informed that the unrecoverable cliff edge had been passed.  The Milliman 2017 Corporate Pension FundingStudy  showed that heading into 2017, corporate pensions were operating at a nearly 20% shortfall of their terminal obligations.  While the stock market surge in 2017 was an undeniable financial asset gain in 2017, the tiny problem was that pension allocations to equities was around 1/3 of portfolios while fixed income (highly correlated to rates set by Central Banks) was over 44%.  So did the economy improve?  No.  Did the market gains offset the Central Bank rate suppression?  No.  And are pension managers desperately aware of what their members don’t know?  Hell yes!  What’s the evidence?  Well, going into 2017, pension risk transfers (think the CDS products that tanked the banking sector in 2007-8) was at an all-time high.

Since 2002, pensions have been operating at a funding deficit with the exception of 2007.  Combined with the impact of interest rate suppression, this puts investors (that’s right, you the reader) in a position where you don’t actually have what you expect you have. 

“But Dave,” you say, “the average consumer didn’t spend 23% less in 2017.”

Not so fast.  According to the most recent Federal Reserve Consumer Credit data (the G.19 Report published on December 7,2017), since 2012, we’ve added nearly $1 trillion in revolving consumer credit to our private consumption behaviors.  Yes, we’re spending a lot but we’re not paying for the things we’re buying with cash.  And most alarming, the biggest spender is not the individual consumer but the Federal Government with an outstanding consumer credit exposure of $1.14 trillion (nearly twice the levels seen in 2012).  When you add the credit spending to the investment picture you find out that the reason why my reader puzzled over my ‘error in prediction’ is because there’s a frenzy of tricks that are kicking the metaphoric can down the road. 

And here’s a note.  I don’t predict things.  In my funds, in my credit underwriting, and in my other activities – mine is not the business of prediction.  What I do is look at the facts that are public but not generally known or discussed.  I figure that if there appears to be a cover-up, there probably is.  And rather than falling for the convenient headline, I look.  The ease with which I (and others) could exploit ignorance arbitrage is self-evident.  But instead, I continue to attempt to point out the writing that’s on the wall.  And for those of you who don’t know the derivation of the metaphor from Daniel 5: 24-28, the conclusion in the metaphor matches the present financial situation.  Days are numbered and the kingdom is already divided.


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Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave