excellent article on the pension situation. i believe this will be an incredible disaster that will eventually take the SPX below 400. there is a lot of reflexivity: high pension-return assumptions keep pro forma earnings high, which keeps the market PE high. but as the market continues its breakdown, increasing amounts of earnings will go to pension funds, which will increase the PE even as the market falls. the falling market will further increase pension funding requirements and further lower PEs in a vicious circle.
hence the increasing reliance on pro forma accounting lies to keep the public on script in believing that stocks are for the long run.
in order to avoid dragging this out for many years, Congress should force the scumbag CEOs to mark pension returns to market and reduce return assumptions to 4-5% range (which is still too generous except for an all-bond pension portfolio, due to severely negative expected forward returns on US equities). this will lower the SPX to 350 where it belongs, but probably save trouble in the long run. for one thing, the pensions won't have to throw so much good money after bad, which they have done the past several years and will likely continue doing over the next decade unless the stock market is abruptly adjusted to a reasonable price level.
unfortunately, too many scumbags in high places would not benefit from such a sea change, so they will prefer temporary bandaid solutions until they are retired and off the hook. this means there will be many billions more wasted in the years ahead.
the other huge, fundamentally unsolvable problem with stock heavy pensions in general is that they will all become net sellers at the same time, meaning nobody will be around to buy their shares when they need to sell in 2010 through 2030. it is mathematically impossible for pensions in the aggregate to achieve the returns they forecast, since 90% of those returns must come not from dividends, but from selling stocks in the future at higher prices to future buyers. but demographics show the buyers will be overwhelmed by the sellers.
thus i expect the US market will be lower in real terms 30 years from now compared to today.
aside from those caveats, though, i'm really bullish on the market! |
