Wednesday, March 15, 2017

Interest Rate Cycle Fueling Pension Crisis Across the Globe #InterestRateCycles #Free

Interest Rate Cycles
CalPERS has been considering a cut to return assumptions for years. The board is now considering lowering its return assumption to as low as 7%. The cost to employees, the real driver of rising social discontent, will be rising pension contributions, slow at first, but unexpectedly high as panic unfolds by 2018. The CalPERS board will next week consider a plan to reduce the return assumption to as low as 7 percent. The cost to employers would be phased in over five years, with state and local governments seeing their pension contributions rise by as much as $2 billion in the fifth year. For employees, the hit could be another percentage point or more in payroll deductions. Public pensions funds, light on private assets such as stocks and heavy in public sector debt, now falling in price, will be lucky to reach 5% next year. The drubbing in public sector debt, a trend the majority still doesn't recognize, will force stocks even higher as fund managers panic and chase stocks higher.

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Cause building, a period when US bonds outperform/compete with US stocks, has turned the majority into sovereign bond (debt) believers despite their long history of default (chart). The majority’s beliefs are supported by the political biases of rating agencies that continue grade government debt as less risky than their corporate counterparts and stocks. This means some of largest pension funds in the United States and Western world, following the group think of the majority, have transitioned from stocks to bonds as a means of reducing their volatility. This decision is pushing many of these funds towards insolvency that will fuel the next crisis as interest rates rise.

Please read  02/17 Interest Rate Cycles for further discussion

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