"Everything Is Overvalued": Public Pensions Face Dangerous Dilemma In 2018

As  we discussed  a few weeks ago, being a pension investor these days has absolutely nothing to do with "investing" in the traditional sense of the word and everything to do with gaming discount rates to make their insolvent ponzi schemes look more stable than they actually are.  Here was our recent take on CalPERS' decision to hike their equity allocation to 50%:

CalPERS' decision to hike their equity allocation had absolutely nothing to do with their opinion of relative value between assets classes and nothing to do with traditional valuation metrics that a rational investor might like to see before buying a stake in a business but rather had everything to do with gaming pension accounting rules to make their insolvent fund look a bit better.  You see, making the rational decision to lower their exposure to the massive equity bubble could have resulted in CalPERS having to also lower their discount rate for future liabilities...a move which would require more contributions from cities, towns, school districts, etc. and could bring the whole ponzi crashing down. 

The new allocation, which goes into effect July 1, 2018, supports CalPERS' 7% annualized assumed rate of return. The investment committee was considering four options, including one that lowered the rate of return to 6.5% by slashing equity exposure and another that increased it to 7.25% by increasing the exposure to almost 60% of the portfolio.

The lower the rate of rate means more contributions from cities, towns and school districts to CalPERS. Those governmental units are already facing large contribution increases — and have complained loudly at CalPERS meetings — because a decision by the $345.1 billion pension fund's board in December 2016 to lower the rate of return over three years to 7% from 7.5% by July, 1, 2019.

Overnight the Wall Street Journal poses an interesting question: what happens when real world fundamentals don't line up with pension boards' artificial goal seeking exercises on discount rates?  The answer, of course, is that pensions, and therefore taxpayers, are forced to take on more and more risk as they stretch for returns...

Retirement systems that manage money for firefighters, police officers, teachers and other public workers aren’t pulling back on costly bets at a time when markets are rising around the world.

Some public pension funds are adding to traditional allocations of stocks and bonds while both are expensive. 

Others are loading up on more private-equity or real-estate holdings that are less liquid and sometimes carry high fees.

...a phenomenon that has resulted in a massive reduction of safer bets on bonds as pensions have been forced to chase returns via investments in expensive private equity and real estate allocations.

Indeed, as one of the people interviewed by the WSJ puts it best, how much risk to take is a question facing all investors as they enter 2018. And the punchline" "Everything is overvalued," said Wilshire Consulting President Andrew Junkin, who advises public pension funds. "There’s no magic option out there."


As our readers are aware, this is hardly a new topic for us. As we pointed out a year ago in a post entitled "CalPERS Board Votes To Maintain Ponzi Scheme With Only 50bps Reduction Of Discount Rate," each year CalPERS has to weigh mathematical realities against the risk of disrupting the ponzi scheme and forcing several California cities to the brink of bankruptcy with lower discount rates...'mathematical realities' rarely win that fight.

But a CalPERS return reduction would just move the burden to other government units. Groups representing municipal governments in California warn that some cities could be forced to make layoffs and major cuts in city services as well as face the risk of bankruptcy if they have to absorb the decline through higher contributions to CalPERS.


“This is big for us,” Dane Hutchings, a lobbyist with the League of California Cities, said in an interview. “We've got cities out there with half their general fund obligated to pension liabilities. How do you run a city with half a budget?”


CalPERS documents show that some governmental units could see their contributions more than double if the rate of return was lowered to 6%. Mr. Hutchings said bankruptcies might occur if cities had a major hike without it being phased in over a period of years. CalPERS' annual report in September on funding levels and risks also warned of potential bankruptcies by governmental units if the rate of return was decreased.

Of course, the pension managers - unless they happen to be traders in the early 20s who have never encountered an even modest bear market or market correction - are quite aware of the underlying tension of allocating cash to stocks at all time highs:

Increasing its allocation to stocks is also risky. “This may not be the most opportune time to take on additional equity risk,” investment manager Dianne Sandoval said at a December board meeting.

Why whatever could she be referring to: the $18 trillion in central bank liquidity which this year will finally shrink for the first time ever, or the ominous up/downside equity investment calculus going forward.

Meanwhile, this is not just a U.S. phenomenon as the WSJ notes that a major Canadian pension fund is also planning a bigger bet on illiquid assets. The $202 billion Canadian pension fund Caisse de dépôt et placement du Québec plans to move money into investments such as real estate, private equity, infrastructure and corporate credit, said President and Chief Executive Officer Michael Sabia, of CDPQ. “Today, liquid assets—traditional government bonds and public equities—account for the majority of our investments,” Mr. Sabia said in a statement. “A few years down the road, this will no longer be the case.”

Of course, when going all-in on the various asset bubbles around the world inevitably fails, taxpayers, as always, will be forced to pick up the pieces: the question is whether or not the public pension ponzi will be too big to bail.


DEMIZEN Wed, 01/03/2018 - 00:00 Permalink

this has to trigger some main street inflation at some point, so play it right and execute accordingly. move capital to economies with conservative monetary policies and low emissions, buy metals, borrow cheap money.

MuffDiver69 Wed, 01/03/2018 - 00:18 Permalink


Laugh My Fucking Ass Off


“This is big for us,” Dane Hutchings, a lobbyist with the League of California Cities, said in an interview. “We've got cities out there with half their general fund obligated to pension liabilities. How do you run a city with half a budget?”


Drop-Hammer Wed, 01/03/2018 - 00:38 Permalink

So, are the hundreds of thousands/millions of Kalifornitard pension participants aware of this debacle?  If not, there are going to be a lot of disappointed Kalifornitards.

DrZipp Wed, 01/03/2018 - 01:23 Permalink

If it weren't for the criminal leeches running these municipalities they would already have declared bankruptcy and put the pensioners on an ice floe with perhaps the equivalent of social security or perhaps 2x that which would be more than fair for retiring between 50-55.

J Mahoney Wed, 01/03/2018 - 01:30 Permalink

Solution---Close out the SOB's. Why should government workers be given all this shit that we dont get (their fucking employers)....Keep police, fire, and military pensions in place as these folks cannot be AS effective when they get older. But the police and fire folks cannot create these millionaire plans like in Dallas

dot.dot J Mahoney Wed, 01/03/2018 - 09:25 Permalink

Why should a cop or firefighter get to stop working and collect a pension w/ all the healthcare benefits for another 30-40 yrs after working only 20-25 yrs on the job?  Do you think a concrete worker or a guy who installs gutters or roofing is as effective at 45 as he was at 25?  He doesn't get to sit on his ass for the rest of his life.  Why should cops be treated differently?  Their jobs are not all that physically demanding.  If so, why are half of them overweight slobs? If they can't hang then there is always the greeter job at Wal-mart.

In reply to by J Mahoney

pitz Wed, 01/03/2018 - 01:48 Permalink

I'm buying assets all day long that are significantly less than the cost of production, excellent cashflows, etc.  

The problem here is that a lot of them are in areas that pension funds won't touch because pension funds feel some sort of entitlement to great returns in bonds or other stuff that they perceive to be 'safe'.

Time for the pensioners to be given haircuts, the managers thrown to the wolves, and the whole idea of pensions to finally be relegated to the heap of Ponzi schemes.

Bemused Observer pitz Wed, 01/03/2018 - 12:07 Permalink

Out of curiosity, just what do you think should happen when workers are too old to continue in their jobs? I do understand the anger at the big pensions, and those should be scaled and clawed back. But the majority of pensioners are NOT collecting anywhere near those sums, and often have to take those WalMart greeter jobs just to keep up.

But with no pensions, and reduced SS and Medicare, what realistically should be done here? They have to eat, have a roof, medical care...how do we get that done without the 'entitlements'?

In reply to by pitz

Easyp Wed, 01/03/2018 - 02:48 Permalink

Buy a silver mining company, mint half and one ounce coins and pay the pensioners with your own currency.  Sell a percentage to cover the wages of the miners.

johnnyyuma Wed, 01/03/2018 - 06:49 Permalink

Seems like I read articles once a month with this same headline. I want to read the story line with hundreds of fat, whining, woebegone 42 year old retired municipal firepeople despair of their gravy train cut of 60%. Until then it's just uninformative click bait.

Dangerclose Wed, 01/03/2018 - 06:59 Permalink

This is the colossal demographic shift we have been warned about for over 20 years. The imbalance of workers supporting the retired. What did we do? The selfish thing, of course! We had less kids and released the "stay at home person" out into the labor force for that extra pay check. This only made the problem worse for all of society. We were brainwashed into believing that having more than 2 kids was a drain on the earth and we should be ashamed. Now we have to import people to work and these families have on average 5 children. This has the same parallels as the fall of the Roman Empire. Read about it.

Bemused Observer Dangerclose Wed, 01/03/2018 - 12:12 Permalink

Did they tell you that the demographic shift was self-limiting? Because it is...all those Boomers now swelling the ranks will DIE OFF sooner rather than later, and because of the way these things go down, they will soon start dying off in bigger and bigger chunks, until you are left with a few 'immortals' who will cling another couple of years, then they will be gone.

So, you just have to deal with this current boom, which will NOT go on forever. They are already on the way out, just be patient.

In reply to by Dangerclose