While it won't say much new to those "stupid enough" to exist in the intersection of the "Retired" and "Alive" Venn circles under the Bernanke central planning regime, we suggest any pensioners who hope to see their life savings generate some...any... return (on capital, or of capital) in their lifetime, to simply skip this article and read some of our cheerier fare. So here is the punchline for pension fund managers which now predict an utterly insane 11% equity return which is the only thing that would make their Pension Plans whole: "In the early nineties, plan sponsors, if biased in their forecast, were generally biased toward conservatism. From 1997 through 2007, expectations, although a bit rosy at times, were largely within the realm of reasonableness. In our view, a long-run equity risk premium of 11% is pure jibber-jabber. It is wishful thinking. I dare not predict the level of the S&P 500 ten years out, but an ERP this high suggests the S&P would have to reach unprecedented levels. If this is what plan sponsors are counting on, I, like Clubber Lang, predict Pain." And "Hope is neither a training plan nor an investment strategy." Uh, wrong. Have you seen the EURUSD these days?
- Recent Federal Reserve activity has pushed down the long end of the yield curve, spiking the present value of plan liabilities and widening the funding chasm.
- The pain of the pension community shows up most obviously in funded status estimates.
- High and increasing levels of implied equity risk premium in pension plans suggest sponsors’ expectations are increasingly optimistic about future contributions from risk assets.
The Rocky series is a modern update of the familiar Horatio Alger tale of the underdog triumphing over adversity. Part of what made Rocky Oscar-worthy was that Rocky ultimately does not win. Of course this sets the stage for Rocky II, where the hero triumphs over his opponent, adversity and his own foibles to win the championship. Rocky III brought us a champ who had become complacent, overindulgent, and a bit lazy, and who is savagely beaten down by a new, hungrier challenger, Clubber Lang.
There was perhaps no better villain in the eighties than Mr. T’s chiseled, mohawked, snarling Clubber Lang, and few better in movie history. Clubber Lang launched Mr. T as a cultural icon and there are relatively few so distinctly of that era who have endured so long and are still so recognizable. In October 2010, Mr. T made a memorable appearance on Bloomberg Television, extolling the virtues of his favorite investment – gold. Nearing sixty, he is no longer the fearsome presence he once was. Thirty years of wearing a golden yoke of up to 45 pounds and five years beating cancer will do that, but he looked quite good for his age and those following his investment advice would more than likely have benefited. Gold is up more than 15% since his appearance (despite the recent pullback), according to COMEX, far outpacing the average pension asset return (represented by the Milliman 100 Pension Funding Index), which has been slightly negative over the same period.