Scary title, huh? Surely, one must exhibit suspicion if not outright derision at the title of this post. But, to prove it, one only need pay attention, because the facts are right out there in the open for all to see.
He is lauded as the “nation's most prominent bond investor.”
What did Mr. Gross say today? He said this, here:
and which was picked up by businessinsider.com, here
“The U.S. (and global economy) may have to get used to financially repressive – and therefore low policy rates – for decades to come. . . . the last time the U.S. economy was this highly levered (early 1940s) it took over 25 years of 10-year Treasury rates averaging 3% less than nominal GDP to accomplish a “beautiful deleveraging.” That would place the 10-year Treasury at close to 1% and the policy rate at 25 basis points until sometime around 2035! “[L]ow yields can become high yields almost overnight. But they should stay abnormally low. A highly levered U.S. and global economy cannot deleverage “beautifully” without repressive future policy rates . . . .”
So, is Mr. Gross an outsider, a loon, or like us, all bedazzled with our silver tin foil hats reflecting the dim glow of the computer? If you say Mr. Gross is an insider, an elite, I agree. He may curry disfavor from time to time, and his style may be grating to some, but he walks the walk and talks the talk. He admits candidly the truth: the Fed cannot increase rates towards the historical mean, for decades!
Now, let us all take a look at demographics and the ongoing retirement phenomenon. Just do a Google search like “retirement demographics.” Besides the glaring reality that the boomers as a group just did not save like their parents, and are thus heading off to retirement totally dependent upon govt aid, or those lucky ones, who get pensions, there is another factor to consider in all this.
The private pension system is structurally unsound. What do I mean? Look here
, from Calpers:
“Assumed Investment Return Rate to Stay at 7.75 Percent,” from a press release on the Calpers page on March 15, 2011.
Here is what Calpers invests in and their allocations: “The highly diversified CalPERS
investment portfolio has an allocation target of 49 percent publicly traded stock, 16 percent bonds, 14 percent private equity, 13 percent real assets – real estate, infrastructure, and forestland – and the remaining 8 percent in smaller allocations in asset classes designed to minimize volatility and liquidity risk.”
Based on this allocation, Calpers says they will return an average annual rate of return
of 7.95 percent: “As a part of its analysis, CalPERS staff, using the revised asset allocation, generated 10,000 investment performance scenarios covering the next 60 years. The analysis concluded that expected returns will average 7.38 percent in the first 10 years and 8.50 percent in years 11 and beyond, which resulted in a 7.95 percent average annual return over 20 years or more.”
So there you have it. Who is correct, the bean counters at Calpers or Bill Gross? Let’s look at the incentives, for some guidance. Calpers bean counters have a vested interest to keep the discount rate high, so as to keep employees contributing to their fund. If the discount rate was lower, then Calpers would have to ask that members pay more going forward, or would have to adjust benefits and projections. Those in charge would have uncomfortable meetings trying to justify their investment decisions. If Calpers raised its contribution rate, this could have the effect of reducing the number of contributing workers, because there could be backlash from new employees opting out into something different. Finally, what happens if Calpers gets its comeuppance by a lowly bankruptcy judge from Riverside, California, who give Calpers a shave or worse?
How about Bill Gross and his incentives. He has NO incentive to argue for fantasy rates of return. He wants to make money for his funds, and his money is where his mouth is. He does not believe for one instant that the Fed can raise rates. Rickards is in this same camp, too. I mentioned what I believe about Rickards already. He is a consummate insider. He is not only talking his book, he is doing it convincingly. So, IF Rickards and Gross are correct, and they most certainly will be absent some calamity or collapse [sorry Mr. Fix, I do not believe collapse is so imminently pending that I have hunkered down in my underground bunker just yet], then rates will stay LOW LOW LOW for quite some time, thereby calling into question the investment assumptions of pension funds all over the place.
I have not even touched the govt mess that is social security. The sad facts are that the only solutions to the massive public debt: (1) payment thereof, (2) sudden default, or (3) stealth default by inflation, ALL result in retirees having dramatic losses in purchasing power when they most need it. Even the lucky boomers with private pensions cannot count on those being solvent at the end.
There is a solution, though. This is a precious metals site, so perhaps the solution is also right there to see, if one could only see it . . .
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