Wall Street’s Next Ticking Time Bomb: Pensions

Jon Corruption, Economy, Fiscal Policies, Government, Market Commentary, Politics

Make no mistake, the criminality and fraud of most, if not all, DC politicians that is being exposed now is also occurring in corporate America and at pension funds, especially with regard to fraudulent financial reporting. As an example, Exxon is now being investigated by the SEC over its asset valuation and accounting practices. The same concept can be applied to pension funds (public and private). The Dallas Fireman and Police Pension fund is the postcard example of both investment and accounting fraud: LINK.
The pension time bomb has been activated for a long time but it’s now in the final countdown. Pensions are woefully underfunded even if we give them the benefit of doubt on their current use of market-to-market. Every pension fund under the sun in this country – because rates are so low – has monthly negative outflows of cash: beneficiaries are being paid more money than is flowing into the fund. If the stock market declines more than 10% for an extended period of time, nearly every pension fund in the country would blow up. This is why the last two stock plunges, which took the S&P 500 down over 10%, were met by heavy, if not blatant, Fed intervention which produced a steep V-bounce in the stock market both times.
Yesterday I spoke to a friend/colleague who works at a public pension fund. He said the latest fad in pension management land is to shift money out hedge funds – which are woefully underperforming the market – and to put even more money into private equity funds. This allows the pension funds to subject that capital to a quarterly mark to market test rather than an daily or monthly valuation accounting. The only problem: private equity investments are highly illiquid and the valuation of the underlying investments is an ‘art’ that is not at all based on actual market transactions. This private equity investment mark-to-market ‘Picasso’ leads to extreme ‘over-marking’ of private equity investment valuations at pension funds.

This post was published at Investment Research Dynamics on September 21, 2016.