The Collapse
Some of you have noticed my turn to the pessimistic view recently. The financial industry doesn't look good, and the problem that most people have yet to realize is that the financial industry isn't A component of our economy, it is the heart of our economy. Everything is tied to it. So here is how the coming collapse will manifest itself in the next months/years.
1. The S&P 500 goes to 300 as the "bailouts" and "handouts" collapse the economy.
2. The PBGC's equity investments are worth 20 cents on the dollar, the private equity and REITs are zeros. This puts the fund 40% underwater across-the-board.
3. It is unable to pay and goes to Congress.
4. Congress can't fund additional borrowing because the bond market has dislocated.
5. You get 10 cents on the dollar for your supposedly 'guaranteed' pension.
What we have in the background of this stock market is a powder keg that is lit and the fuse is almost burned out. Consider the exposure that corporate pension funds have to the stock market. When I flew out to General Mills for a job interview I was told that their pension was funded at 150% of the obligations. That was when the DOW was at 14,000. They are a fiscally responsible and very conservative organization. With limited pension obligations.
Think about the pensions owed by the auto makers, public employees, and pretty much every union in the country. People that have little understanding of the stock market other than that it returns 10% per year. The news is slowly trickling out that pensions are underfunded by a lot. This is a huge problem as the pension benefit guarantee organization, the government sponsored entity that insures pensions is having funding problems of their own.
Just months before the start of last year's stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.
Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.
The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn. The agency would only say that its fund was down 6.5 percent - and all of its stock-related investments were down 23 percent - as of last Sept. 30, the end of its fiscal year. But that was before most of the recent stock market decline and just before the investment switch was scheduled to begin in earnest.
If one or two company pensions go under, they have the funds to save them. When a handful go under they will be stressed. When dozens go down at once, they have to turn to the government. The government is busy writing checks for other things and guess what, people are no longer buying up government debt like they used to. Last week we sold US treasuries to raise money and no one wanted them. China especially is tired of the rhetoric coming from Washington
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