Secrets of an Iran Contra Insider
by Al Martin
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by Al Martin
More Good News for the Unwashed: Bye Bye Pension Plans
(1-3-11) State and government pension systems could be the next major financial debacle which will also affect private and corporate pension plans. Planet wide the problem is the same. The biggest problem with both public and private pension systems is that they are loaded up with junk securities from the past. Just as Spain is a collapsing country, it should be noted that 70% of its state pension system is invested in junk securities. Therefore, as Bloomberg also reported, Spain is going to reduce its old age social security benefits, and they will reduce those benefits with each coming year. Now many year-end financial reviews have brought a new focus on this planet-wide and global problem, which is fueling economic collapse – how to deal with aging pensioners who actually believe they will get their pensions?
The collapsing global public and private pension systems and plans all share similar problems, namely they are loaded up with junk debt. And there’s no way to get rid of it. So it becomes a self-replicating problem, which feeds into another problem, i.e., consistent credit quality deterioration of all governments and corporations. This means that the quality of the debt is declining. Approximately 80% of all debt issued in 2006 by countries for their social security systems that was purchased as investment grade is now junk. This is due to the fact that the credit agencies were behind the eight-ball and didn’t really understand the dynamics of collapse that was built into all this paper. Quite simply they didn’t understand the risk.
The reason why credit quality deterioration is a major factor in the planet’s coming economic collapse because it is a major key in gauging economic strength and the ability to repay debt that governments and corporations will have in the future.
The credit quality downgrades means that the issuers future ability to service that debt is declining and eventually they will have to default. You hear this all the time but they don’t use the word “default”; they use to word “reorganize.” There will have to be some sort of “reorganization,” wherein bondholders take “haircuts.” That is the only way you can keep the whole show on the road. The largest bond holders are state and private pension systems and plans, since they are the purchasers of about 70% of all bonds on the planet.
Refinancing or reorganization means taking the old bonds which have now been downgraded to Triple Junk and then issuing new bonds at 100 cents on the dollar. They take the money -- proceeds from the sale of the new bonds -- and then purchase the old bonds at 80 cents on the dollar and retire them. But somebody’s got to take that 20 cents on the dollar haircut and that would be the holders of the old bonds, which are largely either governments themselves or individuals who have worked for companies that have defined benefit pension plans or contributory fixed pension plans. Or they are individuals who have no pension plan where they work but instead have a 401K or IRA which have been invested into bond funds.
And how does this affect the largest bondholder PIMCO? We heard PIMCO chief Bill Gross in an address over the weekend who expects bondholder haircuts to be taken around the planet in 2011 and 2012.
Of course PIMCO had a sterling track record for years up until 2009. In 2010 they dropped the ball and were consistently wrong, first about going into US Treasuries and then about going into mortgage paper where they got burned. Then they started to buy high yield euro-debt from PIIG countries and they got burned there. They kept getting burnt and burnt because PIMCO and Gross have been wrong.
The problem is that Gross keeps looking for a place to put his money because he has to and his opinions are colored by necessity. Gross runs a financial management firm whose shareholders expect the highest possible return. Therefore he always has to look for something that offers the highest possible return with the lowest possible risk. Now that’s all changed. He even said in his interview that the smart thing to do was just go all into cash.
Gross was the master of his game but the game has disappeared. Why? Because the planet’s economy is changing and he can’t admit that publicly. If you listen to what the man says, he’s telling you what the situation is on the planet, especially when he said that he would prefer to just be in cash. When people in the market say “to be in cash,” in market parlance, it means “short term US Treasury instruments.”
In conclusion the planet’s pension system is a conundrum which can not be solved; it can only unravel. The whole concept of funding retirement pensions is based on an actuarial system, wherein a certain rate of return must be earned over a certain period of years in order to provide a certain fixed benefit for somebody at a certain age. The problem in this is that in order to get close to the 6-7% yields that are necessary to maintain the US social security system and provide the fixed benefits it’s promised to pay in the future, it must take inordinate risks in the purchasing of ever riskier assets, whose credit quality is declining.
In the world of providing pensions for people, you can’t be invested in cash, i.e. short term instruments when 2 year US Treasury Bonds yield 2/3 of one percent per annum. Thus pension management firms have to invest in riskier assets with ever declining value.
Meanwhile there is an ever widening deficit in all of the plans managed by the pension management firms. We now see that 78% of all the corporations in the United States that have pension plans have pension deficits, aggregating more than $3 Trillion.
Classically pension deficits happen over time in the fluctuation of interest rates. When interest rates are low, pension deficits occur. Pension funds make certain assumptions on interest rate yields over long periods of time. We’ve been in a situation, since 1996-97, when interest rates have remained historically low for a very long period of time. At the same time there has been substantial credit quality deterioration of financial instruments, i.e. bonds, continues,
This is what has created these enormous pension deficits. The idea was that over a 40-50 year cycle of time interest rates would rise again to something above that median line necessary to provide a fixed rate of return for the pensioner. All actuarial and insurance systems work the same way. But the problem is that everything has changed now. The planet is beyond the point of no return fiscally speaking. Economic collapse is coming.
The problem now is that interest rates for what will remain the highest quality bonds for the longest period of time, i.e. US Treasuries, Chinese bonds, Swiss bonds etc. provide very little yield. Why? Because they’re the safest and people want safety and are prepared to sacrifice yield. Therefore in order to provide Joe with that pension he’s been promised, the pension manager has to buy 10 year Greek Treasury bonds in order to get the return necessary. These are bonds that are likely to be worth maybe half of what they are worth now in terms of their principal value in 10 years time.
Also corporations simply aren’t profitable enough to do what they’re supposed to do (and legally obligated to do) and that is to divert general corporate revenue coming from their profits into their pension plans. The problem is that there aren’t any corporations on this planet that are sufficiently profitable to do that to support their pension systems given the size of their pension deficits.
People on the verge of retirement, voluntary or otherwise, have asked me about whether to take a lump sum payment or a fixed amount per month. And I would say just roll the dice because the amount of capital in these buyouts, which are becoming increasingly popular, can not be reinvested to yield a return sufficient to equal what that pension is going to be -- supposedly.
The Average Joe should not take the lump sum, but take the “promise.” And hope like hell that the corporation or the country that’s giving them the pension lasts long enough to give them whatever pension for maybe 10 years after retirement.
The only way that Joe takes that lump sum payment is if Joe knows how to make money make money every day in the markets. If you look at what is being offered versus what the monthly supposed payout of the pension is at a fixed age, you will find that you have to only collect that pension for an average 3-8 years to equal the principal value of what they’re offering you now. And that’s the story of pensions for 2011 and the future…
* AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.
After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.
His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."
Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.
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