Posted by on April 11, 2017 3:49 pm
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Categories: Bond Business Economy Equity Markets Finance Financial markets Financial services Investment Labor Market Crash money Morgan Stanley National Pension System Pension Pension funds Pensions Private Equity Social Issues

Several large public pensions around the country are in serious trouble and, after several years of paying out more in distributions than they take in (which is the textbook definition of a ponzi scheme, btw), many are just one more equity market crash away from completely running out of cash.  In fact, we recently wrote about how Chicago’s largest pension fund could run out of cash within 4 years if such a scenario played out (see “How Chicago’s Largest Pension May Run Out Of Cash In As Little As 4 Years“).

And while we hate to be pessimistic, lets just take a look at what happens if, by some small chance, today’s market gets exposed as a massive bubble and we have another big correction in 2018.

Such a correction would force the fund to liquidate over $1.5 billion in assets in 2018 alone….

….and the system would run out of cash completely within 4 years.

And while public pensions may be forced to continue swinging for the fences by allocating more and more capital to equity markets, corporate pension funds, according to Bloomberg and Morgan Stanley, are growing a little weary of Yellen’s equity bubble and may be looking to rotate capital into corporate bonds instead.

Company pensions are nearing a tipping point that’s poised to send them on a buying spree in the U.S. corporate bond market.

The retirement plans, helped by gains in stocks, are edging closer to digging themselves out of a hole they’ve been in for more than a decade, a shift that is cutting their demand for risky assets like equities and stoking their interest in more stable investments like company debt.

Companies on average have about 82 percent of the funding they expect to require for retirees’ pensions, compared with around 75 percent in the middle of last year, according to strategists at Morgan Stanley. Once pensions are around 80 percent funded, they tend to increase their bond holdings and cut their stock investments to lock in gains, Morgan Stanley analysts led by Adam Richmond wrote in a report on Friday. They funnel much of that money toward high-grade corporate debt, especially longer-dated bonds, to help fund their decades-long obligations.

That trend is already happening and could now intensify, according to Morgan Stanley analysts. U.S. company pension funds own more than $1.8 trillion of assets, and even small changes to their allocations can lift already-high prices for bonds, and weigh on stocks.


In all, non-public pension funds held just over $1 trillion in equities at the end of 2016, or roughly 31% of their $3.3 trillion in assets.  Obviously, reducing that equity allocation target by just 10% would therefore put about $330 billion worth of selling pressure on equities…and that’s assuming public pensions don’t follow along.


Of course, by choosing to do the right thing and derisk their portfolios, these massive pension funds could very well become the catalyst that brings Yellen’s massive asset bubbles crashing down…so if you’re going to get out…probably best to be a first mover in what will become a race to the bottom.

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