4 BARRON’S September 30, 2019
Up & Down Wall Street continued
hourly earnings (up 3.2% over the past
year) also will be tells if the U.S. economy
isworkingforaverageAmericans.Andthat
counts more to them than impeachment.
I
N THE FED’S LATEST REPORT CARD ON
U.S. finances, formerly known as the
Flow of Funds report, there is good
newsandbadnews.Thankstothebull
marketinstocksandtherecoveryinhome
prices,householdwealthhitarecord$113.
trillioninthesecondquarter.That’sup88%
fromthecyclicalnadirofthefirstquarterof
2009 and 59% above the previous peak in
thethirdquarterof2007,YardeniResearch
helpfully points out.
In the public sector, however, the story
is less favorable. State and local pensions
have$8.8trillionofliabilities,ofwhichonly
52%isfundedafteradecadelongbullmar-
ket.Fallinginterestrateshavebeenama-
jor propellant of higher asset prices, but
also have lowered pension funds’ income.
Standard & Poor’s says the median as-
sumed return of state retirement funds is
7.25%.ButaccordingtoWilshireTrustUni-
verseComparisonService,themedianpub-
licdefined-pensionplan’sreturnwas6.79%
asofJune30,downfrom8.40%ayearear-
lier. Remember, these are bull-market re-
sults, and backward-looking.
Looking ahead, getting close to public
pension funds’ return targets will force
them into the riskiest assets, according to
Moody’s Investors Service. Based on J.P.
Morgan’s capital markets assumptions for
the next 10 years, domestic investment-
grade corporate bonds are projected to
return a little over 4%, while speculative-
grade bonds are expected to generate less
than6%.U.S.large-capitalizationstocksare
forecast to return about 5%, while macro
hedge funds are seen returning less than
4%. Private equity and emerging market
stocks are forecast to return over 8%, but
with correspondingly higher risk.
That assumes a continuation of the bull
market that already has marked its 10th
birthday.Whatpossiblycouldgowrong?And
whenitdoes,whencewouldthedoughcome
tofilltheholeinstateandlocalpensionsthat
alreadyequalsnearlyhalfoftheirliabilities—
especially as all those babyboomers retire
and drain the pension systems?
But there is a way out, according to a
coupleofaudaciousthinkers.Andit’spretty
simple: print the money.
Stephanie Pomboy, proprietor of Macro-
Mavens,hasbeeninsistingthatthisisthein-
evitable denouement of the public-pension
crisis.Whenthedownturneventuallycomes,
the Fed will once again expand its balance
sheettorepairtheburstingofthebubblein
asset values, notably corporate credit, to
which pension funds are heavily exposed.
To recent arrivals, I’ll remind you of
Steph’searlier,equallyoutrageousforecast.
Morethanadecadeago,sheseemedtocarp
continuouslyaboutthemassiveriskposedby
thefinancialsystem’shugeexposuretoover-
valued housing. That was even before the
worthies at the Fed pronounced the risk
fromsubprimemortgagestobe“contained.”
Harley Bassman, who blogs as the Con-
vexityMaven,cametothesameconclusion.
BestknownasthecreatoroftheMOVEIn-
dex, the bond market’s analog to the VIX,
the stock market’s measure of volatility, he
oversawnumerousmortgageandderivative
operations for Merrill Lynch along with
postsatCreditSuisseandPimcobeforere-
tiringtomanagewhathecallsa“hedgefund
of one.” In his latest commentary, Bassman
contendsthat“helicoptermoney”(tousefor-
merFedChairmanBenBernanke’schannel-
ingofMiltonFriedman’sphrase)isapttobe
dropped to stave off the next recession, as
prescribed by modern monetary theory.
“MMT may arrive on the cat’s paws of
infrastructurespendingorthenakedpolicy
ofUniversalBasicIncome”—theplanadvo-
catedbyAndrewYang,oneofthepresiden-
tial hopefuls in the back half of the Demo-
cratic pack. “But rest assured, as the
undersaved baby boomer demographic
reaches retirement age, there is no politi-
cally viable alternative to MMT. The aver-
ageboomerwillturn65in2020,andthisen-
tire generation will reach legal retirement
in2029;massivefiscalexpansionwilloccur
within this window,” he concludes.
Theinvestmentimplicationsoftheseout-
comes are something far afield from the
usualstockandbondportfolio.SinceJapan
has been the most extreme practitioner of
monetarypolicy,Bassmansuggeststhatin-
vestors buy a 10-year slightly out-of-the-
money call option on the Nikkei and sell a
deeplyout-of-the-moneyputonthatindex,
inpartreflectingthatequitieswouldrepre-
sentaclaimonassetsandwouldretainreal
value during money printing. Not exactly
something the average Joe can do.
Steph’s advice is more straightforward.
Money printing points to gold, just as in
2007-08.Thebarbarousrelicstartedtorally
theninanticipationofFedinterest-ratecuts
and eventually rose 140% to its peak in
2011, by which time the U.S. central bank
was expanding its balance sheet rapidly. A
similar move would take the metal past
$3,500anounce,from$1,512thispastweek.
Thathashistoricallybeenthewaytomake
the best of bad news.
email: [email protected]
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