Bill Gross

Well, how do you like that - Bill Gross singing my tune

Time to take chips off the table

The panic of early 2009 has receded. Equities have rallied by 50% from the lows. Pension funding ratios are marginally better (corporate bond yields have decreased which means liability values have increased).

Markets feel a bit sluggish here. Some negative technicals have been cropping up.

Time to reduce equity exposure.

Liability driven investing (LDI) is being discussed, but it is not an all or nothing proposition. It is possible to transition to lower equity weights and now is the time to consider doing so.

Pension Risk

Interesting article on public pensions:

http://www.washingtonpost.com/wp-dyn/content/article/2009/10/10/AR2009101002360.html

I am not sure that ramping up risk is the right solution but it would be in line with the attitude of banks this past decade...if you need to keep up with peers (or in pension case, liabilities) just keep increasing leverage (risk) and if worst comes to worst (it did and likely will again in the case of pensions) government will be there to help out. Certainly with respect to public plans government backing is explicit; it was less so for the banking industry but that did not seem to stop them.

Nortel Pensions

And now this news piece to add to the murky waters of pensioners as company creditors. Not many employees consider the credit risk of their retirement funds when in a DB plan. A new regime has emerged. Pensioners need to be aware that the bankruptcy of their company may put their pension at risk.

Catch up Strategy

The gambling credo of doubling down may work for some but I remain fearful for the State of California and the PBGC. See here

Totally irresponsible if you ask me, but if you don't have to pay the price for failure, then what are you really risking? Like those who bought overpriced houses largely with banks money, it was the banks who ended up with the major losses. So too the State & Federal Government.

Longevity Hedging

The newest form of Liability Driven Investing involves longevity hedging. When I mentioned here that one of the reasons BP was closing their defined-benefit plan to new employees was due to longevity, I suggested that one solution was to raise the retirement age. This would give the employer a longer period over which to contribute and a shorter period over which to pay out from the plan.

Another approach is for pension plans to actively hedge their longevity risk. Who are the buyers? There are companies that benefit from an aging population, such as pharmaceuticals and retirement residence owners. And there are hedge funds that perceive the huge underlying demand from pension plans as driving implied life expectancy levels out to a point that they are tempted to step in.

More to come....

Deflation and the Run of the Bulls

Paul McCulley of PIMCO fame has a recent article on the fear of deflation and its relationship to monetary policy. Taking a page out of Helicopter Ben's playbook, McCulley asserts that fear of deflation requires the Fed to maintain "inappropriate" monetary policy in order to conquer the demon which has plagued Japan for the better part of two decades.

While I think many would agree with that assertion, the point is there are few beneficiaries and many casualties of such a policy, if it is successful. The beneficiaries are debt-holders, such as the US Treasury and all those who irresponsibly overborrowed against their house to overconsume in the short-term. The worst casualties are retirees on fixed pensions whose buying power has declined in equal measure to the policy's success. Current workers who have saved will also suffer as the value of their savings decline in real terms.

There are really 2 questions that mus be pondered:

1. is the fear of deflation real?; and
2. can the Fed really enginner inflation when Japan has not been able to?
   

One point to ponder with respect to the US / Japan comparison: in the mid-90s, the US castigated Japan for maintaining zombie banks on life support rather than allowing them to fail and then driving on...is TALF and the assortment of other programs the Fed has engineered not doing precisely that?

Comments welcome...