Welcome to the 11-16-2017 update from your Pocono Summit Certified Financial Planner and retirement planner, Mike Savage. Today, Mike discusses the behaviors of large pension funds and what effects those behaviors have on your finances.
The news seems to get stranger and stranger every day. As prudent investors, CALPERS, the nation’s largest pension fund, as it was reported by Bloomberg, may reduce the stock exposure of their portfolio from a current position of 50% to as low as 34% of the overall portfolio. If many other pension funds do the same- and it makes sense since the markets have gone straight up for a record amount of time-to reduce the supposed risk in their portfolios – this would be a large drag on the buoyancy of the stock markets going forward.
Hey, no reason to worry though! The Wall Street Journal reports that the Japanese Public Pension Fund may be able to directly buy stocks with their $1.1 Trillion in assets- that’ll keep it propped up for a while! Of course, the Japanese Central bank already owns 80% of Japanese ETFs, are top 10 shareholders in 90% of the stocks in the Nikkei 225. (This info is 6 months old so they are likely holding an even higher amount than I am saying here) They have also already bought all newly issued Japanese Government bonds in the past 2 years and own the lion’s share of the outstanding Japanese Government Bonds.
Before anyone thinks that this can just go on and on think about this. All of the buying taking place by central banks, hedge funds and major banks are all based upon debt and low interest rates. As central banks “print up” money from nowhere they are not only debasing the currency but are also creating more debt. This charade will likely end when interest rates are forced up because entities that can’t “print” their own money start to have problems carrying this newly issued debt.
The warning signs are clearly exposing themselves as I write this article. Junk bond yields are rising. This means that there is some stress in the system that is showing up first in the weakest of the bonds. If the current trends continue it cannot be a good sign for “risk-on” behavior going forward.
For those who think to themselves “I’ll sell and keep the money safe in the bank”- you better think again!
I have written many times about the bail-in plans that are in place globally- and yes right here in the good ole USA. I have cited papers that can be accessed at FDIC.gov like the December 10, 2012 paper by the FDIC and Bank of England that spells out the plans for bail-ins. I have cited the FDIC meeting minutes from April 14, 2016 where the bail-in plans by the major banks had to be approved by January 1, 2017.
I have written about many bail-ins in Europe that have not been reported in the mainstream media as far as I know but have taken place in Italy, Spain and Portugal in the last 12 months.
According to Gains Pains and Capital.com
“Something extraordinary happened yesterday. And no one is talking about it” (No surprise there!)
- “The ECB proposed removing “deposit insurance” for bank deposits. Put another way, the ECB wants to make it so that if an EU bank fails, the individuals who keep their savings in the bank lose everything. In the paper published by the European Central Bank’s Banking Supervision website, the ECB proposed the following: ‘Covered deposits and claims under investor compensation schemes should be replaced by limited discretionary exemptions to be granted by the competent authority in order to retain a degree of flexibility’” The ECB proposes that should an EU bank fail, the amount of capital you can access would be both “limited” and at the sole discretion of an authority”.
Hey, but why should that be news?
Actually, I personally believe that this would be a good thing if people actually had to determine whether keeping money in certain banks made any sense. Winners and losers would then be determined by the market instead of beurocrats. Unfortunately, looking at the bank’s books won’t really give anyone the information that they really need to make a rational decision because the books are as cooked as many major companies books are these days. Back in 2009 the banks were not only allowed to, but were actually encouraged to, not mark their assets to market (what they are actually worth if they tried to sell them) but to use the value of the assets if they were held to maturity. Many called this “mark to myth”. Another example of keeping us in the dark about the true state of affairs.
As I’ve said many times they will have to do a bail-in in one shot. If there are a few small bank failures and people have their deposits (at least some portion) taken away it won’t take long for most people to put two and two together and remove their money from their banks so they are not the next to get “bailed in”.
I have said many times that in our traditional definition of “safe” I can’t think of any asset that can claim to be “safe” these days- even cash because of the constant money “printing” to try and keep other asset classes propped up or clamped down to hide the reality of our current over-indebted situation.
I don’t believe that traditional asset allocation is going to help anyone reach the goals that they have set up for themselves. There have been two booms and busts from 1995-2009. We are in a third boom that I expect will turn into a bust at some point. I also expect that, as the booms and busts have grown exponentially in size, the next bust will be historic.
Twice now in the last few days there have been large “sells” of paper gold into the market- like last Friday’s 4 million ounce sale just after the London close. First of all, I don’t believe anyone has that much gold to sell. Even if they did they wouldn’t put in a market order (sell at any price) if they didn’t mean for the price to fall. Anyone making a serious trade would put in a limit order to get a certain price- if making a profit were the actual motive which it appears NOT to be here. You would also want to sell BEFORE London’s close to maximize the bidding for your sell.
In the olden days these types of interventions would be hidden from view. Today, these deeds are done in full view of everyone- including the authorities- and no one says a word. Of course, a few billion in fines get levied to, again, give the illusion that someone is watching out for us when in reality it is just a financial game show in my opinion.
One day this will change. That day may be closer than many imagine!
Mike Savage, Financial Advisor
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Japan’s Nikkei 225 Stock Average is a price-weighted index comprised of Japan’s top 225 blue chip companies on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow Jones Industrial Average Index in the US, a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. It is not possible to invest directly in any index. There is no assurance that these trends will continue. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Investments in debt securities involve a variety of risks, including credit risk, interest rate risk, and liquidity risk. Investments in debt securities rated below investment grade (commonly referred to as “junk bonds”) may be subject to greater levels of credit and liquidity risk than investments in investment grade securities.