I remember an article that I wrote around 2009 when I described a pension plan (Chicago Transit Authority) that had a large funding deficit. To close the budget gap the fund borrowed assets at 6% and the idea was to earn 8% and keep their funding current with the proceeds. This took place in 2007.

In 2008 the fund lost nearly 50% leaving the debt intact but greatly compromising the fund’s solvency.

The reason I am remembering this right now is that it was just reported that a similar action is being taken by CALPERS (the country’s largest pension plan). It could be that the timing may be in-line also.

They have reported that they are looking to take out a $30 BILLION loan. This loan is not going to be used to purchase assets but will be used to pay benefits. The reasoning is that their commercial real estate portfolio is down, and they don’t want to sell for fear that it would create a fire sale of assets. A fire sale is when things are sold for a fraction of what they are thought to be worth. Their goal is to be able to pay claims and not be forced to sell assets at a steep discount.

At first you may think this is a great idea and that it is prudent to plan for some rough times ahead. In looking at this a little closer what we may realize is that the assets that they are hoping to recover over time may not recover for decades. That could prove catastrophic.

First of all, pensions have a mandate to earn a specified return. If you pay 6% or so for a loan you have to earn an additional 6% on top of your mandate to meet it. With a faltering economy how likely is it that anyone can earn 14-15% year after year? My opinion- NOT LIKELY.

The problem as I see it, for commercial real estate, are many. Like:

  • Corporate layoffs are rising leading to less need for commercial space.
  • Interest rates have risen while occupancy is at all-time lows. This will lead banks to carefully lend and could lead to many bankruptcies as the owners may not be able to refinance old low- rate loans. Many of these loans are non-recourse loans so many “owners” can simply walk away as many have already done as the low vacancy (lack of income) and high interest rates make no sense going forward. According To Moody’s Analytics 19.6% of commercial real estate is VACANT. That is an all-time high. What will a new buyer be willing to PAY? That will determine IF there can be a recovery.
  • The economy is collapsing at an accelerating pace which appears to be an obstacle for a turnaround any time soon.
  • A lot of the properties that are causing the most problems also have the most debt attached to them like towers in major cities like New York, San Francisco, Baltimore and many other major cities where tenants are moving out not just because of excessive taxation and costs but also because of rampant crime and lawlessness. In these places there have been staggering losses in the perceived “value” of these buildings. My perception is that it will be a LONG process for this space to recover and that there will be FAR more downside before we rise again.
  • More and more people are working from home. This does not just affect the tower landlords but all of the surrounding businesses that catered to the needs of the commuters. While I am sure Covid had a major impact I remember walking in Manhattan PRIOR to the lockdowns and saw MANY vacant stores with “FOR RENT” signs. This is a worsening problem.

It may be that this loan will turn out good, but I would bet against it. There are many reasons, but the top ones are I don’t believe that the commercial real estate market is going to improve for quite a while. While this is their focus right now, we have to keep in mind that stocks, bonds and real estate are all being artificially held up by low interest rates and central bank (and their friends) “printing and buying”.

Not only do I not expect a recovery in the CRE space, but I DO expect a major correction in the overvalued stock and bond “markets” to hit just about everyone’s balance sheet. If this all takes place simultaneously you can bet that pension funds, banks, insurance companies, corporations and individuals will all be clamoring for HELP. My bet is that it WILL all happen at once and likely in the blink of an eye.

The fact is that all assets are being manipulated and there is no price discovery of virtually any asset out there.

I have asked many times “what happens when the value of a property is exposed to be worth FAR LESS than was originally thought but the debt it was purchased with REMAINS? This is not only true of real estate but also for stocks, bonds, cash, etc.?

In real estate a borrower can walk away. With stocks and bonds if fear takes over the selling could be massive and lead to major losses as people head for the exits at the same time. Selling leads to more selling and lower prices -QUICKLY.

Right now, it appears to me that the collateral backing up all of this debt is cratering and we are adding to our debt pile in unprecedented amounts. In some cases, to keep an illusion of solvency and prosperity and in other cases to sustain those being disenfranchised by those “in charge”. In any case, we are issuing MASSIVE amounts of debt to stave off the inevitable collapse with NO COLLATERAL AT ALL to back it up. That is far worse than having collateral decline in perceived value.

Eventually, the central bank’s CURE (Conjuring up cash, issuing more debt, buying and selling assets to manipulate prices and perception) will become the disease that destroys the entire fiat debt-based system. To many people’s surprise history will likely reveal that this was all intentional.


Keep an eye out for my emails as I am sending a book I wrote last year out chapter by chapter that just may explain the “intentional” part.

Be Prepared!

Any opinions are those of Mike Savage and not necessarily of those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information in this report does not purport to be a complete description of securities, markets or developments referred to in this material. The information has been obtained from sources deemed to be reliable but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.


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