The Aleph Blog » Pensions

Archive for the ‘Pensions’ Category

To Live off of, and Die from, the Equity Premium and Alpha

Thursday, April 10th, 2014

I’m working on my taxes.  I’m not in a good mood.  Okay, writing that made me chuckle, because I am usually in a good mood.

Let me divide my working life into four segments:

  • 1986-1998: Actuary — reasonably well paid, and significantly underpaid compared to the value I delivered.
  • 1998-2007 — Investment risk manager, Mortgage bond manager, Corporate bond manager, and Senior Analyst at a long/short hedge fund.  Paid well for my efforts, and the  rewards to clients were far more than what I was paid.
  • 2007-2010 — Almost no pay, as I deal with home issues, provide research to a small minority broker-dealer, and try to gain institutional asset management clients.  Living off of assets from earlier days.
  • 2010-2014 — Living off of asset income as I slowly build a retail and small institutional client base for my value investing.

The last two periods are the most interesting in a way, because I was drawing more income from investments than I was from any other source.  Even during my time at the hedge fund, I made more money from my own investing every year than I was paid, and I was paid well.  That said the mid-2000s were a hot time, particularly if you made the right calls on a growing global economy.

My net worth today is roughly where it was at the peak of the markets in 2007, despite my low wage income.  I have been bailed out by the returns of the equity market and my alpha.

This is not a comfortable place to be, because general equity returns are not predictable, and alpha, though I have had it for years, is not predictable either.  That said, my client base has been growing, and in another year or so, my practice should support my family even if the markets don’t do well.


Though I just told a story about me, the real story isn’t about me.  Think of all of the people who are trying to manage their lump sum in retirement.  They are relying on strong equity markets; they are hoping for alpha.  They are not ready for setbacks.

Unless you are seriously wealthy, when you are not receiving reliable income from a wage-like source, you can feel like you are in a weak position. I have felt that on occasion, but in general  I have not worried.

I write this because equity outperformance over bonds will likely be limited over the next ten years.  I peg equities at about a 5%/year average nominal return, with a diversified portfolio of bonds at around 2-3%/year.  Also the ability to add alpha is limited, because alpha is zero in total, and are you smart enough to find the managers that can do it?

In desperate times desperate men do desperate things.  Low interest rates are leading many to speculate more than they ordinarily would.  Equity allocations go higher.  Allocations to “alternatives” go higher.  People start using nonguaranteed income vehicles as if they had the structural protections of bonds.

As I always say, be careful.  Those trying to manage a lump sum for income in retirement are playing a dangerous game where if you try to draw more than 3.5%/year with regularity will prove challenging, because that is playing at the boundary of what the assets can deliver, and leaves little room for an adverse scenario.  Be careful.

Sorted Weekly Tweets

Saturday, March 29th, 2014

Rest of the World


  • Malaysia Plane Traced in Inmarsat Engineer London Huddle How they managed to figure out the area of the crash $$ $SPY Mar 30, 2014
  • UK Pension Revolution Putting Long-Term Bonds at Risk Need 2 match liabs drives demand 4 long bonds, lowers yields $$ Mar 30, 2014
  • Putin Has Exposed NATO’s Weakness US & NATO Europe willing to agree upon? What r they willing 2 risk? Be careful $$ Mar 30, 2014
  • China Said to Expand Property Survey Amid Oversupply Concern Will b difficult 2 end overinvestment by fiat $$ Mar 30, 2014
  • Chinese Pigs Eating Soybeans Cut US Supply to 1965 Low Chinese demand 4 pork drives demand 4 US Soybeans $$ Mar 30, 2014
  • Lira Fate Tied to Real Assets as Hot Money Flees In countries where inflation is a threat, invest in property $$ Mar 30, 2014
  • Business not ipso facto criminal: Tendency of presuming it guilty without proof is damaging India’s economy $$ Mar 30, 2014
  • Mr. Putin’s Revealing Speech Defender of Orthodox civilization as he sees it pushes back against encroahing NATO $$ Mar 30, 2014
  • Russian Forces on Border Stir Concern as Crimea Annexed Threats of more economic sanctions will not deter Putin $$ Mar 23, 2014
  • What the West Can Learn From Putin’s Other Neighbors Don’t make promises that u won’t keep; Putin is not scared $$ Mar 22, 2014


Financial Sector


  • So what is today’s nonbank business model? Legalized extortion done to “protect consumers,” objective is political $$ Mar 30, 2014
  • Wall Street Banks Cut Out of Prized Commercial Mortgages $MET $PRU originate commercial mortgages 2 fund own liabs $$ Mar 30, 2014
  • SEC Is Probing Dealings by Banks and Companies in Loan Securities Current CLO issuance drives loan issuance $$ $BKLN Mar 30, 2014
  • Pimco Chases BlackRock in ETFs as Money Returns to Bonds Amazing how people follow anything w/positive momentum $$ Mar 30, 2014
  • And if banks start lending aggressively, it will b time to radically shrink asset maturities in bond portfolios, velocity will b rising $$ Mar 30, 2014
  • Banks Lending Like It’s 2007 Belied by $10T Hoard But they aren’t lending heavy yet, if they do FOMC has 2tighten $$ Mar 30, 2014
  • Scandal-Hit British Banks Turn to ‘Weirdy Beardy’ ”Why do you exist?” “Who r u?” Pondering existence bugs bankers $$ Mar 30, 2014
  • Josh Rosner: The Wrong Remedy for Fannie and Freddie Better to wind them up & get Govt out of the Mtge mkts $$ Mar 30, 2014
  • Iowa’s Friendlier Watchdogs Lead Insurer Pack to Des Moines Iowa DOI will regret embracing complexity, gtee funds2 $$ Mar 30, 2014


Market Impact


  • Which will win? $BRK.B or $IWM ? 3views: & & BRK will beat smallcaps $$ Mar 30, 2014
  • Americans Can’t Retire When Bill Gross Sees Repression Investments eventually reflect the underlying cash flows $$ Mar 30, 2014
  • Financial scars linger: 1/3 of investors wary of stocks Have 2 wait 4 these people 2 come & put in the top $$ $SPY Mar 30, 2014
  • 1999 Buffett: stocks can’t possibly meet public’s expectations. Internet? Notes how few got rich in auto &aviation $$ Mar 30, 2014
  • Declining Pension Benefits Leave Workers Uneasy Difficult 2 fund high benefits when interest rates r so low $$ $TLT Mar 30, 2014
  • Google Traders See Opportunity in Confusion on New Shares New nonvoting shares may allow 4 some arbitrage plays $$ Mar 30, 2014
  • Attention Suckers: Please Send Us Your Money @Ritholtz comments how the JOBS Act weakened investor protections $$ Mar 30, 2014


US Housing


  • High Prices Partly to Blame for Slow New Home Sales When markets near their peak, frequently volumes drop off $$ $LEN Mar 30, 2014
  • Time might be ripe for boomers to sell their homes and move on Sell them 2whom & @ what price? Lack move-up buyers $$ Mar 30, 2014
  • Finding a House That Won’t Destroy You Buy a house u can afford even under stressed conditions, reduce risk $$ Mar 30, 2014


US Politics, Policy & Economics


  • Florida’s Scott Travels on Corporate Tab as Lobbyists Tag Along Governors increasingly use corporate $$ 2fund trips Mar 30, 2014
  • IRS Takes a Position on Bitcoin: It’s Property Thus any trading of bitcoins involves capital gains &losses $$ $BTCUSD Mar 30, 2014
  • Google, EBay and the Roots of Collusion Some don’t want to annoy companies that r complementary 2their biz goals $$ Mar 30, 2014
  • The Individual Mandate Goes Poof Barack Obama undoes what House GOP would like 2undo, just not permanently totally $$ Mar 30, 2014
  • Global Warming Will Not Cost the Earth, Leaked IPCC Report Admits Will b interesting 2c how gets spun by bothsides $$ Mar 30, 2014
  • Economists: Rising interest rates are the biggest threat to recovery More evidence that rates will stay low $TLT $$ Mar 24, 2014
  • Kocherlakota: Don’t raise rates to head off possible crisis There may come a time when you will have no choice $$ Mar 22, 2014



  • Advice for a Happy Life by Charles Murray Marry young & someone similar 2u, don’t try2get rich, Groundhog Day $$ $SPY Mar 30, 2014
  • Why Runners Can’t Eat Whatever They Want Studies Show Heart Risks to Devil-May-Care Diets—No Matter How Much U Run $$ Mar 30, 2014
  • Speed Reading Returns Apps and Classes Help People Adapt 2Reading on Their Phones | More content 2 read everywhere $$ Mar 30, 2014
  • The book Scientology tried to ban Read about the *real* L. Ron Hubbard, from a book Church of Scientology hates $$ Mar 30, 2014



  • Wrong: Not Voting Should Not Be a Choice Seems fundamental that no one should b forced to vote; it’s a protest $$ Mar 30, 2014
  • Wrong: Japan Is Doomed Unless It Learns to Love Inflation More “hair of the dog that bit you solutions” $$ $JPY $JOF Mar 30, 2014
  • Wrong: Digital v human: the new debate We’ve seen transformational technologies b4, takes a while 4 new jobs 2show $$ Mar 30, 2014
  • Wrong: Fed’s Bullard: Yellen’s ‘6 Months’ Comment Doesn’t Represent Change in Policy Stance Could have fooled me $$ Mar 22, 2014


Notes, Comments, Reples & Retweets

  • RT @ReformedBroker: In November 1999, Buffett wrote this op-ed for Fortune on why he doesn’t bet on innovation. @pmarca @hblodget http://t… Mar 27, 2014
  • RT @felixsalmon: “This means Bitcoins are not fungible, and that makes it unworkable as a currency.” cc @pmarca @bar… Mar 27, 2014
  • RT @journalistjosh: Crowdfunding emptor: Attention Suckers: Please Send Us Your Money via @BloombergView Mar 27, 2014
  • We enjoyed having @susanweiner speak to us at the #CFA Institute – Baltimore; we can all benefit from learning to write more engagingly $$ Mar 26, 2014
  • ‘ @PlanMaestro Yes, I remember that piece and the series that followed it $$ Capital efficient Mar 26, 2014


The Idea of Contributory Defined Benefit Plans

Tuesday, March 18th, 2014

In the good old days, there were Defined Benefit [DB] plans for pensions, and only those.  Why were those good?

  • The sponsor took care of the investing
  • Participants received a level, or inflation-adjusted payment.
  • Payments offered longevity insurance — you could not outlive them.

Then, by accident, the 401(k) plan, and other defined contribution [DC] plans came into existence.  Employees could invest their money pretax, and make money during the bull markets of the ’80s and ’90s.  Many companies terminated their DB plans, and replaced them with DC plans, cash balance plans, etc.

DC plans were attractive to most participants because:

  • They could see the value easily — it was expressed in a single number, and a higher number is always better, right?
  • The employer match was an obvious source of value.
  • Since most of the plans were participant directed, many enjoyed control of the asset allocation, particularly in bull markets.
  • The benefits were portable, they did not rely on continued employment with the same firm.
  • They could take loans against their  balances.

After the bull market of the ’90s, what did participants in DC pension plans lose?

  • They weren’t natural investors, so they lost there through underperformance.  Fear and Greed led them to lose.
  • They lost longevity insurance — it is a lot cheaper to get it early, when you don’t need it.
  • As interest rates fell, so did the ability to buy a future income  by buying an annuity.  Yes, the balance was higher, but you could not earn as much from it with safety.
  • Managing a lump sum for income is a very tough task, and one that most average investors are not equipped to tackle.

This is why I would like to propose replacing DC plans with DB plans, but give employees the option of adding more to their DB plans, and making DB plans portable.  This would require:

  • Making DB plans tax-favored relative to DC plans.  Drop the tax-advantaged status for DC plans.
  • Have standard transfer assumptions for the valuation of DB plans.

The great advantage of contributory DB plans is that they divide responsibilities/advantages where they are best held:

  • Plan sponsors are better at investing than participants.
  • DB plans provide longevity insurance.
  • If participants want to save more, they can do so, buying streams of future income.

I know this piece is nonstandard — out of step with the current “reality.”  If pensions were structured this way, it would save many people a lot of headaches:

  • How do I invest?
  • How can I lock in a good future income for life?
  • How can I get more than what the company is putting aside for me?

Contributory Defined Benefit plans would divide the duties of pensions properly.  Participants would decide how much to save, and sponsors would invest and provide longevity insurance.  Can you think of a better way to do pensions?  I’m all ears.

Sorted Weekly Tweets

Saturday, February 22nd, 2014

Facebook & WhatsApp


  • Rags-To-Riches Tale Of How Jan Koum Built WhatsApp Into Facebook’s New $19B Baby Background on WhatsApp founders $$ Feb 22, 2014
  • WhatsApp Shows How Phone Carriers Lost Out on $33B Perhaps consortium of telephone companies should have bot them $$ Feb 22, 2014
  • Whatsapp and $19B Explains why $FB decided 2 get into mobile, & how WhatsApp may benefit their mobile push $$ $GOOG Feb 22, 2014
  • Zuckerberg Bonded With WhatsApp CEO Over Coffee and Dinners Promise made to respect the unique culture of WhatsApp $$ Feb 22, 2014
  • Facebook’s horrible, stroke-of-genius IPO @felixsalmon Makes point that overvalued $FB stock can b currency 4deals $$ Feb 22, 2014
  • How Much Sequoia Made On WhatsApp The funny part is how Zuckerberg pranked Sequoia 10 yrs ago, & regretted it $$ $FB Feb 22, 2014
  • Facebook Investors Shrug Off Concerns About $19B Deal also & $$ $FB Feb 21, 2014


US Politics & Policy


  • Companies bracing for 1-2 retirement punch Unlikely that Obama’s proposals would b enacted; hurts powerful people $$ Feb 22, 2014
  • White House to Propose New Limits on Overseas Corporate Tax Avoidance This will be difficult 2 enforce; complexity $$ Feb 22, 2014
  • Gold Rush Ghost Town Bodes Ill for California Power Flow Interesting article on how the drought is affecting CA $$ Feb 22, 2014
  • Peggy Noonan: Whose Side Are We On? We can have a “Cold War” vs those who hate democracy & human rights $$ $SPY $TLT Feb 22, 2014
  • NSA Official Warned About Threat 17 Years Before Snowden Warned computer system administrators had too much power $$ Feb 22, 2014
  • Fannie Mae Payments to US Will Exceed Bailout 2 bad, b/c government owns $FNMA & will keep it as a piggy bank $$ Feb 22, 2014
  • An anti-tech backlash in San Francisco Note to politicians: don’t bite the hand that feeds u 2 support malcontents $$ Feb 21, 2014
  • Good: Bumper profits threaten US ethanol support Time to free *all* energy sources from subsidies adj 4 pollution $$ Feb 21, 2014
  • Bottlenecks along the Industrial Revolution There is $$ 2b made in expanding energy infrastructure in America $$ Feb 21, 2014
  • CBO Is Right: Minimum Wage Hike Can Kill Jobs Suggests raising the Earned Income Tax Credit, which would add jobs $$ Feb 21, 2014
  • Obama Keystone Pipeline Review Roiled by Nebraska Judge Governor & Legislature bypassed Public Services Commission $$ Feb 21, 2014
  • Obamacare’s Latest Surprise for Taxpayers? @Asymmetricinfo says Obama Admin may extend risk corridors past 3 years $$ Feb 19, 2014
  • Detroiters Without Cars Seek Jobs in Vain as City Shrinks Cities r organic & they can die, like Detroit. Give up $$ Feb 19, 2014
  • UAW’s Devastating Defeat at a Tennessee Volkswagen Plant: 4 Blunt Points Give workers credit 4 rejecting bad deal $$ Feb 17, 2014


Market Impact


  • Frontier-Market Funds Pour in Boosted by Fixed Currencies 2 much $$ flowing into immature mkts via ETFs; avoid $$ Feb 22, 2014
  • Learning From a Literary Legend: The Importance of History Argues that 10-year stock returns will b below average $$ Feb 21, 2014
  • Income As The Outcome: Reframing the 401(k) Plan Int rates fall, 401(k) bond values rise, but future income falls $$ Feb 21, 2014
  • Wall Street Bond Dealers Renounce Treasuries That Lure Pimco This is a mess, &no one knows, but I remain long $TLT $$ Feb 19, 2014
  • FX Traders Facing Extinction as Computers Replace Humans True if all u r doing is matching trades not if profiting $$ Feb 19, 2014
  • Information asymmetry, bad incentives and Taibbi @izakaminska does an excellent takedown of Tabibi’s recent piece $$ Feb 15, 2014


Rest of the World


  • Japan Record Trade Gap Shows Risk of Abenomics Losing Steam High debts, trade deficit due 2 low yen, disaster $$ $FXY Feb 22, 2014
  • For Chinese, It’s Going to Cost More to Become Canadian Pity those that want to escape China 2 Canada w/their loot $$ Feb 22, 2014
  • Nigeria’s Delta Oil Thieves Scrape Out a Precarious Living Long piece shows a vignette of the troubles in Nigeria $$ Feb 21, 2014
  • Foreign Investors Scoop Up New Treasuries Even as Fed Cuts Buying Weaken your currency. Help exporters. Buy US Tsys $$ Feb 21, 2014
  • India Hedging at Two-Year High as Polls Shroud Outlook Fears of a minority govt have hedgers buying puts on Nifty $$ Feb 21, 2014
  • Samsung Investors May Discover World of Possibilities Pity about Sarbanes-Oxley. Samsung shares used 2 trade in US $$ Feb 21, 2014
  • Emerging Stocks Rise to Three-Week High on Record China Lending W/China overlending already a problem, not helpful $$ Feb 21, 2014
  • Invading Switzerland? Try Before 8 or After 5 The Swiss Air Force likes to have the evenings off. War can wait $$ Feb 21, 2014
  • UN warns North Korea’s Kim Jong-un w/a strongly worded letter Few things crueler than making a Mom kill own child $$ Feb 21, 2014
  • Bank of Japan Surprises Markets Expands Loan Programs, Keeps Main Policy Unchanged, builds bigger debt bubble $$ $FXY Feb 21, 2014
  • Japan’s GPIF Should Own $600B of Stocks, Ito Says Angling 4a nomination 2 the coveted “Putting in the top” award $$ Feb 21, 2014
  • As World’s Kids Get Fatter, Doctors Turn to the Knife Bariatric surgery on a 3-yo, as parents can’t say no re food $$ Feb 21, 2014
  • China Fund Shifts Focus Away From Energy to US, European Recovery Plays CIC shifts out of power & into real estate $$ Feb 21, 2014
  • Japan Growth Figures Disappoint GDP Increase Comes in Well Below Expectations, perhaps Abe will think twice $$ Feb 21, 2014
  • China Overtakes India as Gold Consumer When your property can b confiscated by gov’t, helpful 2 have gold 2 carry $$ Feb 21, 2014
  • US to Face G-20 Pressure Over Tapering If the emerging market nations are properly financed, US $$ policy won’t harm Feb 21, 2014
  • At Asia Air Show, Plenty of Competition for Sales of Drones Many uses 4 drones to monitor areas that r hard 2get2 $$ Feb 21, 2014
  • Russians Return to Cyprus, a Favorite Tax Haven But they won’t put $$ is Cypriot banks after losing much of it b4 Feb 21, 2014
  • Billionaire Niel Trains Geeks to Fix France’s Talent Mismatch Sets up a school in France that teaches programming $$ Feb 21, 2014
  • Elliott vs Argentina: 3 possible resolutions @felixsalmon Sovereign immunity, pari passu & bondholders’ ransom $$ Feb 20, 2014
  • Europe Mending as Markets Signal Even Portuguese Get Work Less clear than it seems, but Europe is getting better $$ Feb 20, 2014
  • Sochi Olympics: Vic Wild, American-Born Snowboarder Competing For Russia, Wins Gold Far better he got a good wife $$ Feb 20, 2014
  • What the Heck Is Going on in Venezuela? (Could the Maduro Regime Fall?) Yes, it could fall, but what will replace? $$ Feb 19, 2014
  • China Digs Itself Deeper Into Dollar Trap Buying Dollar assets supports the cronies of the party that export $$ $FXI Feb 19, 2014
  • Asia Has Crisis to Thank for Gains in Emerging Rout Emerging Asia, minus China, in better shape than 1997-8 $$ $FXI Feb 19, 2014
  • Swiss Fault Lines Exposed as Villagers See Risk to Postcard Life Urban vs rural & the “last settler” syndrome $$ $FXF Feb 17, 2014
  • Salmond Says Forcing Scotland to Drop Pound to Hurt UK Seriously doubt UK would giveup the seigniorage if Scots go $$ Feb 17, 2014
  • A Rebuke to Japanese Nationalism Japan needs 2 give up any sense that what they did in WWII was honorable $$ Feb 17, 2014
  • Indonesia Says Australian Defense of Spying Is ‘Mind Boggling’ My, but Snowden opened many cans of worms w/leaks $$ Feb 17, 2014
  • Saudis Agree to Provide Syrian Rebels With Mobile Antiaircraft Missiles Proxy war between Wahabis & Shia continues $$ Feb 15, 2014


Financials & Personal Finance


  • Wall Street Landlords Buy Bad Loans for Cheaper Homes Color me skeptical; when investors own homes, mkt overvalued $$ Feb 22, 2014
  • Energy Holdings Nears Bankruptcy After Creditor Talks Falter They overpaid & the debt was huge, even Buffett lost $$ Feb 22, 2014
  • Tender Offer for Insurer Divides a Boardroom $AFG ‘s offer for $NATL is more than generous, just tender yr shares $$ Feb 22, 2014
  • Putting Your 401(k) on Autopilot Would b better if we made plans where employees could buy defined benefit units $$ Feb 22, 2014
  • The growing case against ETFs Makes same point that Jack Bogle & I make, ETFs get traded badly by most investors $$ Feb 22, 2014
  • Americans Ramp Up Borrowing US Household Debt Posts Largest Quarterly Increase Since Before Recession $$ #seenthisb4 Feb 21, 2014
  • Has Small-Business Lending Really Improved? Qty available may b high, but yields r steep @ nontraditional lenders $$ Feb 21, 2014
  • The Current Opportunity Set Valuation-sensitive mgrs see fewer & fewer places 2 put $$ 2 work, so cash balances grow Feb 21, 2014
  • These Wells Fargo robbers were also tellers Comments, some think if banks r dishonest they should b stolen from $$ Feb 21, 2014
  • I, Claudius, caller of bank bonds Memo 2 bond investors: if you buy an odd bond, b sure 2 read the prospectus $$ $TLT Feb 15, 2014
  • When One Spouse Saves and the Other Spends I do not get how this person can be a financial advice columnist $$ $TLT Feb 17, 2014
  • Debt-Market Chill May Leave Banks Out in the Cold–Heard on the Street No January bounceback 2 make up 4 December $$ Feb 15, 2014

Companies & Industries


  • 10-Gbit Google Fiber is already real, just not from $GOOG $VZ has tested it & others 2, coming 2 biz, not home $$ Feb 22, 2014
  • Charter Seen Eyeing Cox After Time Warner Loss Cox family is pretty cagey; $CHTR would have 2 pay through the nose $$ Feb 21, 2014
  • ‘Candy Crush Saga’ Maker Files for an IPO Put King Digital in the “too hard” pile, hard to predict future success $$ Feb 21, 2014
  • Google to Push Its Fiber Rollout on Comcast’s Turf $GOOG experiments, $CMCSA will have hard time competing w/fiber $$ Feb 21, 2014
  • My Goldman Sachs Post-Traumatic Stress Disorder (And Why I’m Grateful) Toughened her up, made her more cynical $$ Feb 21, 2014
  • Chevron’s Free Pizza Offer Only Feeds Public’s Distrust It was a cheesy way 2 compensate people 4 their troubles $$ Feb 21, 2014
  • The Coal Plant an Illinois Town Couldn’t Give Away $AEE pays $DYN to take over a coal plant. Now $DYN wants 2leave $$ Feb 21, 2014
  • Rarest of Rare Iridium Gains as Growth Spurs Demand Cheaper than gold, Iridium is used in industrial applications $$ Feb 21, 2014
  • Buffett’s Coca-Cola Complacency Warning Foretells Troubled Year Listen to Buffett, his intuition is sharp $$ Feb 20, 2014
  • Steve Perlman’s Amazing Wireless Machine Is Finally Here If it works, it is a huge increase 4 mobile bandwidth $$ $T Feb 19, 2014
  • Actavis Agrees to Buy Forest Labs for $25 Billion Kudos 2 @Carl_C_Icahn Quite a string of victories $FRX $ACT $IEP $$ Feb 18, 2014


Fed Notes

  • Fed Puts Rate Increase on the Radar Move Before 2015 Unlikely, but Minutes Suggest Some Inflation Hawks R Circling $$ Feb 21, 2014
  • The Key Passages in the Federal Reserve’s Minutes Hawks start discussion on when the Fed Funds rate should rise $$ Feb 21, 2014
  • Yellen Leads Fed Damned Every Way by Emerging Market Angst Can’t win b/c developed mkt $$ policy swamps EM policies Feb 21, 2014


US Economics


  • Worsening US Divorce Rate Points to Improving Economy “We’re finally doing well, honey. Now we can afford2divorce” $$ Feb 21, 2014
  • Citi’s Economic Surprise Index Hits Zero As such, the economy is slowing & bond yields r falling. Who knew? $$ $TLT Feb 21, 2014




  • ‘Downton Abbey’ Is Downright Un-American If a servant wrote book about how nice her employer was it wouldn’t sell $$ Feb 21, 2014
  • Go Ahead, Let Your Kids Fail Fail & bounce back -> Kids gain skills & grit @asymmetricinfo is off on her book tour $$ Feb 21, 2014
  • I Took the GMAT With No Preparation. Here’s What Happened Journalist gets score good enough 2 go 2 biz school $$ Feb 20, 2014
  • Friedman and Hanke on Bitcoin But what happens when 1 party gets cheated in a Bitcoin transaction? Caveat emptor? $$ Feb 20, 2014
  • The Official Forecast of the US Government Never Saw This Winter Coming We don’t understand climate well $$ $TLT $SPY Feb 19, 2014



  • Wrong: In Buffett We Trust as Berkshire Annual Report Lacks Disclosure There is more than adequate info in the 10K $$ Feb 21, 2014
  • Wrong: Cut Off Harvard to Save America When u mess w/what is a nonprofit & not, u can’t tell what will b the result $$ Feb 21, 2014
  • Wrong: Is China at Risk of a Debt Crisis? Not Really,Bank Says China facing domestic banking crisis, like US 2008 $$ Feb 19, 2014


Comments, Replies and Retweets

  • “From what I glean, Zuckerberg romanced them & told them $FB wouldn’t touch their baby. We’ll see” — David_Merkel $$ Feb 20, 2014
  • “Well said. It is hard for China to give up forced investment and export promotion. It’s economic heroin” Merkel $$ Feb 19, 2014
  • Commented on StockTwits: This: and if I knew Spanish, could have seen it earlier:… Feb 18, 2014


Why are Pensions so Messed Up

Tuesday, February 18th, 2014

A few days ago, I was reading Felix Salmon’s piece Pension politics.  (Nice title, the type that Tadas likes — the shorter the better.)  I wrote a short response in the comments, largely agreeing with Felix.  Here it is:

Here are the facts:

1) DB pension funding accounting rules are more liberal than life insurance accounting rules.

2) Pension actuaries have long assumed investment earnings rates well in excess of what can be achieved.

3) Longevity has long been increasing for those that buy annuities, and take pensions.

4) Average people are lousy investment managers, they panic and get greedy at the wrong times. Pension asset managers aren’t great, but they largely avoid panic & greed.

5) The PBGC is horribly underfunded, as are most municipal pension plans.

6) Overseas, things can be bad, like Poland, Argentina, India, etc. In those cases being on your own is better. Our custodial systems here are pretty good. (Please ignore MF Global.)

7) Fees are generally too high in asset management, and most people should go for passive management, or a few clever value investors.

8 ) Hedge funds, commodities, and private equity are not the answer. Analyze the returns on an dollar-weighted [IRR] basis and they will be much lower than the illustrated buy & hold returns.

9) Highly paid workers lose out in bankruptcy. Multi-employer trusts are prone to a run on the pension plan if a major employer goes BK.

10) the average person is at best a budgeter, and not an investor. That said, buying inflation insurance is very expensive, if you can achieve it at all.

Summary: in general, you are right, Felix, but it is a question of cost to the corporations funding the DB plans. I think the cost is worth it, but maybe it needs to be shared with workers, taking pre-tax dollars to buy more future DB plan payments. How many people would do that? Sadly, not many.

Pensions have always been a bit of a compromise.  In order to get employers to create Defined Benefit [DB] pensions, the government allowed for funding methods that were liberal — a plan sponsor wouldn’t have to put in as much at the beginning; it can catch up over time.  More than that, the assumptions that DB pensions could use were far more liberal than what life insurers could use for similar contingencies.  Life insurers had to use best estimates and then add risk margins.  Pensions could dream of returns, with no risk margins.

The 401(k) was an accident.  It was tossed into a much larger bill, and no one noticed.  After passage, some benefits consultants, notably Ted Benna, found ways to use it, creating the boom in Defined Contribution [DC] plans.

Corporations initially added DC plans to their DB plans, but as the 90s ended, and equity performance sank, many terminated their DB plans.  Part of it was the asset markets, but another part of it was aging workforces, because the funding rules were weak (unlike life insurance).  Sponsors realized that they would have to spend a lot more on DB plans in the future than they would otherwise want to.  Now stingy corporations cut back on their DC matches, or accept kickbacks out of investment manager fees.

There are two great virtues in defined benefit plans: 1) Investing is handled by professionals.  2) Level payments are made.  Most people can budget.  Few can invest.  Yes, there is the problem of inflation, should it occur, but pensioners should have assets outside of their pension to deal with inflation.  They need longevity insurance, so that they avoid outliving their assets.

Though it might be hard managing a fixed income versus uncertain inflation over an uncertain lifespan, it is much harder to manage a lump sum over a full retirement.  When finances are tight, it is much harder to make the right decisions.  Hope biases average investors in favor of taking chances, whether the market favors taking chances or not.

Add in the troubles with defaults of DB plan sponsors, and significant benefits can be lost, particularly if you have been highly paid.

I would want to tell most asset allocators that there is little to no magic in alternative investments.  The alternatives face the same risk factors as ordinary investments, and they are not underinvested by pension investors.

Closing Notes

Sorry, I forgot to blame the IRS for limiting overfunding for tax reasons, when the overfunding was really funding, and would have been useful today.

Even without the introduction of the 401(k), corporations would have cut back on DB pensions because of costs.  A lot of that was due to bad funding methods, but without those bad funding methods, many DB plans would never have been done.

Just be grateful you don’t live in other parts of the world, where governments are more graspy, and pension assets are a target to plug holes in the government deficit.

Sorted Weekly Tweets

Saturday, February 15th, 2014

Market Impact


  • Companies Squeeze 401K Plans From Facebook to JPMorgan This should not surprise, many companies shrink labor costs $$ Feb 15, 2014
  • Wells Fargo edges back into subprime as US mortgage market thaws Isn’t a problem now, problem comes w/imitators $$ Feb 15, 2014
  • Homebuyers Get Break as Loan Rates Defy Fed Tapering Housing & general economy weakened, so mortgage rates fell $$ Feb 13, 2014
  • Pension politics @felixsalmon points out how defined benefit plans r in general better 4 workers. Mind the PBGC $$ Feb 13, 2014
  • Colleges Raise Record $33.8B Exceeding US Peak in 2009 Donations always follow creation of unrealized cap gains $$ Feb 12, 2014
  • Some Lines Say Maybe the Stock Market Will Go Down @matt_levine correctly criticizes the 1928-9 $SPY graph overlay $$ Feb 13, 2014
  • 1929 Stock Market Crash Chart Is Garbage Unequal left & right scales make the relationship look tighter than it is $$ Feb 12, 2014
  •  When to Ignore the Investment Experts “When all the experts &forecasts agree — something else is going 2 happen.” $$ Feb 11, 2014
  • Comparing Economic Recoveries In 1984-2006, growth was borrowed from future by increasing debt levels-> #payback $$ Feb 11, 2014
  • Aluminum Lines Still Trouble the London Metal Exchange Aluminum inventories will b a prob, til short intrates rise $$ Feb 11, 2014
  • Top Anecdotal Signs of a Market Bubble Good piece, like one of mine: Watch the credit cycle $$ Feb 11, 2014
  • Ten Stocks to Own During a Market Correction Good list. I own a few of them. $$ Feb 11, 2014
  • Does trend-chasing explain financial markets? Partly. Difference between investment IRR and total return is big $$ Feb 10, 2014
  • “Security. Safety. Stability.” from @reformedbroker Gold is useful at certain points, but only when it is hated $$ Feb 10, 2014
  • Flows Don’t Follow Value, They Follow Performance @reformedbroker wrote this little gem. Learn & internalize it $$ Feb 10, 2014
  • Long Term Charts 2: Western Markets Since The Middle Ages Interesting charts from very messy data at Zero Hedge $$ Feb 10, 2014
  • Most Expensive Place to Find Out Who You Are @jasonzweigwsj : Your reaction 2 minor crisis shows yr risk tolerance $$ Feb 10, 2014


Companies & Industries


  • AIG Takes $832 Million Charge on Death Bets as Hedge Funds Gain Life settlements should b illegal $$ $MET $AIG $PRU Feb 14, 2014
  • To Stop the Coffee Apocalypse, Starbucks Buys a Farm $SBUX helps create a variety of rust resistant Arabica trees $$ Feb 13, 2014
  • Former BlackRock Manager Finds Billions on Rice Energy Few investment mgrs have operating talent; Daniel Rice does $$ Feb 13, 2014
  • Buffett’s Pal Munger Heads a Very Weird Company Growth of $DJCO thru investing leads 2 # of growing pains & 13F $$ Feb 13, 2014
  • Here’s Why the Biggest Cable Company in the Country Thinks It Can Get Bigger Feds tolerant of cable re antitrust $$ Feb 13, 2014
  • Why AOL ended up spending millions on ‘distressed babies’ $AOL chose 2b in healthcare biz 4 its employees & lost $$ Feb 13, 2014
  • 3 High-Yielders To Buy On The Pullback In total $SNH issues more stock than it pays in divs. Divs -> cap losses $$ Feb 13, 2014
  • Who is John Thompson? A look at Microsoft’s new chairman May have right stuff to protect new CEO from meddling $$ Feb 10, 2014


US Politics & Policy


  • Runaway Drones Map Land, Film ‘Wolf,’ Knock Down People, FAA Gives Chase Drones r here 2 stay; time license them $$ Feb 15, 2014
  • Teacher Tenure Put to the Test in California Lawsuit Tenure has outlived its usefulness; older teachers can b lazy $$ Feb 15, 2014
  • Lincoln’s Foreign Policy in Today’s World Kept England & France from joining Civil War; otherwise pragmatic $$ $SPY Feb 15, 2014
  • What Would Lincoln Do? A clever man w/principles, who did not cease to be pragmatic pursuing 1 main goal – Union $$ Feb 15, 2014
  • Harvard Professor Attacking Google Thrives as Web Sheriff At some point, lack of disclosure will blow up on him $$ Feb 14, 2014
  • The $2.2B Bird-Scorching Solar Project Get used 2 idea: almost every form of energy imposes environmental costs $$ Feb 13, 2014
  • Obamacare Damage-Control Teams Seek to Calm Complaints Things r tough when u r trying to avoid media embarrassment $$ Feb 13, 2014
  • Billionaire Musk Gets Brownsville to Pay for SpaceX Like a football owner bargaining 2 get taxpayers buy a stadium $$ Feb 13, 2014
  • Snowden Swiped Password From NSA Coworker & it cost him his job. Snowden denies it; NSA is Not Saying Anything $$ Feb 13, 2014
  • Puerto Rico Legislators Amend Bill Calling for Bank-Deposit Shift Provincial govt’s attempt 2raid cookie jar stopd $$ Feb 13, 2014
  • Obamacare Will, in Fact, Encourage Employers to Cut Jobs As the employer mandate comes into force, jobs will b cut $$ Feb 12, 2014
  • Tea Party Scorns Republicans as House Lifts Debt Ceiling t-party can b “pure” as Dems raise ceiling w/few GOP $$ $TLT Feb 12, 2014
  • A Lame Duckish Calm Falls Over the Capital Parties in DC act as if the next event is the November elections $$ $TLT Feb 12, 2014
  • Obama Rewrites ObamaCare Another day, another lawless exemption, once again for business; WSJ bangs populist drum $$ Feb 11, 2014
  • The US Senate Again Insists on USPS Saturday Mail Delivery 2 timid; end Wednesday & Saturday delivery $$ $UPS $FDX Feb 11, 2014
  • US firms ‘paid effective tax rate of 2.2% in 2011’ More than a tax haven, Ireland helps insurers shave reserves $$ Feb 11, 2014
  • No Honeymoon for Janet Yellen QE withdrawal will bite, & what will become of all the deposits? $$ Feb 11, 2014
  • Please Hold Your Bernanke Applause Remember, when Greenspan left, he was viewed as a success, same as BB now $$ $TLT Feb 11, 2014
  • Sounding the Tax Alarm, to Little Applause IRS stiffs whistleblowers who often lose employability 4 being a tipper $$ Feb 10, 2014


Rest of the World


  • Putin is Playing a Game of His Own Not so fast. Russia has significant resources & influence in Eastern H’sphere $$ Feb 15, 2014
  • Boy’s Life Hanging on 8-Hour Trip Shows Why Venezuelans Protest Socialism is like a cancer that spreads til death $$ Feb 14, 2014
  • Let’s Watch Venezuela Destroy Itself Logical extreme of Socialism falls apart; pity that Chavez never lived 2c it $$ Feb 14, 2014
  • Chinese Join Winklevosses in L.A. Luxury Home Hedges Amazing what the wealthy will pay 4a fancy foreign retreat $$ Feb 14, 2014
  • Next crisis won’t come from the emerging markets Argues France, Germany, Britain, Australia & Canada-> 2 much debt $$ Feb 13, 2014
  • Mister Donut, Pan Am and Friendster Found Alive and Well Old brands never die, they just move overseas & make $$ $SPY Feb 13, 2014
  • Bank of England points to 2015 rate rise, blurs guidance More precision than 1 can know; the world is messy $$ $FXB Feb 13, 2014
  • Italy Pays Record Low to Sell 3-Year Debt at Auction Let the leverage build for the next crisis $$ Feb 13, 2014
  • Fink to Mobius Touting Emerging Stocks Fails to Stem Outflow A time 2 nibble, not a time 2 gulp $$ $EEM Be wary Feb 13, 2014
  • Greek Truckers Show Plight as Groceries Show Up Frozen Freeing up the labor market will work as attitudes change $$ Feb 13, 2014
  • Tunisians Bolt Doors Even After New Constitution Passed Constitutions cannot create cultural change; asks 2 much $$ Feb 13, 2014
  • Israel Desalination Shows California Not to Fear Drought When resources r tight there are incentives 2 create tech $$ Feb 13, 2014
  • London Walkie Talkie Owners to Shield Car-Melting Beam Reflective parabolic curve of building melts cars @ a spot $$ Feb 12, 2014
  • Rouhani Seeks Economic Fix as Iran Commemorates Revolution Will have to get the agreement of unelected true rulers $$ Feb 11, 2014
  • Argentina to Replace Bogus Inflation Index to Mend IMF Ties Argentina tries 2 find cheapest way out of this mess $$ Feb 11, 2014
  • Who Should Pay for Trusts that Go Bust? If China is smart, protect depositors, but let banks & WMP holders fail $$ Feb 11, 2014
  • Iceland Girds for Fight as Suit Targets Half $14B GDP Icelandic taxpayer will refuse the bill; UK will b stiffed $$ Feb 11, 2014
  • Mobius Says Emerging-Market Rout Near End as Valuations Lure I dunno, a 4% earnings yield premium seems small $$ $EEM Feb 11, 2014
  • Rehabilitating Portugal Long; Argues that a Greek-style bailout should b done, or Portugal will eventually default $$ Feb 11, 2014
  • Iranian TV Shows Rare Broadcast of Band Playing Music Christianity has always been easier on music than Islam $$ Feb 11, 2014


Work Trends


  • Sheep-Shearing Wells Fargo Banker Bridges US Income Gap Sells coffeemakers too; many in US work multiple jobs $$ $TLT Feb 13, 2014
  • Workers Shed Caution, in a Healthy Sign for Labor Market When workers r willing 2 quit, labor mkt is healthy $$ $TLT Feb 11, 2014




  • A Little Valentine’s Day Straight Talk Sage counsel 2 younger women if they want to get married: start early $$ Feb 15, 2014
  • The Sex Question Readers Want Answered Most Even Long-Married Happy Couples Ask, ‘How Can We Have Sex More Often?’ $$ Feb 11, 2014
  • Ten Ways You’re Probably Leaving Money on the Table Simple list of ways to save money for avg upper-middle class $$ Feb 11, 2014
  • Why Mom’s Time Is Different From Dad’s Time Husbands, u can win if u reduce chaos for your overburdened wives $$ Feb 11, 2014




  • US Scores Fusion-Power Breakthrough Bad news is Tritium very expensive @ $100K per gram; takes much energy 2 make $$ Feb 13, 2014
  • If Ocean Heat Pump Switches On, Expect to Feel It Speculative; we don’t understand climate or hurricanes well $$ Feb 11, 2014
  • Who is Steven Reisman? Meet Hip-Hop VIPs’ Favorite Lawyer, The Man With The $2 Bills Weird. Very, very weird $$ $SPY Feb 11, 2014
  • What Really Happened to Flappy Bird? Beware the success u wish 4? Also: Still a puzzle $$ $SPY Feb 11, 2014


Wrong, etc.


  • Skeptical: Blackstone-Fueled Single-Family Home Boom Lifts Chicago In past hi levels of investor ownership bearish $$ Feb 15, 2014
  • Wrong: Pros Panic, Retail Investors Stay Cool on Emerging Markets Too short a period time to judge $$ Feb 14, 2014
  • Wrong: Social norms: The indignity of no work New technologies will create new jobs & make the whole world better $$ Feb 13, 2014
  • Wrong: Warren Buffett is laughing at you for selling Poorly thought-out piece glues 2unrelated ideas together $$ $EEM Feb 13, 2014
  • Wrong: The #1 High-Yield Investment Of America’s Elite Spammy article that talks about REITs as if they r a secret $$ Feb 11, 2014


Replies, Retweets & Comments


  • 10 miles west of Baltimore, MD, we got ~15 inches of snow over the last last 2 days. #snow #weather #pax $$ Feb 14, 2014
  • “I made this comment six months ago:… & then, I tipped the SEC. …” — David_Merkel $$ $DJCO Feb 13, 2014
  • “Administrative Services Only” plus individual stop loss protection is in general the smart way2…” — David_Merkel $$ Feb 13, 2014
  • “This is a common confusion in statistics — you can have a high correlation and a low beta. Second…” — Merkel $$ Feb 13, 2014
  • RT @Pawelmorski: Scary parallel my foot. Feb 12, 2014
  • @davidgaffen that would only be a temporary fix. I wrote this 3.5 yrs ago on the topic: The internet eats USPS Feb 11, 2014
  • @quakkelaar I miss you too. If you are ever near Baltimore/DC, let me know; we can get together, brother. Last few years have been hard Feb 11, 2014
  • RT @ReformedBroker: Please explain how the wording of this investment advertisement on the Washington Post site could be legal:… Feb 10, 2014
  • ‘ @quakkelaar Hail old friend. Yes, same old mistakes, b/c those wishing to retire are making the money sweat, until it rebels on them $$ Feb 09, 2014


Avoid Selling Stocks When You Are Old, Maybe?

Thursday, January 16th, 2014

The Wall Street Journal recent had an article, What You Know About Retirement Investing Is Wrong, where it recommended that elderly people invest more in stocks as they get older.  I think the advice is wrong, unless you understand it this way:

Stocks are longer assets than bonds.  Use your bonds to pay for your spending in the early years of your retirement, and don’t sell your stocks.  Once you run out of bonds, start selling your stocks, if the dividend income isn’t enough to live on.

But even this idea is weak.  If a person followed this in 1997 with a 10-year horizon, their stocks would be worth less in 2008-9, even if they rocket back out to 2014.

Asset allocation is more difficult than it is in the textbooks, or in the syllabuses for the CFA Institute or for CFPs.  It is a blend of two things — when does the investor need the money, and what asset classes offer decent risk adjusted returns looking forward?

If long-dated, volatile asset classes offer great returns looking forward, but the client has a short time horizon, he can’t invest much in risk assets.

If long-dated, volatile asset classes offer great returns looking forward, but the client has a long time horizon, he can invest a lot in risk assets.

If long-dated, volatile asset classes offer poor returns looking forward, but the client has a short time horizon, he should stay in safe assets.

If long-dated, volatile asset classes offer poor returns looking forward, but the client has a long time horizon, he should stay in safe assets.

Stocks do tend to do well over the long run, but few of us live in environments where that growth is uniform.  The stock market zigs, zags, booms, and busts.  What if it busts when your are old?

Personally, I think it is wiser to maintain a more balanced investment posture in retirement, because the future is not predictable.

Book Review: Kentucky Fried Pensions

Tuesday, December 17th, 2013

frontfinal This book takes you through the corruption in the Kentucky Retirement System.  It has the dubious distinction of being the worst-funded municipal pension system in the US, leaving aside Puerto Rico.

This book is very well-researched for three reasons:

1) The author served one four-year term on the board of the Kentucky Retirement System, so he has insider knowledge.

2) The author is an expert on pensions — he has worked in this area for over 25 years.  He also holds a CFA Charter, which demonstrates his knowledge in investments, and his commitment to ethics in investing.

3) The author extensively cites his findings, giving nearly 600 endnotes in an otherwise 256-page book.

The Kentucky Retirement System is not a victim of incompetence alone, but of fraud, political favoritism, and structured neglect.  The structured neglect is probably the most serious matter.

For years, Kentucky would not pay its full actuarially required contribution to the retirement system.  Now, you can’t argue with the math, though you can argue with assumptions.  Not making the full payment persistently will leave a pension plan weakly funded.   As the author points out, it is a quiet means of borrowing against the future, and at a far higher rate than Kentucky could borrow in the municipal bond market.

This is the product of a broken political culture that only cared about the present:

1) Keeping current taxes low

2) Spending more than taxes

3) Politicians accepting bribes campaign contributions from those gaining pension business from the State of Kentucky.

4) Board members that would not enforce thorough audits.

5) Board members that would not seek out investment experts for their board.

6) Politicians that would appoint weak board members that were political cronies.

7) Awarding investment mandates to political cronies, where placement agents would earn disproportionate sums.

8 ) And more…

If you read this, you will wonder how a municipal pension plan could get screwed up so badly.  My answer is this — the political culture of the state tolerates corruption, so it grows like a weed in obscure places like the Kentucky Retirement System.

On the Rating Agencies, Etc.

The book asks the question as to why the rating agencies were complicit on municipal pensions, waking up late to the problems.  My answer is simple.  The rating agencies have never hired many actuaries, and as such did not consider what is obvious to any actuary that I know.  They came to the game late, and that is normal for the rating agencies — if there has not been a failure from a given factor, their models will not have that factor.  That’s normal for most of us, because few of us can envision failures that have never happened before.

Few are like Buffett, who said, “We’re paid to think about things that can’t happen.”  That is the sound of one hand clapping, and few can hear it.

Never allege conspiracy, when mere incompetence will do.  Few saw the housing bubble, and many denied it, including the present and incoming Fed Chairmen.  Incompetence is pervasive; we should be surprised when things go well.

On Pension Obligation Bonds, we should note that they are a dumb idea, and that every municipality that has tried it ended up regretting it.  It is hard enough to fund pensions without borrowing money; it is much harder to do after borrowing money.


The main problem with the book is that it needed a better editor.  It reads like a series of essays that are self-contained, because much material is repeated that could have been eliminated.

Secondarily, the book takes a position that pension benefits can’t be cut.  That is not true.  It may take constitutional changes to do so, but in a democracy, anything can be done.  We could repeal the prohibition against ex post facto laws on a basis limited to pensions.

I say this because many municipal unions pressed for pensions far beyond what was warranted, in exchange for lower salary increases.  It appealed to venal politicians, because increasing pensions usually had no current cash cost.

Eventually, municipalities will be forced to cut pensions, even for those that have retired.  There will be no other choice.

Who would benefit from this book: If you want to know the depths of depravity in municipal pensions, this is the book for you.  If you want to, you can buy it here: Kentucky Fried Pensions: Worse Than Detroit Edition.

Full disclosure: The author sent me the book after I asked for a review copy.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

Book Review: Retirement GPS

Wednesday, December 4th, 2013


This book encourages you to invest most of your savings abroad, away from the imperfect but good protections offered by US law.  I wrote a piece on this idea a few years ago that pointed out the problems with this idea.  (Note to those reading this at, Google “Aleph In Defense of Home Bias” and you will find my article.)

Now don’t get me wrong — I invest in foreign companies.  One-third of the assets that I run are invested abroad, in both developed and emerging markets.  International investment is good, but it is not a panacea.  There is no inherent advantage to investing abroad versus investing in the US.  Even if emerging markets are growing more rapidly, that doesn’t mean they are better to buy. because valuations are higher, and government policies are more fickle.

This book is rather facile about problems in emerging markets.  Problems with Brazil led me to sell my stocks when Dilma Rousseff was elected President.  Lula promoted markets, Dilma did not.

I found this book to be long on cliches, and short on sharp ideas.  If you try to take the advice as an amateur, you will have a hard time doing it.  If you decide to hire an advisor other then the authors, you won’t get what the book offers.  Thus I can tell you that the book is merely a marketing pitch for their services, and so I tell you to avoid it.


Already expressed, though I would also add that the book didn’t feel right.  Too casual in the way that it treated topics.

Who would benefit from this book: Few would benefit from the book; the theory is flawed.  If you want to, you can buy it here: Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.

Full disclosure: The publisher sent me the book after asking me if I wanted it.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

The Municipal Pension Payment Curve

Thursday, October 31st, 2013

This article was originally going to be titled, “Dying Cities, Dying States, Dying….”  I thought that would be correct but too pointy.  The key to thinking about pensions is to look at the likely cash flows for current and former employees.

Here’s my scenario: a municipality decides to terminate its overly generous defined benefit [DB] plan, and though it is 30% underfunded, they agree to not let underfunding get greater than 30%.  Sadly, the discount rate on the pension cash flows is 8%/yr, but the likely investment earnings rate is 6%/year.

Here’s the graph of pension payments to beneficiaries, and contributions to the plan:

Pension Payment curve_14804_image001

At the beginning of this scenario, pension payments were 10% of the municipality’s budget.  Assuming taxes only grow at the rate of 2%/year,  contributions to pensions are not less than 10% of the municipality’s budget until 2049.  As a share of the budget, it peaks out at 32% from 2032 to 2035.  It’s over 20% from 2022 to 2043.

30% underfunding isn’t that uncommon, and discount rate assumptions of 8% aren’t that uncommon either.  Would that all municipalities were at discount rates of 6%, or at my more likely view, 4%.

But it doesn’t matter.  We can argue over assumptions.  The cash flows actually paid to beneficiaries do not rely on assumptions.  The assumptions exist to try to allow pre-funding, so that municipalities fund their plans to the same degree that benefits are accrued.  Some municipalities have done that with pensions, almost none have done it with retiree healthcare, but the retiree healthcare promise is much weaker one.  You can turn it from a Cadillac plan to hospice care, in many cases.  In this case the state constitution matters a great deal, so do your own homework here.

Part of my advice to you is to watch weaker states and municipalities, like Puerto Rico, Illinois, Chicago, Pittsburgh, and many others.  I don’t have all of the data in front of me.  This is one of those cases where relative standing is important.  People will migrate out of areas with low funding, and high expected payments, and into municipalities with higher funding, and lower expected payments in relative terms.

You will see municipalities depopulate, because the taxes are disproportionate to the increasingly slim services rendered, because much of the revenue pays for the overly generous past promises to retirees.  As a result, you will see more municipal bankruptcies.  I would expect that you would see most of the bankruptcies in the 2020s.

I know that’s vague, but I think it is more defensible than Meredith Whitney’s notable statement a few years ago.  The pension cost curve is inexorable, and I suspect most municipalities can bear it for the next six years, but will have a hard time with it as the tail end of the Baby Boomers retires in the 2020s.


1) If you are in an area under pension stress, if you at all can, not harming your existing earnings, move to an area not under that stress.  Remember, as other people move, it will become increasingly difficult to maintain existing services.  Think of the slow police response times in Detroit, and packs of stray dogs that roam the city.

2)  If you work for a municipality, consult your state constitution to see what you are guaranteed.  In many cases, healthcare will not be covered.  Even existing pension benefits in payment now may be under threat in a default.  Be aware.

This is one of those cases where the rich will get richer, and the poor will get poorer — better to be on the rich side of the line, and sooner.

Final Note

All that said, we face the same issues with Social Security and Medicare, though both are unfunded.  At present, Social Security’s payments will be cut by 25% or so in 2026, unless some adjustment is made to the system.  Medicare is another issue, and the question is what will it cover.  It could be stripped back a great deal when the US realizes it can’t fund a generous system that extends life a few years at high cost.

My main point to all of my readers is to be aware of the imbalances in the existing systems, and be ready for the coming adjustments, because the US economy will not be willing to make all of the payments that have been promised to oldsters who have served the public.


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

 Subscribe in a reader

 Subscribe in a reader (comments)

Subscribe to RSS Feed

Enter your Email

Preview | Powered by FeedBlitz

Seeking Alpha Certified

Top markets blogs award

The Aleph Blog

Top markets blogs Bull, Boards & Blogs

Blog Directory - Blogged

IStockAnalyst supporter

All Economists Contributor

Business Finance Blogs
OnToplist is optimized by SEO
Add blog to our blog directory.

Page optimized by WP Minify WordPress Plugin