1/ Several months from now, the corona virus danger (& panic) likely will be behind us. But lower earnings for 2020 will linger, even assuming China isn't plunged into worse economic chaos. What's an immediate effect in the US?
2/ The political fallout is impossible to gauge. Here's one thing that seems more certain, though The public pension fund peril, which has long been building, but has been masked by the decade-long bull market, will be fully evident.
3/ Important story today in @WSJ by @hgillers. It's at B9, but I would have placed it atop the fold on B1:
wsj.com/articles/fragi…
wsj.com/articles/fragi…
4/ Pension funds face a double-whammy. Plummeting bond yields have for some time meant that fixed income can no long be relied about for 40% to 50% of fund return. So, funds have increasingly relied upon publicly traded equities (and, more perilously, PE & other alt investments).
5/ The article quotes the Wilshire Consulting CIO as estimating public pension funds have shrunk by between 3% & 5% over the past few weeks (and that's before today's trading).
6/ Most public pension funds, in calculating their liabilities, assume they will earn 7% per year. And even at that, most are underfunded, many of them terribly underfunded. Now, let's see what happens when returns actually go negative.
7/ It's also a problem for corporate pension funds. They use more realistic assumptions in estimating fund performance & liabilities. But falling corporate bond rates mean public companies will have to make far larger pension contributions this year.
8/ Remember as you consider this: Illinois is broke. New Jersey & Connecticut are not far behind. Many municipalities, too, are terribly strained, Chicago being the largest example. Puerto Rico problems are coming to the continental U.S.
9/ These problems have been building for years. Commentators such as @jpmorgan's Michael Cembalest have been warning about them with detailed research pieces. They were bound to emerge even more starkly when the bull market finally ended, or at least paused.
10/ MMT no doubt has wonderful attributes & has solved (papered over?) some problems. But it has also repressed interest rates & gutted the traditional means of assuring reliable pension funding via fixed income. And, here we are. Link again: wsj.com/articles/fragi…
