by Dave Kranzler, Investment Research Dynamics:
Congress, for some reason, has agreed to use U.S. Taxpayer money to bailout Puerto Rico. That’s mighty generous of Congress to use Citizens’ money for that, especially when most Congressmen have their money tax-sheltered in the Rothschild Trust Company in Reno. But it begs the question: Why is Puerto Rico even part of the United States?
An article in the Wall Street Journal reports that Puerto Rico’s pension fund is underfunded by $43 billion, which is on top of $70 billion in various forms of Government debt. Puerto Rico is an “unincorporated territory of the U.S., which means that it probably harbors a lot of U.S. money hiding from the IRS. That explains why Congress is using other people’s money to bailout their own money plus the money of those who fund Congressional seats.
Puerto Rico, for all intents and purposes, has financially collapsed. Your tax dollars are keeping it solvent and paying out pension beneficiaries. But the State of Illinois would love to have the size of PR’s problems. The State pension fund in Illinois is underfunded by over $111 billion. That’s based on a lot of assets like commercial real estate, junk bonds and private equity investments that are marked to fantasy. Mark ’em to market and I bet the pension fund is underfunded by closer to $200 billion.
That’s just Illinois. If we were to do a rigorous mark to market assessment of the State pension funds in California, Texas, New Jersey, New York and Florida, I’d bet my last roll of silver eagles that combined the pensions in those States – not including Illinois – are underfunded by over $1 trillion.
The graph above shows a 60-minute intra-day chart of the S&P 500 going back to late June. I’ve been featuring this chart in my Short Seller’s Journal every week. The S&P 500 has basically flat-lined since July 7. If you overlaid a bollinger-band width indicator, it would show a horizontal line since July 7. The Fed has temporarily achieved the remarkable feat of removing volatility from the stock market.
The Fed has keyed the stock market to minimizing VaR. “VaR” stands for “Value at Risk.” It’s essentially a fancy-sounding term that measures how much an investment portfolio – or bank asset portfolio – might lose given certain volatility assumptions over time. That’s it in a nutshell though I’m sure quant-geeks will get picky with that summary.
But the bottom line is that if market volatility shoots up for some reason, VaR will shoot up and that will incinerate every single big bank and pension fund in this country. Puerto Rico’s predicament will look like a feel-good Broadway musical by comparison.
A friend of mine did a comprehensive of study of public pension funds and concluded that a 10% or more drop in the S&P 500 over a sustained period of time would induce the collapse of all public pension funds. I think he assumed the best case in terms of how pensions currently mark their assets. If you notice, the 10%-plus sell-offs last August and January were followed by sharp “V” bounces – both time. That was undoubtedly the work of the Fed and my friend’s quantitative work explains why.
I would be surprised if there’s ever been a 7-week period of time when the volatility in the stock market has been as low as it has been since July 7. Especially considering the high volume of economic, political and geopolitical events that are occurring simultaneously, each of which individually has caused sharp market sell-offs historically.
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