Two Summaries and an Assessment

by Dave Schuler on June 16, 2014

Here’s a summary of Mohammed el-Erian’s summary of the IMF’s report on the state of the U. S. economy:

  • Growth this year will be 2% or below
  • Growth for the foreseeable future will be 2% or below
  • Interest rates will stay low for a protracted period

Now here’s the assessment. If your financial plans include a portfolio that’s growing at 8% or faster, you might want to reconsider your plans. I’m talking to you, public pension plans.

{ 16 comments… read them below or add one }

... June 16, 2014 at 3:45 pm

Yeah, and looking at another downward revision for Q1 GDP. And yet they’re still saying most of it was because of an unexpected outbreak of winter in winter. Consumer spending is the downward factor mentioned this time. Q1 was just bad, even accounting for weather and business laying off of inventory build to offset last year’s Q3. (That last thrown out there to save Drew some time later.)

Too bad none of our rulers give a fuck about the economy. And I’ll skip the story about the IT worker forced to train his H1-B replacement – it’s all too common and predictable these days. “Which is why we need immigration reform,” he said sarcastically…..

Guarneri June 16, 2014 at 5:13 pm

Indeed, Q1 was just plain bad. And god forbid we ever have cold and snow again………in winter of all things.

There are as many pension allocations schemes as pension funds. And return predictions, seein’s how they are about the future, are difficult. But you won’t go too far wrong with the following. Be afraid, very afraid.

Typical Pension Asset Allocation (stylized, and long term)

Cash 4% Return: 0%
ST and LT Debt 45% 2.5%
Public Equities 35% 9%
RE 5% 7%
Alternatives 11% (PE, Hedge etc) 12%

Weighted Average Portfolio Return: 5.6%
Recently public equity returns have beaten 9%, but required return to get to 8% for the portfolio? 15%/yr……….forever. Not a chance.

If the Fed stops pumping the public equity market, then what? Its 1/2 to more of the total return. Further, what will happen to bond prices (total returns) if rates rise (they fall, for those of you not financially inclined)

It could be a real shit show.

But let’s just assume the two scenarios I originally laid out (a best case). What the hell you say. 5.6% vs 8%, is it really that different? Well. Yes.

Over a 10 year period the lesser portfolio value grows only to 80% of the 8% portfolio value. (70% in 15 years) That’s a huge shortfall; the power of time. And most pension funds aren’t even fully funded today.

All I know is you neither want to be the guy or gal counting on that public pension check……..nor the guy or gal paying the taxes to fund that check. You want to be…….uh, ooops. Houston, we have a problem. All this to try to reignite the housing market for the NARE brokers? For public equity holders?? To make government borrowing cheaper for the national association of elected spendthrifts. To make student loans cheaper for the education-industrial complex?

The mother of all latent tax increases and government liability defaults.

... June 16, 2014 at 6:31 pm

To make student loans cheaper for the education-industrial complex?

That’s only half of it. The other half is to create a class of debt slaves.

Still making my way through the IMF summary. But I’ll note that their prescriptions for improving employment and wages in this country are run completely counter to their immigration proposals. Here’s the story I mentioned earlier. But maybe those displaced IT workers can get jobs working for the government and bring their server farms up to the standards of the 1990s, LOL.

Guarneri June 16, 2014 at 7:04 pm

“But maybe those displaced IT workers can get jobs working for the government………”

Will they, ahem, “mysteriously” lose Lois Lerner’s emails? If not, they’re hired……

... June 16, 2014 at 7:10 pm

Will they, ahem, “mysteriously” lose Lois Lerner’s emails?

Yeah, but you know, there couldn’t POSSIBLY be anything to this story. It’s just normal extreme incompetence, nothing suspicious.

Ben Wolf June 16, 2014 at 7:21 pm

I would suggest the IMF is overly optimistic. The federal budget deficit is forecast for 2014 in the range of $500 billion while our trade deficit is likely to be identical or worse, at least the trend so far indicates. This leaves the private domestic sector at a balance of zero net savings for the year; the last time the private surplus fell toward this level we had the worst recession since the Great Depression and unlike the Clinton years we can’t take on enough private debt to hold a recession off.

I’m worried for the final two quarters of this year.

... June 16, 2014 at 7:31 pm

Ben, don’t you know that all those DREAMERs coming across the border are going to boost Q3 and Q4 GDP to record heights? Come on, man, us your head!


... June 16, 2014 at 7:32 pm

USE your head, USE your head.

USE your proofreading, Ellipses, USE your proofreading.

Guarneri June 16, 2014 at 7:40 pm

I think Ben is correct. And exactly what new fiscal drag does Obama and his ilk have in mind they haven’t sprung yet? The only issue is that these things are only predictable as ultimate events. The timing is a bitch. How much personal debt can the consumer take on to support financed spending before………..crash! No one knows.

And despite support here for just walking away from debts, that’s only an inter-temporal issue. The cost of financing will rise or the ability to borrow evaporate for some. Then crash.

... June 16, 2014 at 8:26 pm

The cost of financing will rise or the ability to borrow evaporate for some.

Are the banks lending?

And yes, absolving debts does leads to losers elsewhere. But what do you suggest? I could sell my house and pay off a fraction of my debt and live in the street … and then never pay the rest of it. (I’ve got a cheap house, recall.) As it is so much debt has accumulated and continues to accumulate that it will not be repaid and cannot be repaid. That 40-50% of college graduates who are either un- or under-employed – think those loans are getting repaid ever? Not bloody likely.

Same with the debts of those of us who have had their lives ruined by The Great Non-Existent Recovery. There’s no way I can repay the debts I’ve got. There will never be a way to do so because I was forcibly retired at age 39 and I will never work again. I finally gave up when I couldn’t even get interviewed to do minimum wage work at McDonald’s or Wal-Mart. I can’t even get into the drug trade because that’s very ethnic and I’m in the wrong enclave for that. I probably could go down to the Parliament House (Reynolds will know what I’m talking about) and let the desperate gays fuck me in the ass for cash, but that’s about the only work I MIGHT be able to get – and I wouldn’t bank on that as I’m not as young, pretty and slim as I used to be.

No, my debts aren’t getting paid back either.

And there are legions of others who have seen their economic futures whither while they continued to try and live the lives they used to have. They’re just piling on the debt before they crash too. Some of that will get paid back, but most of it won’t.

Worst of all, the people running the country don’t even pretend to care anymore, and if they have any credible ideas they’re not sharing them. And you know that I think, based on their actions, that they are achieving exactly the goals they want by eroding the hated middle and working classes in this country, so you will pardon me if I don’t hold my breathe waiting for some of them to come up with an idea or two.

But if you’ve got any ideas on how people like me can repay our debts, or how all those college students with that non-dischargable student loan debt (a category of debt which is growing rapidly, I’m sure you’ve heard) can do so, I’d love to hear it. Please enlighten me with your acumen.

Andy June 17, 2014 at 1:12 am

Perfect time for a new war! Ice, it’s not to late for you to join the mobile infantry and particpate in the great crusade to make the middle east just like midwest.

Dave Schuler June 17, 2014 at 5:36 am

One of the underlying problems is that while justice may be a universal concept just what is just or not just isn’t. Similarly with any number of other concepts.

We have a strong missionary tradition in the United States, not only in the sense of Christian missionaries baptizing “all nations” but in the modern sense of NGOs teaching about birth control or hygiene. The NGOs don’t think that what they’re doing is damaging to traditional societies but then the 19th century Christian missionaries didn’t, either.

Guarneri June 17, 2014 at 8:21 am

I’m not arrogant enough to profess to understand or to prescribe what you should do with your personal balance sheet, ice. What I am observing is that if default becomes socially and economically acceptable, and common, it will become necessary for private lenders to price up loans or cease making them all together. Because time financing of large expenditures is socially and economically useful this would be a bad policy result.

Just draw yourself a line from 1-20% and pencil in the instrument and typical borrower profile at various points along the scale.

Have you ever done a back of the envelope on an acceptable loan loss rate for each instrument? Here’s a hint: it’s very low, until you get way up the scale. Eventually they have a term called loansharking for that type of lending. This is the mistake Ben made in a comment the other day.

It’s not about “debt slaves” and such, ice, it’s just cold hard arithmetic. We should think long and hard about default before putting ourselves in jeopardy or invoking it if we want to continue to access credit……….or, alternatively, we can add to the ranks of those feeding at the public trough aka letting your neighbor pay for your stuff.

TastyBits June 17, 2014 at 9:07 am


The economy expands through credit creation. This includes replacing existing credit in addition to new credit. The money supply alone cannot support the amount of credit that exists in the US. Through the magic of fractional reserve lending, money is borrowed into existence.

Each round of credit creation either replaces credit or supports the next round of credit. In addition, what is visible is only the tip of the iceberg. There are financial instruments supported by the credit, but they are several steps removed from the original debt. In many cases, this is deliberate.

The economy needs credit to expand, but the credit being created is replacing existing credit. Also, the financial instruments that new credit supports are not being created. This occurs below the water, and therefore, it is not understood by the “smartest people in the whole wide world”. Until the assets rise or the debt is worked off, the economy will drag along.

The primary debt is like a warehouse full of Windows XP computers. You cannot sell Windows 8 computers because you do not have any room, but at the rate XP computers are selling, it will take 20 years to free up space. The best solution would be to take a loss and get rid the stock. This would free up space to stock Windows 8 computers and make more money than the loss.

Now, a smart businessman would understand this concept, and conservatives claim to be business oriented. Somehow, none of them seem to be able to grasp this simple concept. The truth is that few conservatives understand how the economy, monetary, or economy work. I have used the term money where I should have properly used currency, but I doubt any conservative could explain why this is important.

The real reason why this debt cannot be forgiven is that it supports the wealth of the 0.1%.

Guarneri June 17, 2014 at 9:22 am

Interested readers can go to zerohedge for two notes on inflation and wage growth. Not good.

... June 17, 2014 at 2:34 pm

Andy, do they take 46 year olds with bad necks and a history of broken vertebrae? I just assumed I was too old and too much of a mess physically.

But I’d rather make the middle east like Arizona. Seems more appropriate.

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