For some reason this story on the report of the actuary of the California Public Employee Retirement System, remarking on the 1% return when their projections require 7.5%:
While the fund’s actuary recommended lowering the rate to 7.25 percent, the Calpers board said at the time that would burden local governments when they were already coping with financial strains.
reminded me of this exchange from the Woody Allen screenplay for What’s New, Pussycat?, back when Woody Allen was actually funny:
Michael James: Did you find a job?
Victor Skakapopulis: Yeah, I got something at the striptease. I help the girls dress and undress.
Michael James: Nice job.
Victor Skakapopulis: Twenty francs a week.
Michael James: Not very much.
Victor Skakapopulis: It’s all I can afford.
Considering that the reason that California local government have financial strains is largely due to high payrolls and employee benefits, it’s a bit circular, isn’t it?
Thank God California has decided to take on a project that will cost tens of billions of dollars (if they’re lucky). I mean, that ought to help their finances, yes?
Nice, Tongue-in-cheek, Icepick.
In the past you have, Dave, correctly in my opinion, noted that IL has an unrealistic target. 8% if I recall correctly. This is the same situation, but also augments a point I’ve made.
I do not know what the composition of the CALPERS portfolio is, but I doubt it is radically different from many state pension funds. ZIRP is destroying them on “safe securities.”. I also heard that their public and private equity allocations had done poorly. This is interesting. The stock market is widely reported on, so I won’t comment on that. But wrt PE, CALPERS is huge, and wouldn’t even look at a small fund like ours. Further, big PE funds were all the rage in the 2005-2008 timeframe. So CALPERS is probably in a bunch of big funds.
There is a thing called the “J Curve” in PE. It’s just a fancy way of saying that these are long term illiquid investments that are negative cash flow for the first 1-5 years (to fund investments) and then goes positive in the out years, perhaps 7-8-9 years out, as these investments are harvested. Your capital account goes deeply negative, and then hopefully positive. Well, in that 2005-2008 period purchase multiples were high, and then, oopsey, the proverbial sheet hit the fan. The J curve didn’t J. So it would be no surprise that CALPERS didn’t get the PE returns on their, say, 5-15% portfolio allocation to PE. A double whammy. ZIRP and this…… And a 1% return. Oops.
This is why I have railed in some comments maybe a week or two ago about how ZIRP isn’t the friend of the cops, firemen, teachers and other public employees. (and to the Dave schulers of the world) There is no yield to “safe” securities. You Obamaphiles out there ought to think about that when he makes his inane speeches and encourages loose policy, and people talk about the desirability of QE3. And further, I made the point that it encourages “yield chase” into risky assets. But those more volatile assets may not be performing when CALPERS has cash outflow needs. And so like their PE portfolio, which may recover over time, if they have to liquidate now due to simple cash flow requirements……..they are screwed.
That’s not good money management. And ZIRP only helps the ginormous banks and politicians. The Average Joe screwed again by big government and their self interest.
Gee. Ever heard that from me before?
Then the effects on the economy of higher interest rates would be what? Taxes are bad for business. Borrowing money at higher rates is good?
Steve
Nice try, Steve. I’m sure you are a wonderful doctor, but……
The market and term structure of interest rates tells people how to behave. Second, for every borrower there is a lender. It’s not a dead weight loss. If you are a 70 year old grandma you want a yield on savings. If a business has an opportunity they need to pay the freight.
The point of ZIRP is to benefit the government, in their profligate borrowing, and big banks, with their crappy balance sheets. Taxes just go to feed the monster. It’s like Soylent Green.
Again, not to be a prick, you stick to medicine, Michael should stick to writing. I live in the capital markets every damned day.
As Drew mentions, those low interest rates are going to be crushing any company with a pension plan. They’re going to have to pump money into those plans instead of into the business. Businesses with pension plans are a diminishing part of the market, unfortunately, but I’m sure Disney, for example, would rather spend more money on their operations than on funding their pension and retiree medical costs.