At or near the peak of every stock market, things get crazier and crazier.
Toggle bonds where interest is paid, not in cash but with more bonds, have been running rampant. Corporate share buybacks went crazy.
Now, despite massive stock market overvaluation, with median Price/Revenue ratios at an all-time high, Alaska governor Bill Walker wants to borrow money from Asia at 4% to buy stocks, hoping for 8% returns to shore up Alaska pension funds.
The Pension Proposal Received a Negative Reaction, but the governor is like to go ahead anyway.
Alaska lawmakers took a skeptical look Thursday at a plan by the administration of Gov. Bill Walker to nibble at Alaska’s pension debt.
One week ago, the three-member Pension Obligation Bond Corporation Board voted to borrow up to $3.5 billion from bond markets from Asia. Proceeds from that bond sale would be invested in global markets, and any difference between the interest earnings and the interest paid on the bonds would go toward the state’s unfunded pension debt.
The board is assuming 8 percent average earnings, deputy commissioner of revenue Jerry Burnett told the Senate Finance Committee on Thursday afternoon.
It expects to be able to borrow money from Asian pension funds at 4 percent interest.
“It’s a gamble,” Sen. Mike Dunleavy, R-Wasilla, declared.
“It’s a gamble to have an unfunded pension system and assume we’ll have enough” money when payments come due, Burnett responded.
The state faces a gap of approximately $6 billion, invested at about 8 percent interest per year, to meet expected demand. The proposal approved by the bond corporation board would carve less than a third off the gap.
If the new money earns 7 percent interest instead of 8 percent, it would close the gap by only $1.1 billion, according to state figures.
While lawmakers also appeared skeptical, their ability to stop the plan seems limited. The bond corporation board was empowered by a 2008 law and has the authority to issue up to $5 billion in bonds without approaching the Legislature again.
As planned, the bonds will be marketed through October and sold in the final week of the month, with deals closing on Halloween.
Median Price/Revenue Hits Record High
Chart from John Hussman’s October 3, post Sizing Up the Bubble.
Toggle Bond Flashbacks
- September 9, 2016: Red Hot Junk and Massive Bond-Market Dislocations; Equity Smash Coming Up?
- June 25, 2007: Toggle Bonds – Yet Another High Wire Act
Trick or Treat
Borrowing money at these share price valuations is yet another high wire act, but this is precisely the attitude fostered by the Fed.
It’s fitting this deal will close on Halloween. Trick or treat, but don’t expect any treats.
Mike “Mish” Shedlock
It all reminds me of the final scene of the movie “The Bridge on the River Kwai”
Joyce, manning the detonator, breaks cover and stabs Saito to death. Aghast, Nicholson yells for help, while attempting to stop Joyce from reaching the detonator. As he wrestles with Nicholson, Joyce tells Nicholson that he is a British officer under orders to destroy the bridge. When Joyce is shot dead by Japanese fire, Shears swims across the river, but is fatally wounded as he reaches Nicholson. Recognizing the dying Shears, Nicholson exclaims, “What have I done?” Warden fires his mortar, mortally wounding Nicholson. The dazed colonel stumbles towards the detonator and collapses on the plunger, just in time to blow up the bridge and send the train hurtling into the river below. Witnessing the carnage, Clipton shakes his head muttering, “Madness! … Madness!”
You win
A tip of my hat
And yet, Warden justifies it all to the little ladies that carried everything there. I had to kill them to save them. Just like a politician….
“It’s a gamble to have an unfunded pension system and assume we’ll have enough” money when payments come due, Burnett responded.
…
Hhmm, could have chosen Door #1 … and cut back on pension benefits …. where recipients still get some sort of (livable) payout.
But Noooo … had to chose Door #2 … this will BLOW UP IN YOUR FACE … where recipients can expect???????? …. or will taxpayers face massive tax increase to close gap?
One thing certain. Bill Walker has cemented (shoe) his legacy.
Don’t blame this on the Gov. Article XII, Section 7 of the Alaska State Constitution states as follows: “Membership in employee retirement systems of the State or its political subdivisions shall constitute a contractual relationship. Accrued benefits of these systems shall not be diminished or impaired.”
His solution is idiotic
Door #2 is the kick the can down the road model. He is hoping to out run the resultant fallout.
Ummm, what happens if the stock market goes down and the “returns” are below what is required to service the debt? There is no precedent for a US state declaring bankruptcy. Will the bond buyers just say “Easy come, easy go”? Will the Fed print money to make up the difference? Will China invade Alaska? This is undoubtedly the stupidest idea ever; it’s so stupid, it’s worthy of the EU.
Too bad there isn’t a “Rich Man” clause for pensioners, allowing them NOT to pay taxes for years, offsetting their losses (the amount they were promised, but will never get).
Mish,
We’re talking about Alaska, not California. What is the rest of the story? How did Alaska get to this point?
I believe it is tied to expected returns on oil
Then they should completely cut off supply to force the price to rise… no, wait…
It is tied to the desire to make money from nothing.
I suppose Asia is borrowing money from the EU at 0% in hopes of making 4%. Who is the EU borrowing from to make 0%?
madashellowell – EU isn’t borrowing, they are printing.
I think it is about time I start my new company so I can sell stock to state pension plans. My company will be named Enchanted Legumes Inc.
Least someone would have ate per sent investment.
Mix in some shrooms and the sky would be the limit.
How about Recipe 92%? Fully leveraged with exotics, and a creative pinch of Coco, may contain derivatives.
Sorry, I diverge…
How can I short the Alaska pension fund? This could be the short of the lifetime.
There are two wires.
One has a + written on it, the other a – .
Touch the wires together.
If the lights in the whole state go out you will know that someone made an error.
Apart from looking like a christmas tree, you will also get blamed.
Don’t try this at home without the oversight of a regulatory supervisor.
Here in NC a teacher working 30 years is “entitled” to a pension of over $30’000 a year – starting at age 52 if they started teaching at 22. At that time they will have paid “in” $90’000 on a pension that will return $1’000’000 if they live 30 more years. So, the salary they get ALSO needs $30’000 a year set aside for the years after they work. INSANITY!
Government employees look upon government as their own personal Ponzi scheme.
Just one of those days, and bursting with liquidity
The public had our pensions canceled outright years ago — we were all put on defined contributions (for some the contribution is defined as zero). The investment risk and longevity risk are entirely our own.
I couldn’t care less if “public servants” get screwed. Most put in fewer hours, do less work even when they are supposedly on the clock, and for some absurd reason they think they are entitled to retire after 20-30 years when their bosses (aka the public supposedly being served) has to work ***AT LEAST*** 40 years (if you start working around age 21 and are lucky enough to retire at 65, that is 44 years).
Retirement “promises” from politicians are exactly like every other worthless political promise. And that applies double to the “judges” who think public pensions should be backed with unlimited taxes — if you judges don’t like it, go get a job in the real world.
Everyone has been lied to by politicians. Time for the babies in “public service” to grow up.
Promises from politicians are not “worthless”. Yes, true, they will never come true, BUT, their primary purpose is to create expectation and a sense of entitlement that will be used for political purposes in the future. We see it in action today.
Read my lips, your coed intern will get more action from politicians than will your worthless pension
The only morally defensible stand in all of this, is that the person(s) whose signature(s) are on the documents “promising” pension benefits, are liable for them…… Not other people’s children, who weren’t even born when the scam, to which they were never a party, was perpetrated.
Then, just let the chips fall where they may. After all, what are some retired public sector unionistas going to do about it? Run us over with their wheelchairs?
You must be a politician — your comments are worth the same as a politicians promise
Politicians are not known for their intelligence or common sense. They are known for their desire to tell other people what to do and their pliability to let others put them in that position.
After a little pullback, which could last a month or two, stocks will outperform all other asset classes, including gold, as distressed foreign capital seeks safety from soveriegn defaults. The popping of the govt debt bubble is part of the transition from public to private, as Socialism fails everywhere, again. This is another reason to move to Alaska, provided they cash out in 2018-2020 and buy gold. They should spinkle some in the rivers and market another gold rush, as people will be looking to escape the civil unrest that’s coming from all the other pensions stuck in govt bonds, govt’s dig in their heels to save themselves, and the world transitions to another reserve currency.
Alaska can’t do the math correctly. The return on investment PLUS interest paid needs to be 8%. So the ROI needs to be more like 12%. If returns of 8% were easy to come by, then other pensions would be in better shape. 12% return means risk is worse than Greek 10yr bonds yielding 8.25%. That’s a HUGE risk.
How did the rest of us miss that??? Is that really true???? If so they are truly doomed.
Wonder which Wall Street salesman had Walkers’ ear long enough to sell him on this scam. That guy sure stands to collect a nice commission if the idiocy ever gets consummated.
Another truism of the later stages of bubbles, is the switch from suckering private parties, to public patsies. The latter are not only reliably retarded and uncritical (Robert Citron perhaps the most famous, but only the tip of a huge iceberg), but also have the “benefit” of not having any of their own skin in the game. As such they are a reliable cash cow, once private sector entities start realizing the game is up, and tighten their belts.
This is like being down about $10 grand at the track going into the 8th race and doubling down on the longshots in the final 3 races in attempt to break before it’s time to go home.
This sure to fail risk taking is not limited to Alaska. It’s happening throughout the country and won’t end well.
Hold on. I notice in today’s news a 6 billion barrel oil discovery in Prudhoe Bay. They say it should begin production by 2022. Alaska gets 50+% of its revenue from oil taxes.
Alaska government gave incentives to encourage the exploration. Didn’t say what those were.
This is by far and away the most entertaining planet I’ve ever visited. Every place else, the beings are evolved enough to base decisions on rational thought processes. Talk about BORING! You Earthlings are very entertaining but highly unlikely to make it to the next stage of evolution.
We’ll blow ourselves to smithereens before we completely leave the monkey stage. Had God stopped at the Homo Erectus stage at a time when our forefathers didn’t have the capacity to create budgets or bombs Planet Earth would be in much better shape.
Borrow at 4%, and bet it all on one spin of a Vegas roulette wheel (derivatives). If you don’t win, just demand a bailout.
They’d have better odds in Vegas.
As Dogbert might say “It’s a risk I’m willing to take.”