As I noted last week, I expected there was a possibility of more stock upside last week given how oversold stocks were when the current rally started. I view the current rally as a countertrend with more downside ahead.
As many savvy readers of “Portfolio Watch” have undoubtedly noted, there is a growing divergence in the precious metals markets between the spot price of gold and silver and the reality of the pricing of real metals.
While the spot price of silver is around $19.50 per ounce, anyone looking to invest in silver knows that it’s impossible to find an ounce of tangible silver for that price. For example, a one-ounce silver American Eagle silver coin sells for $34 to $37 per ounce currently.
Pre-1965 ‘junk” or “90% silver” sells for around $32 per ounce. Even a 100-ounce silver bar, assuming you are comfortable buying in that quantity, sells for between $23 and $24 per ounce.
As far as gold is concerned, a 1 oz. gold American Eagle coin sells for between $1850 and $1900 per ounce even though the spot price of gold is at least $200 less than that.
This disparity in price between physical metals and the spot price of metals has always existed but has been growing of late.
It is just one phenomenon that exists due to the artificial economy created by fed policies over the past decade-plus.
One of the other threats that I have been writing about occasionally for several years is the huge problem of pension underfunding. While many companies no longer offer a traditional defined benefit pension, many state and municipal governments do. And many of these plans are so far underfunded, benefits cannot possibly be paid to pension recipients as promised.
There are a couple of reasons for this in my view.
One, pensions have suffered under the Federal Reserve’s artificially low-interest rates over the past dozen years or so. A traditional, defined benefit pension plan is funded so that there is enough money in the plan to eventually pay promised benefits to pension plan participants. Contributions are made to pension plans based on an interest rate assumption. Therein lies the problem.
Despite interest rates being at historically low levels, pension plans were not required to adjust their actuarial assumptions to reflect reality. As a result, many pensions are now woefully underfunded.
Two, many public pensions paid by states and municipalities are ridiculously rich, at least in my view. While this is true in many states, an article was recently published describing the very generous pension benefits being received by many retired Illinois employees (the article also reveals some very exorbitant salaries for public servants. Here is a bit from the piece (Source: https://openthebooks.substack.com/p/why-illinois-is-in-trouble-132188):
So, just who is making all of this money?
Meet the Illinois government employee $100,000 Club. It’s comprised of 132,188 public employees and retirees who earned a new ‘minimum wage’ of $100,000 or more.
While crime skyrockets in the neighborhoods, test scores plummet in the public schools, and inflation decimates private-sector paychecks, the Illinois public employee class is living the good life.
Our auditors at OpenTheBooks.com found nearly 500 educators in the public schools with salaries between $200,000 and $439,000. In small towns, city managers made up to $341,300. Three doctors at the University of Illinois at Chicago earned incomes between $1 million and $2.1 million.
Barbers trimmed off $104,000 at State Corrections; janitors at the Chicago Transit Authority cleaned up $143,634; bus drivers in Chicago picked up $242,812; and suburban community college presidents made $418,677.
Public schools (43,500) – Last year, 26,904 educators earned six-figure salaries while 16,592 retirees pocketed $100,000+ pensions. However, test scores plummeted with only 31-percent of students reading at grade level.
Big salaries: Eighteen school superintendents made $300,000+, among them Edward Mansfield (Homewood Flossmoor D233— $434,323); Michael Lubelfeld (North Shore School D112— $392,952); Gregory Jackson (Ford Heights D169—$379,465); Kevin Nohelty (Dolton School D148—$373,626); and Blair Nuccio (Indian Springs D109—$355,154).
Big pensions: Eighteen retired school superintendents received $300,000+ in retirement pensions, among them Lawrence A. Wyllie (Lincoln-Way CHSD 210 – $361,787.64); Henry Bangser (New Trier Township HSD 203 – $351,676); Gary Catalani (Wheaton-Warrenville Unit SD 200 – $350,113.08); Laura Murray (Homewood-Flossmoor CHSD 233 – $344,450); and Mary Curley (Hinsdale CCSD 181 – $334,540.20).
There are several legal loopholes for individuals to access state funding through private associations, nonprofit organizations, and state legislative bodies.
- Retired Chicago Mayor Richard M. Daley (D) double dipped pension systems for nearly $249,636. Daley made $158,076 per year in pension payouts after a short eight-year career as a state senator plus another $91,560 per year in city pension payouts for his 22 years as the mayor of Chicago.
- Three top paid earners within the municipal-government pension system work for private associations – not government. Brad Cole of the Illinois Municipal League pulled down $437,447, up from $407,656, (2020). Peter Murphy, executive director of Illinois Association of Park Districts, made $357,816, while Brett Davis, executive director of the Park District Risk management Agency, brought in $342,405.
- Former Illinois Governor Jim Edgar (R) double dipped pension systems: General Assembly pension ($186,660 per year) and University Retirement System pension ($90,336). Last year, Edgar’s total payout in pension heaven? $276,996
Since Edgar left the governorship in 1999, we estimate that he earned $2.4 million in compensation from the University of Illinois (2000-2013) and another $2.5 million in pension payments from his career as legislator, secretary of state and governor.
While this is a small sampling from just one state, it represents the problems with public pay and pensions in many states. “The Wall Street Journal” recently [published a piece on this very topic (Source: https://www.wsj.com/articles/pension-funds-plunge-into-riskier-betsjust-as-markets-are-struggling-11656274270):
U.S. public pension funds don’t have nearly enough money to pay for all their obligations to future retirees. A growing number are adopting a risky solution: investing borrowed money.
As both stock and bond markets struggle, it’s a precarious gamble.
More than 100 state, city, county and other governments borrowed for their pension funds last year, twice the highest number that did so in any prior year, according to a Municipal Market Analytics analysis of Bloomberg data. Nearly $13 billion of these pension obligation bonds were sold last year, which is more than in the prior five years combined.
The Teacher Retirement System of Texas, the U.S.’s fifth-largest public pension fund, began leveraging its investment portfolio in 2019. Next month, the largest U.S. public-worker fund, the roughly $440 billion California Public Employees’ Retirement System, known as Calpers, will add leverage for the first time in its 90-year history.
While most pension funds still avoid investing borrowed money, the use of leverage is spreading faster than ever. Just four years ago, none of the five largest pension funds used leverage.
Public pension funds are “operating more like hedge funds in some cases,” said Joseph Brusuelas, chief economist at accounting firm RSM. “They’re treading on very risky footing doing things like this.”
Pension funds historically invested very conservatively, favoring relatively low-yielding fixed-income investments. Calpers had all its money in bonds until 1967.
Funds suffered significant losses in the 2000-02 dot-com bust and the 2008 financial crisis. Those setbacks, coupled with years of insufficiently funded benefit promises, left the funds as a whole well over a trillion dollars short of the asset level they ought to have. The level is dictated by a formula that includes their obligations and their targeted investment returns.
It is just a matter of time before there are major US public pensions with funding problems that will affect payouts.
Should the federal government attempt to help as it probably will, such assistance will be funded by more currency creation. This will add to the inflation problem that we are all presently experiencing and punish pension recipients who have well-funded plans as well as retirees who have accumulated assets in 401(k) or other defined-contribution plans.
I have gone on record since the beginning of 2022 with my forecast that the Fed will at some future point reverse course and cease tightening in favor of more easy money policies.
Studying the historical behavior of groups of politicians concludes that this is how this story always ends.
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