The Market Bull – October 18, 2019
The markets closed with modest losses on little news. The European Union sends a Brexit deal to England, but will it pass? The other 3 didn’t. Since Monday the Standard and Poors 500 Index is up 20 points or .67%, while the NASDAQ gained 46 points or .57%.
I have said for a number of years now that the world’s central banks, including our own Federal Reserve, Zero Interest Rate Policies would in addition to blowing one destabilizing asset bubble after another, ultimately destroy every pension and retirement system in existence. Along comes a report out of Europe from what is considered one of the best managed and properly funded pension funds, which is the Dutch pension system. After it announced that beginning in January 2020 it would reduce pension benefits to its participants. The Dutch Pension Plan specifically cited negative interest rates, far more prevalent in Europe than the USA, as the primary reason for the pension benefit cuts in the Netherlands. With each 1% fall in interest rates leading to a roughly 12% fall in the coverage ratio between assets and liabilities in pension pots, the Dutch Central Bank noted that cuts appear inevitable. With a current funding level of 92%, which is actually quite high all things considered, and strong accounting and actuarial standards the Dutch pension plan is considered a model. Yet benefit cuts of 8% loom at the beginning of next year. Pension benefit cuts will become “the” financial crisis over the next 10-20 years, probably sooner if another financial crisis occurs as many pension fund managers have turned to alternative investments and stocks in a hunt for return in a zero or negative interest rate environment.
On the subject of financial crisis and continuing with shades of 2007 the Fed continues to see substantial over subscribing of its Repo Market Operations. The latest one being oversubscribed 4.8 to 1 when the Fed announced the results of its second “NOT A QE” Treasury-Bill Permanent Open Market Operations or POMO, which showed that Dealers submitted $36BN in bids for the maximum $7.5BN in purchases. With 1 Trillion in excess reserves on deposit with the Federal Reserve, you have to wonder why the banks are still so desperate for liquidity even though the Fed has now made it clear that its balance sheet will expand to accommodate all reserve needs, and why do they so stubbornly refuse to approach the interbank market for their funding needs? A very important question, that so far, we have no answer to.
Standard and Poors 500 Index closed at: 2,986.20 down 11.75
NASDAQ finished the day: 8,089.54 down 67.31
Gold ended trading at: $1,494.10 down $4.20