Registered Investment Adviser Caleb Lawrence
The major averages enter the final hour about even unable to recover from the weeks Trump inspired turmoil. Since Monday the Standard and Poors 500 Index has lost 19 points or .8% while the NASDAQ has given up 54 points or a little less than 1%.
One of the hallmarks of the 2007-2009 financial crisis was pie in the sky assumptions about asset valuations that had very little if any basis based on historical valuations and logical facts available at the time. This is nothing new as these trends were seen in 1929, 2000 and again today as 2017 draws to a close. It seems to be human nature to extrapolate the past and project it into the future something that has also been done with Social Security, Medicare and of course most pension plans as well. Promises made when interest rates were much higher and the commonly assumed 7-8% pension fund return wasn’t such a fanciful pipe dream. The financial travails of Social Security and Medicaid are fairly well known. Facing insolvency in 2035, and a deficit north of 12 trillion Dollars, it could be significantly higher depending on whose math you use. Medicare is looking at insolvency in 2029. Your average public or private pension fund isn’t fairing much better as underfunding levels of 30-50% are very common. Given the Fed’s near zero interest rate policies and the probability of your average pension fund manager consistently earning the 7-8% widely assumed rate of return is effectively zero. Absent sharply higher pension contributions, a reduction in participants or a bit of both underfunding levels are all but certain to increase going forward no matter how much you torture the math to produce the desired result as has been the popular trend for a number of years now. When promises are made based on pie in the sky assumptions this is the inevitable result, basic back of envelope High School math.