Namely, the effect on pension funds and insurance companies’ dependent on laddered bond portfolio’s to manage the income streams required to effectively meet long-term payment liabilities associated with Life Insurance, Annuities, and other items. CALPERS recent mea culpa that it earned just .6% last year when they and your average pension fund uses an assumed rate of return running 7.5%, illustrates the underfunding levels faced by these entities. A level pegged at 6-trillion Dollars for U.S. state and local employee pension plans. Though one can argue the methodology and/or the actual un or underfunded liabilities at this point. What is crystal clear is that the underfunding levels are growing rapidly due to a lack of investment return, and pie in the sky 7.5%+ assumed rates of investment return. Stepping back to look at the bigger picture and the idea that interest rates will normalize, meaning the benchmark 30-year Treasury yield gets closer to 7%, or about 3-times what it is presently, is a non-starter due to the record or near record levels of existing debt public and private. Because the dramatically higher debt service costs will produce across the board bankruptcies if interest rates do normalize. As I have said many times we follow in Japan’s footsteps as do most developed economies and they will prove the canary in the coal mine.
This is Caleb Lawrence Registered Investment Adviser Scotts Valley Drive and Willis Road in the Scotts Valley Plaza, Suite 202 or call me toll free at 888-RICH PIG / 888-742-4744.
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