Don Coxe on Brewing US Pension Crisis, Stimulus vs. Rising Rates

The following is a summary of our recent interview with Don Coxe, which can be accessed on our site here or on iTunes here.

The Pension Crisis and Demographic Realities

Pension fund committees are facing the difficult prospect of getting the 7.5 percent returns they need, Coxe stated.

“The pension fund crisis in this country is going to be … over the next 2 years, the single biggest problem that the nation is going to have to face.”

We’ve been pushing the issue off, he added, and even if we get the growth President Trump is talking about, all of it is already priced into the market.

This is partly driven by demographics, Coxe stated, because the reality is US savings in the private sector are largely allocated for people 50 years of age and older.

With bonds not producing the necessary income, investments have been redistributed into equities, Coxe stated.

“Demography … is the unseen driving force of why this valuation is occurring,” he said. “But if decisions are being made collectively by the over-70s, then what we know is, that’s a short-term play, by definition.”

Politicians Complicit for the Sake of the Deficit

We’re facing a looming crisis for Social Security with short-duration assets in the Social Security Trust Fund that aren’t receiving anything like the yield on the 10-year treasury, Coxe stated.

He appeared before the US Congressional Committee on the Social Security Trust Fund back in the 1990s because of his work with the Canada pension plan, he added, and his analysis at the time was that the policy of holding short-duration bonds in the fund meant that as those funds rolled over, the fund would earn progressively lower returns.

“It became such a violent debate with the committee that I was actually ordered to step down from the platform,” he said. “I was told by the Chairman of the Committee, Daniel Patrick Moynihan, that both political parties were in on it. That by having a short duration, they were reducing the national deficit for that year.”

Thus, both parties were systematically hurting the future of Social Security.

“Now we’re in this position where the yield in the Social Security Trust Fund is ridiculously low,” he said. “They can’t postpone very much having to vastly increase the contribution to that Fund.”

The Fed is the only group that can increase the yield, he added. For investors, the thing to keep in mind is that even if the bond yields do go up from here, the fact remains that as portfolios roll over, you’re gradually increasing your income by buying bonds.

“I think the lesson … listeners really need to look at is, not to be told this is a bad time to buy bonds,” he said. “I think this is a case where if you have a choice between fear and greed, the stock market right now has the greed. The bond market is showing fear of the Fed. In the past, fear of the Fed didn’t hurt you as much as failing to see a political crisis.”

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