6 ms·

A very large percentage of the market is required to achieve a certain return. Think insurance companies. Giant pension plans. Etc. They have all been forced fu

by erentz 6y ago

A very large percentage of the market is required to achieve a certain return. Think insurance companies. Giant pension plans. Etc. They have all been forced further and further out the risk curve over the past decade due to low interest rates.

ianai 6y ago
I wonder how long those pension plans may make their obligations if they start paying short term obligations with their long term principals. I could see something from them triggering a correction.
- cool_dude85 6y ago
  The current model of having a very large fund that needs to show to an actuary that it's "fully funded" is relatively new. Defined benefit pensions existed for quite a while before "fully funded" pension funds, using a pay-as-you-go system, and could probably survive indefinitely that way if designed right.
  - bpt3 6y ago
    > Defined benefit pensions existed for quite a while before "fully funded" pension funds, using a pay-as-you-go system, and could probably survive indefinitely that way if designed right. The PBGC was created because this isn't the case. The issues with Social Security are another example of how pay as you go isn't completely sustainable.
    - cool_dude85 6y ago
      The PBGC is an insurance system. Of course, pension plans haven't always been able to pay out, but the fact that an insurance system exists for them doesn't make them any more of a failure than a savings account backed by FDIC. And what issues with social security do you mean? The program has taken in more than it's paid out since '83.
      - bpt3 6y ago
        Yes, and the PBGC exists because so many of the pay as you go pensions went under. Also, social security has required many changes that decrease benefits over the years to remain solvent, such as increasing the expected retirement age.
api 6y ago
Everything is being forced further out on the risk curve. Everything. This also explains wacky basketcase unicorns like WeWork, perpetually unprofitable companies raising round after round, the continued existence of the cryptocurrency world in spite of it being like 90%+ scams, real estate going up in cities where >25% of people are behind on their mortgages, etc. There's no "alpha" anywhere. Money is chasing its tail. All this QE is just going to give us is more asset bubbles. The financial economy is completely detaching from the real economy and becoming a pure fantasy LARP for the rich and of course governments.
- willcipriano 6y ago
  My guess is when the financial economy goes bust and those dollars start chasing real economy assets all the inflation we were assured wouldn't happen due to all the money printing will happen all at once. People act like the big short guys were geniuses to see this trend come out of nowhere. I was a teenager asking questions like "How can housing prices rise nationally at a multiple of wage increases for any sustained period of time?" and was short down by the "smart money" on forums not unlike this one.
  - pjc50 6y ago
    Once you allow for the fall in interest rates over the past decades, the house price rise looks less surprising. However, there's a weird corollary: what happens when rates go negative?
    - deleted 6y ago
      [deleted]
    - objektif 6y ago
      US will not allow interest rates to go negative.
      - api 6y ago
        Will we have a choice? The Fed has tremendous influence over the economy in the short-medium term, but over long time horizons they are actually at the mercy of it.
cool_dude85 6y ago
Pension funds aren't required to achieve a certain return. If returns over a long period are below the assumed rate, then the employer simply needs to increase contributions. This is less than ideal but not a requirement in any reasonable sense.
- jasode 6y ago
  >If returns over a long period are below the assumed rate, then the employer simply needs to increase contributions. It's seductive to type out the word "simply" to describe a proposed solution but that doesn't mean it's simple in reality. (My previous comment about supposedly "simple" fixes: https://news.ycombinator.com/item?id=16698821 https://news.ycombinator.com/item?id=16698821) E.g. The employer (the state government) that pays into pension funds for teachers won't simply pay more. The taxpayers aren't sympathetic to raising taxes on themselves to pay for fully funded pensions (even if the pension is underfunded) when they perceive the teachers already getting better benefits than they do. A lot of citizen taxpayers who are not teachers also suffer from underfunded pensions themselves!
  - cool_dude85 6y ago
    This doesn't at all address the core point I'm making: that pension funds are not required to achieve a given rate of return in any meaningful sense. But sure, I agree that there are other ways to handle the situation if the fund doesn't achieve its assumed rate of return. There are other options than increasing employer contributions.
    - jasode 6y ago
      >This doesn't at all address the core point I'm making: that pension funds are not required to achieve a given rate of return in any meaningful sense. You're being uncharitable in reading gp's (erentz) word "required". No, there isn't a statute or law that says the pension fund must get 8% returns or the pension administrators go to jail. Nobody is saying that. Here's how to interpret the word "required" in a more reasonable manner... Using Illinois Teachers Pension as an example: the pension fund manages ~$50 billion but they still have a ~$70 billion shortfall.[1] The CIO (Chief Investment Officer) is currently Stan Rupnik. His salary is ~$400k per year and he's responsible for investing the pension fund in a way that balances max returns with safety. If he just sits back and folds his arms in a defiant manner exclaiming, "hey, the pension fund is not _required_ to achieve a given rate of return so I'm just going to invest all $50 billion in T-Bills which returns a negligible 0.19% yada yada yada" ... he's not going to keep his job. That's what a meaningful interpretation of "required" is for the context of this discussion. [1] https://www.chicagobusiness.com/finance-banking/teachers-pension-fund-levers-risk-investment-portfolio https://www.chicagobusiness.com/finance-banking/teachers-pen...
grecy 6y ago
And the people making those decisions get paid on commission, so of course they want returns, not "safe parking".

by erentz 6y ago

ianai 6y ago

I wonder how long those pension plans may make their obligations if they start paying short term obligations with their long term principals. I could see something from them triggering a correction.

cool_dude85 6y ago
The current model of having a very large fund that needs to show to an actuary that it's "fully funded" is relatively new. Defined benefit pensions existed for quite a while before "fully funded" pension funds, using a pay-as-you-go system, and could probably survive indefinitely that way if designed right.
- bpt3 6y ago
  > Defined benefit pensions existed for quite a while before "fully funded" pension funds, using a pay-as-you-go system, and could probably survive indefinitely that way if designed right. The PBGC was created because this isn't the case. The issues with Social Security are another example of how pay as you go isn't completely sustainable.
  - cool_dude85 6y ago
    The PBGC is an insurance system. Of course, pension plans haven't always been able to pay out, but the fact that an insurance system exists for them doesn't make them any more of a failure than a savings account backed by FDIC. And what issues with social security do you mean? The program has taken in more than it's paid out since '83.
    - bpt3 6y ago
      Yes, and the PBGC exists because so many of the pay as you go pensions went under. Also, social security has required many changes that decrease benefits over the years to remain solvent, such as increasing the expected retirement age.

api 6y ago

Everything is being forced further out on the risk curve. Everything. This also explains wacky basketcase unicorns like WeWork, perpetually unprofitable companies raising round after round, the continued existence of the cryptocurrency world in spite of it being like 90%+ scams, real estate going up in cities where >25% of people are behind on their mortgages, etc. There's no "alpha" anywhere. Money is chasing its tail. All this QE is just going to give us is more asset bubbles. The financial economy is completely detaching from the real economy and becoming a pure fantasy LARP for the rich and of course governments.

willcipriano 6y ago
My guess is when the financial economy goes bust and those dollars start chasing real economy assets all the inflation we were assured wouldn't happen due to all the money printing will happen all at once. People act like the big short guys were geniuses to see this trend come out of nowhere. I was a teenager asking questions like "How can housing prices rise nationally at a multiple of wage increases for any sustained period of time?" and was short down by the "smart money" on forums not unlike this one.
- pjc50 6y ago
  Once you allow for the fall in interest rates over the past decades, the house price rise looks less surprising. However, there's a weird corollary: what happens when rates go negative?
  - deleted 6y ago
    [deleted]
  - objektif 6y ago
    US will not allow interest rates to go negative.
    - api 6y ago
      Will we have a choice? The Fed has tremendous influence over the economy in the short-medium term, but over long time horizons they are actually at the mercy of it.

cool_dude85 6y ago

Pension funds aren't required to achieve a certain return. If returns over a long period are below the assumed rate, then the employer simply needs to increase contributions. This is less than ideal but not a requirement in any reasonable sense.

jasode 6y ago
>If returns over a long period are below the assumed rate, then the employer simply needs to increase contributions. It's seductive to type out the word "simply" to describe a proposed solution but that doesn't mean it's simple in reality. (My previous comment about supposedly "simple" fixes: https://news.ycombinator.com/item?id=16698821 https://news.ycombinator.com/item?id=16698821) E.g. The employer (the state government) that pays into pension funds for teachers won't simply pay more. The taxpayers aren't sympathetic to raising taxes on themselves to pay for fully funded pensions (even if the pension is underfunded) when they perceive the teachers already getting better benefits than they do. A lot of citizen taxpayers who are not teachers also suffer from underfunded pensions themselves!
- cool_dude85 6y ago
  This doesn't at all address the core point I'm making: that pension funds are not required to achieve a given rate of return in any meaningful sense. But sure, I agree that there are other ways to handle the situation if the fund doesn't achieve its assumed rate of return. There are other options than increasing employer contributions.
  - jasode 6y ago
    >This doesn't at all address the core point I'm making: that pension funds are not required to achieve a given rate of return in any meaningful sense. You're being uncharitable in reading gp's (erentz) word "required". No, there isn't a statute or law that says the pension fund must get 8% returns or the pension administrators go to jail. Nobody is saying that. Here's how to interpret the word "required" in a more reasonable manner... Using Illinois Teachers Pension as an example: the pension fund manages ~$50 billion but they still have a ~$70 billion shortfall.[1] The CIO (Chief Investment Officer) is currently Stan Rupnik. His salary is ~$400k per year and he's responsible for investing the pension fund in a way that balances max returns with safety. If he just sits back and folds his arms in a defiant manner exclaiming, "hey, the pension fund is not _required_ to achieve a given rate of return so I'm just going to invest all $50 billion in T-Bills which returns a negligible 0.19% yada yada yada" ... he's not going to keep his job. That's what a meaningful interpretation of "required" is for the context of this discussion. [1] https://www.chicagobusiness.com/finance-banking/teachers-pension-fund-levers-risk-investment-portfolio https://www.chicagobusiness.com/finance-banking/teachers-pen...

grecy 6y ago

And the people making those decisions get paid on commission, so of course they want returns, not "safe parking".