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Financial news I consider important, with my opinion, which is worth as much as you paid for it.
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Thursday, December 18, 2008

California Pension fund Calpers in trouble

Calpers is a pension fund for 1.6 Million state employees, has lost almost a quarter of its assets since July 1. Calpers in recent weeks said it expects to report paper losses of 103% on its housing investments in the fiscal year ended June 30. That's because Calpers invested not only its own money, but billions of dollars of borrowed money that must be repaid even if the investment fails. In some deals, as much as 80% of the money invested by Calpers was borrowed.

Oversight for Calper's investment decisions came from Calpers' staff and consultants. The average employer-contribution rate for public agencies, including cities and counties, is considering an increase from 13% to of 18% of payroll, which is very high for state pension funds.

Why did I decide to print this piece of bad news? With Madoff losing 50 billion of private investors money in a ponzi scheme, and Calpers losing unknown amount of money for 1.6 million employee pension fund, these are the first of a line of major private investment blow ups.

Government employee pension funds are particularly troubling, what will result is even HIGHER taxes for local, county, and state levels to cover their bad investments. This will in turn put more pressure on the taxpayer/consumer. For non-government pension funds, failures could ensue in next few years as people withdraw for retirement, unable to "pass" the extra cost required to a taxpayer.

I have talked to people who rely on pension funds, they are litterally are counting on every nickel to survive for the rest of their lives. And if inflation hits, as the fed wants, these pension funds will not be able to keep up with inflation. So fixed-income people, such as pension funds, are facing a grim future. Either the fund goes bust with deflation, or the purchasing power given will not increase to keep up with expenses.

In any event, over the long haul, gold will eventually be a great place to be, 2,000 an ounce is not irrational. I'm not a steadfast gold bug for next 6 months, but will be looking to switch with gold breaking below 600-700.

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