CalPERS unfunded pension deficit approaches $1 trillion. Who is counting?


California Public Employee Retirement System (CalPERS) lost around 2% of its funds in 2015/16. The fund assumed an aggressive 7.5% return. Dr. Joe Nation of Stanford Institute for Economic Policy Research thinks unfunded liabilities have surged to $150bn from $93bn in the last two years. He suggested the use of a more realistic 4% rate of return last year. At that rate, CalPERS had a market based unfunded liability of $412bn (or the equivalent of 2 years’ worth of California state revenue). At present Nation now thinks the number is just shy of $1 trillion using a 3.25% discount rate. He expects that the 2017 data for CalPERS will be out in a week or so which should give some interesting perspective as to how much deeper the pension hole is for Californian public servants.

N.B. California collects $232bn in state taxes annually in a $2.3 trillion economy (around the size of Italy).


Tommy trouble

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It seems the UK Armed Forces are finding it difficult to recruit their own. So much so that they have lifted a 5-yr waiting period for Commonwealth citizens to join up. The National Audit Office states the armed forces are suffering the worst shortage of new recruits since 2010, being short 8,200 from desired levels. Therefore Aussies, Canadians, Indians and other Commonwealth citizens can sign up.

According to official Ministry of Defence (MOD) in the year leading to November 2017 1,759 of the 15,325 regular troops quit  because their time was up. Nearly half (7,439 ) quit early because of worsening conditions and falling morale. 3,325 were kicked out on disciplinary grounds and another 2,337 were medically discharged.

The MOD’s UK Regular Armed Forces Continuous Attitude Survey 2015 revealed,

-The number of personnel stating that they are dissatisfied with Service life has risen to 32%, up from 27% in 2014. Not a good start.

-There has been a fall in the number of personnel reporting that they are proud to be in their Service, from 81% in 2014 to 77% in 2015.

-25% “state that they plan to leave as soon as they can, or have put in notice to leave” (+9% on 2011).

-Satisfaction with pension benefits has dropped 18% since 2011

– Less than a third (27%) of Service personnel agree that the level of compensation is enough

-In 2015, job security was the top retention factor, followed by dental and healthcare provision, pension and opportunities for sport.

  • Individual morale 40% (-6% on 2011)
  • Unit morale 21% (-6% on 2011)
  • Service morale 14% (-4% on 2011)
  • Service life satisfaction 47% (-10% on 2011)
  • Job satisfaction 56% (-8% on 2011)

UK morale.png

Apart from the appalling trajectory of morale, it is clear that care once out of the military doesn’t fare much better.

While the MoD total budget will increase from GBP23bn to GBP50bn by 2020, data about how it is spent is highly opaque. More is learnt by some of the history surrounding the treatment of Tommies.

Support of  veterans has been so lacking that charities such as Help for Heroes has been active picking up the shortfall. It raises over GBP30 million per annum to support the 2,500 British veterans discharged for medical reasons every year to cope with civilian life.

Despite the American Psychiatric Association acknowledging PTSD in 1980, it took the UK another five years to officially recognize PTSD after the sharp increase in veterans suffering from mental health issues post the Falklands War of 1982. Of the 30,000 troops that were sent to fight, the UK armed forces allocated only one psychiatrist to the far away battlefield.

The problem was compounded in the 1990s with widespread closures of UK military hospitals as a cost cutting measure. Seven of the eight military hospitals had been shut or transferred to the NHS by 1999.

The UK Ministry of Defence (MOD) wrote in its recent report on those deployed in Iraq and Afghanistan about how low suicide rates were. It stated, “While rates of mental disorder are lower in the military (3.1%) than the general population (4.5%), the MOD routinely carries out research into those who have served on large scale combat operations, in order to more accurately assess the effects of deployment.” Note there is no data on veteran suicide in the UK.

The UK MOD’s ‘Defence People Mental Health and Wellbeing Strategy’ is supposedly in place to challenge the stigma surrounding mental health issues, to ensure that all who serve, and have served, can enjoy a state of positive physical and mental health. The MOD has committed £22 million a year on mental health with the establishment of two 24/7 helplines for serving personnel and veterans. How is it a charity funds 1.5x what the government does?

To put that in context, Australia spends 20x this amount every year just on veterans counseling services. America, albeit a larger veteran base, spends $9bn on mental health for its soldiers.

One wonders why the MOD doesn’t listen to the surveys and act. Then it wouldn’t have to go down the mercenary route.

How well do Americans know their Defense budget?


The US spends more than the next 9 countries combined when it comes to defence. What is probably lost on many Americans is the spiraling cost of funding the veterans who served. The US is forecast in 2020 to spend almost as much on the Dept of Veterans Affairs (VA) as China does on military spending. The direct cost of wars in Iraq and Afghanistan has driven the indirect costs of treating those who served almost 5-fold since the war began. US politicians have passed increase after increase.  Have these increases been thought of in context of the trend? Or do annual increases just get signed off as a reflex action?

Total VA.png

If we put the VA budget next to the defence budget, the former has grown from 14.8% of the latter to around 29% between 2000 and 2020. The number of veterans receiving disability compensation has grown 2 million in 2000 to 4.3 million in 2016. A total of 7.2 million veterans are actively seeking services or payments from the VA, up from 5.5 million in 2000.


Spending per veteran by priority group also reveals sharply higher costs. This is not an exhaustive list of priorities, but the main 7.

Priority 1

• Veterans with VA-rated service-connected disabilities 50% or more disabling
• Veterans determined by VA to be unemployable due to service-connected conditions.

Priority 2

• Veterans with VA-rated service-connected disabilities 30% or 40% disabling

Priority 3

• Veterans who are Former Prisoners of War (POWs)
• Veterans awarded a Purple Heart medal
• Veterans whose discharge was for a disability that was incurred or aggravated in the line of duty
• Veterans with VA-rated service-connected disabilities 10% or 20% disabling
• Veterans awarded special eligibility classification under Title 38, U.S.C., § 1151, “benefits for individuals disabled by treatment or vocational rehabilitation
• Veterans awarded the Medal Of Honor (MOH)

Priority 4

• Veterans who are receiving aid and attendance or housebound benefits from VA
• Veterans who have been determined by VA to be catastrophically disabled

Priority 5

• Non service-connected Veterans and non-compensable service-connected Veterans rated 0% disabled by VA with annual income below the VA’s and geographically (based on your resident zip code) adjusted income limits
• Veterans receiving VA pension benefits
• Veterans eligible for Medicaid programs

Priority 6

• Compensable 0% service-connected Veterans.
• Veterans exposed to ionizing radiation during atmospheric testing or during the occupation of Hiroshima and Nagasaki.
• Project 112/SHAD participants.
• Veterans who served in the Republic of Vietnam between January 9, 1962, and May 7, 1975.
• Veterans of the Persian Gulf War who served between August 2, 1990, and November 11, 1998.
• Veterans who served on active duty at Camp Lejeune for at least 30 days between August 1, 1953, and December 31, 1987.
• Currently enrolled Veterans and new enrollees who served in a theater of combat operations after November 11, 1998 and those who were discharged from active duty on or after January 28, 2003, are eligible for the enhanced benefits for five years post discharge.

Priority 7

• Veterans with gross household income below the geographically-adjusted income limits for their resident location and who agree to pay copays.

Vet Prio Group.png

Countries have an obligation to look after the troops that sustain injury, physical, mental or otherwise. The question is whether politicians are cottoning on to the mounting relative increase in healing the veteran community to the spending on weapons of war?

There are 19.6 million veterans in the US. By 2045 this is expected to dip below 12 million. With 2.1 million serving active duty military personnel and reserves, the overall costs of healing may not come down anytime soon.

What it does say is that there is a massive need to work out how to reduce the costs to the VA without impeding improving healthcare and benefits for veterans.

The scariest part of the IPCC’s 2030 forecast isn’t actually the science


Before we read into the validity about how we’re doomed before 2030 if we do not strictly adhere to the preachings of the UNIPCC’s latest gloomy climate bible, this is far more compelling

The Delinquent Teenager, written by Canadian investigative journalist Donna Laframboise chronicles how the IPCC participants are picked by governments, not for their scientific knowledge and expertise, but for their political connections and for “diversity.”

Other issues she uncovers go as far as to say that approximately 1/3rd of the sources for the IPCC come from magazines, press releases and unpublished scientific papers. It also tables corruption, scandals, and conflicts of interest. The Summary for Policy Makers (i.e. our leaders) is compiled by bureaucrats not scientists and often completed before the articles they actually summarise are made available.

She writes:

Richard Klein, now a Dutch geography professor, is a classic example. In 1992 Klein turned 23, completed a Masters degree, and worked as a Greenpeace campaigner. Two years later, at the tender age of 25, he found himself serving as an IPCC lead author. Klein’s online biography tells us that, since 1994, he has been a lead author for six IPCC reports. On three of those occasions, beginning in 1997, he served as a coordinating lead author. This means that Klein was promoted to the IPCC’s most senior author role at age 28 – six years prior to the 2003 completion of his PhD. Neither his youth nor his thin academic credentials prevented the IPCC from regarding him as one of the world’s top experts…


Nor is he an isolated case. Laurens Bouwer is currently employed by an environmental studies institute at the VU University Amsterdam. In 1999-2000, he served as an IPCC lead author before earning his Masters in 2001. How can a young man without even a Masters degree become an IPCC lead author? Good question. Nor is it the only one. Bouwer’s expertise is in climate change and water resources. Yet the chapter for which he first served as a lead author was titled Insurance and Other Financial Services. It turns out that, during part of 2000, Bouwer was a trainee at Munich Reinsurance Company. This means the IPCC chose as a lead author someone who a) was a trainee, b) lacked a Masters degree, and c) was still a full decade away from receiving his 2010 PhD.

Or this

Sari Kovats, currently a lecturer at the London School of Hygiene and Tropical Medicine, is an even more egregious example. She didn’t earn her PhD until 2010. Yet back in 1994 – 16 years prior to that event and three years before her first academic paper was published – Kovats was one of only 21 people in the entire world selected to work on the first IPCC chapter that examined how climate change might affect human health. In total, Kovats has been an IPCC lead author twice and a contributing author once – all long before she’d completed her PhD.

One of CM’s favourite passages though is when one of the expert reviewers noticed “in a particular section of the report, the IPCC was basing its arguments on two research papers that hadn’t yet been published. In itself, this should ring alarm bells. Since the wider scientific community had been given no opportunity to scrutinize them, it was surely premature to consider.”

So we are expected to fork over billions of dollars to defend this junk science?The biggest battle the scientific community faces is the damage done by the fraudulent data manipulation. The scandals are too numerous to mention. If a fInancial industry pundit missed 98% of the time they’d be fired.

Maybe the trick is to make regulations that will lead to fines, jail sentences and stripping of credentials (such as the finance industry) should scientists be caught fiddling the books. Afterall isn’t inappropriately wasting taxpayers money through junk research just as bad as  torching investors’ hard earned cash via insider trading?

Were such laws passed we would soon see alarmism paint a far less hysterical position.  As it stands the UN shows once again why it needs defunding. Afterall they thought Robert Mugabe would make a good ambassador for WHO. With judgement like that who’d doubt their credibility?

Pension blackhole widens


CM has been saying for quite some time that the US public pension system is a runaway train running out of track. It seems Zerohedge today confirms many of those same trends. The ratcheting down of return targets by ridiculously small amounts because to actuarially mark-to-market to reality is too scary to contemplate.

To quote the article,

CalSTRS is making the bold move to drop its future goal to… 7%…And CalPERS is ratcheting down its return goals in steps to… wait for it, 7% by 2021.

with interest rates near their lowest levels in human history, it’s been difficult for these pensions to generate a suitable return without taking on more and more risk.

And that’s another big problem with pensions – their investment returns are totally unrealistic.

Most pension funds require a minimum annual return of about 8% a year to cover their future liabilities.

But that 8% is really difficult to generate today, especially if you’re buying bonds (which is the largest asset for most pensions). So pensions are allocating more capital to riskier assets like stocks and private equity.”

Pensioners in Japan hit 40% of all shoplifting


The Japanese National Police Agency (JNPA) has recorded that almost 40% of all shoplifting is being committed by pensioners. CM wrote a full report on pensioner crime and the percentage continues to climb. In February 2018, an unemployed Oita Pref. woman in her 70s was arrested for shoplifting. She stole one 163 yen (US$1.40) baked potato. While she had sufficient cash to pay she said, “It was a waste of money to buy it.” Shoplifting in Oita among the elderly is now 47.5% (26.9% in 2008) of the total, well above the 39.5% nationwide average (26.6% in 2008).

In addition, the proportion of elderly people who repeat offenses increased in 2017 26.2%, up from 13.9% in 2008. 70% of offenders earn less than JPY 2mn per annum (US$18,000).

Supermarkets and drug stores account for 70% of the places crime is committed. 50% use the excuse that they have the money but don’t believe it is worth paying for. 10.5% believe that shoplifting is not a serious crime. 14.5% wanted to save some money for their pension and 11% insist they do not have enough money.

GEzus Priced super far?

US Corp prof.pngIt is not rocket science. Generally higher interest rates lead to lower profitability. The chart above shows that quarterly pre-tax US profitability is struggling. We took the liberty of comparing the profitability since 1980 and correlating it to what Moody’s Baa rated corporate bond effective 10yr yields. An R-squared of almost 90% was returned.

US Moodys corp

With the Fed moving toward a tightening cycle, we note that the spreads of Baa 10yrs to the FFR has yet to climb out of its hole. During GFC it peaked at 8.82%. It is now around 3%.

US Moodys

Why not use the Aaa spread instead? Well we could do that but looking over the last decade the average corporate debt rating profile looks like this. We have seen a massive deterioration in credit ratings. If we look at the corporate profitability with Baa interest rates over the past decade, correlation climbs even higher.


Corporate America binged on cheap credit over the last decade and given the spreads to Aaa ranked corporate bonds were relatively small, it was a no brainer. In 2015, GE’s then-CEO Jeff Immelt said he was willing to add as much as $20 billion of additional debt to grow, even if it meant lower bond grades. We can see that the spread today is a measly 0.77%. Way off the 3.38% differential at the time of GFC. Still nearly 50% of corporate debt is rated at the nasty end.

US Moodys corp aaa-baa.png

We shouldn’t forget that the US Government is also drunk on debt, much of it arriving at a store near you. $1.5 trillion in US Treasuries needs refinancing this year and $8.4tn over the next 3.5 years. Couple that with a Japan & China pulling back on UST purchases and the Fed itself promising to taper its balance sheet. So as an investor, would you prefer the safety of government debt or take a punt on paper next to junk heading into a tightening cycle?


In any event, the 4.64% 10yr Baa corporate bond effective yield is half what it was at the time of GFC. Yet, what will profitability look like when the relative attractiveness of US Treasuries competes with a deteriorating corporate sector in terms of profitability or balance sheet?

Take GE as an example. Apart from all of the horror news of potential dividend cuts, bargain basement divestments and a CEO giving vague timelines on a turnaround in its energy business things do not bode well. Furthermore many overlook the fact that GE has $18.7bn of negative equity. Selling that dog of an insurance business will need to go for pennies in the dollar. There is no premium likely. GE had a AAA rating but lost it in March 2009. Even at AA- the risk is likely to the downside.

Take GE’s interest cover. This supposed financial juggernaut which was at the time of GFC the world’s largest market cap company now trades with a -0.17x interest coverage ratio. In FY2013 it was 13.8x. The ratio of debt to earnings, has surged from 1.5 in 2013 to 3.7 today. It has $42bn in debt due in 2020 for refinancing.

By 2020, what will the interest rate differentials be? There seems to be some blind faith in GE’s new CEO John Flannery’s ability to turn around the company. Yet he is staring at the peak of the aerospace cycle where any slowdown could hurt the spares business not to mention the high fixed cost nature of new engines under development. In a weird way, GE is suffering these terrible ratios at the top of the cycle rather than the bottom. Asset fire sales to patch that gaping hole in the balance sheet. Looks like a $4 stock not a $14 one.