Author Archives: Bone Fish

Pending Home Sales Drop In March – Stagnant For 2 Years

(ZeroHedge), contracts to buy previously owned U.S. homes declined in March after rising a month earlier by the most since 2010, as perhaps the seasonal exuberance gives way to affordability constraints. Despite NAR’s comments that “home shoppers are coming out in droves this spring,” it is evident from the chart below that pending home sales have been stagnant for almost two years.

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/04/21/20170426_sales1_0.jpg

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/04/21/20170426_sales_0.jpg

Regionally, only The South saw a sales increase:

  • The PHSI in the Northeast decreased 2.9 percent to 99.1 in March, but is still 1.8 percent above a year ago.
  • In the Midwest the index declined 1.2 percent to 109.6 in March, and is now 2.4 percent lower than March 2016.
  • Pending home sales in the South rose 1.2 percent to an index of 129.4 in March and are now 3.9 percent above last March.
  • The index in the West fell 2.9 percent in March to 94.5, and is now 2.7 percent below a year ago.

Lawrence Yun, NAR chief economist, says sparse inventory levels caused a pullback in pending sales in March, but activity was still strong enough to be the third best in the past year.

“Home shoppers are coming out in droves this spring and competing with each other for the meager amount of listings in the affordable price range,” he said.

“In most areas, the lower the price of a home for sale, the more competition there is for it. That’s the reason why first-time buyers have yet to make up a larger share of the market this year, despite there being more sales overall.

Yun worries that the painfully low supply levels this spring could heighten price growth — at 6.8 percent last month — even more in the months ahead. Homes in March came off the market at a near-record pace 1, and indicating an increase in the likelihood of listings receiving multiple offers, 42 percent of homes sold at or above list price (the second highest amount since NAR began tracking in December 2012).

“Take my money!!”

Deja Vu: JPM Slashes Auto Loans For Their Own Book; Ramps Up ABS Issuance For The Suckers

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Back in 2007/2008, Wall Street drastically pulled back on mortgage origination for their own balance sheets while ramping up their issuance of RMBS securities.  Of course, the goal was very simple: package up all the mortgage-related nuclear waste on your balance sheet into a pretty package, tie a ribbon around it with that AAA-rating from Moody’s and sell it all to unsuspecting pension funds and insurance companies around the globe. 

Now, despite all the ‘harsh penalties’ that Obama imposed on Wall Street after the mortgage crisis, like that $1.8 billion settlement where we showed that Goldman will actually make money from their ‘punishment’, it seems as though the exact same scheme is currently underway with auto loans.  Per Bloomberg:

Both banks have grown more reluctant to make new subprime loans using money from their own balance sheets. Wells Fargo tightened its underwriting standards and slashed the volume of all loans it made to car buyers in the first quarter by 29 percent after greater numbers of borrowers fell behind on payments. JPMorgan’s consumer and community banking head Gordon Smith earlier this year said the bank had cut its new lending for subprime auto loans “dramatically.”

At the same time the firms are indirectly funding billions of dollars of the loans by helping companies like Santander Consumer USA Holdings Inc. borrow in the asset-backed securities market, essentially shunting money from bond investors to finance companies. Wall Street banks packaged more loans from finance companies into bonds in the first quarter than the same period last year, and Wells Fargo and JPMorgan remained two of the top underwriters of the securities.

Of course, with only ~$200 billion of auto ABS outstanding, compared to $9 trillion in RMBS, the auto loan market hardly represents the same “systemic risk” to the financial industry today as mortgage loans did back in 2007.  That said, deterioration in lending standards could certainly wreak havoc on consumers, investors and the auto industry which will undoubtedly have ripple effects throughout the economy.

The risks to Wall Street firms from subprime auto bonds are smaller. Big banks provide lines of credit to finance companies that make subprime loans, but these tend to be a small part of major firms’ balance sheets. The auto loan bond market is much smaller, too: there were just $192.3 billion of securities backed by auto loans, including prime and subprime, outstanding at the end of March according to the Securities Industry and Financial Markets Association, compared with around $8.9 trillion of residential mortgage bonds at the end of last year.

Banks might not get hurt much by subprime auto securities, but for investors who buy them, the risks are growing. Subprime borrowers are falling behind on their car loan payments at the highest rate since the financial crisis. General Motors Co. expects car prices to drop 7 percent this year and auto lender Ally Financial Inc. reported last month that prices fell that much during its first quarter, so the value of the loans’ collateral is dropping. Even Wells Fargo’s analysts who look at bonds backed by car loans cautioned in March that it may be a good time for investors to cut their exposure.

And while JPM and Wells are pulling back on their own auto loan underwriting, we wonder whether they’re sharing these details regarding auto loan delinquencies with new buyers of their sparkling auto ABS securities?

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user230519/imageroot/2017/03/29/2017.03.29%20-%20SubPrime%201_0.JPG

Or the fact that loss severities are also starting to rise… 

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user230519/imageroot/2017/03/29/2017.03.29%20-%20SubPrime%202_0.JPG

Oh well, losses are never possible on those highly-engineered, complex wall street structures…until they are.

Source: ZeroHedge

 

Who Will Live in the Suburbs if Millennials Favor Cities?

Longtime readers know I follow the work of urbanist Richard Florida, whose recent book was the topic of Are Cities the Incubators of Decentralized Solutions? (March 14, 2017).

Florida’s thesis–that urban zones are the primary incubators of technological and economic growth–is well-supported by data that shows that the large urban regions (NYC, L.A., S.F. Bay Area, Seattle, Minneapolis,etc.) generate the majority of GDP and wage gains.

https://i1.wp.com/www.oftwominds.com/photos2016/gdp-county2.jpg

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Cities have always attracted capital, talent and people rich and poor alike. Indeed, “city” is the root of our word “civilization.” So in this sense, Florida is simply confirming the central role cities have played for millennia.

More recently, Florida has addressed the rising wealth/income inequality that is making desirable urban areas un-affordable to all but the top 10% or even 5% wage earners. This is a critical concern, because vitality is a function of diversity: a city of wealthy elites paying low wages to masses of service workers is not an economic powerhouse.

What happens as buying a home in a desirable city becomes out of reach of all but the most highly paid tranche of workers?

The larger question is: what happens to home ownership as housing prices continue higher while the next generation’s wages remain significantly lower than previous generations’ incomes?

Millennials are typically earning less than Baby Boomers and Gen-X did in their 20s and 30s, and if this continues–and history suggests it will–then how many Millennials will be able to buy a pricey house?

One consequence of stagnating wages and rising home valuations is a “nation of homeowners” morphs into a “nation of renters.”

The other big question is: if Millennials aren’t earning enough to buy pricey homes, who is going to buy the tens of millions of houses Baby Boomers will be selling as they downsize/move to assisted living? As for inheriting Mom and Dad’s house–that’s not likely if Mom or Dad need the cash to fund their retirement/assisted living.

This question is especially relevant to suburban homes, especially those far from employment centers. Though data on this trend is sketchy, it seems Millennials strongly favor city living over exurban/suburban living.

Anecdotally, I can’t think of a single individual in their 20s or 30s that I know personally who has bought a house in a distant suburb. Everyone in this age group has bought a house in an urban zone. Not a highrise condo in the city center, but a house in a ring city near public transport.

Though data on this is hard to find (if it exists at all), Millennials seem more willing to make the sacrifices necessary to live in the urban core, either by renting rather than buying a cheaper suburban home, or by purchasing a modest bungalow on a small lot rather than an expansive suburban home on a big lot.

(This could change if Millennials start having lots of children, but to date small bungalows in urban regions appear big enough for families with two children.)

In a turn-around from the postwar era, which saw a mass exodus of the middle class from city centers to suburbia, the upper middle class is moving back to urban centers and the lower-income populace–once the urban poor–are being pushed out to the suburbs. We can now speak of the suburban poor.

To some degree, the suburbs have become victims of their own success. Long commutes in heavy traffic are the inevitable result of the vast expansion of suburban subdivisions, shopping malls and business parks. These killer commutes detract from the desirability of suburbs, especially to auto-agnostics of the Millennial generation, who exhibit low enthusiasm for auto ownership.

Rather than symbolizing freedom, auto ownership is viewed as a burdensome necessity at best.

If we overlay these trends (assuming they continue into the future), we discern the possibility that marginal suburban housing could crash in price and morph into suburban ghettos of isolated low-income residents.

The Pareto Distribution may play a role in this transformation. Should 20% of the suburban housing stock fall into disrepair, that could trigger the collapse of valuation in the remaining 80%.

Not all suburbs are equal. Those with diverse job growth may well act as magnets much like small cities. Those with few jobs and long commutes are less desirable and have smaller tax bases to support services.

The asymmetry between modest/stagnant Millennial wages and the soaring cost of housing cannot be bridged. If these trends continue, only the top tranche of highly paid young workers will be able to afford housing in desirable areas. Given a choice between affordable ownership in a small city or in a distant suburb, Millennials may well choose the affordable small city rather than the distant exurb or low-services suburb.

https://i0.wp.com/www.oftwominds.com/photos2016/wage-inequality3-16a.jpg

Note that most incomes have gone nowhere since about 1998. Even the top 5% has made modest gains in real (inflation-adjusted) income.

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Meanwhile, home prices are back in bubble territory. “Hot” urban areas such as Seattle, Portland, the San Francisco Bay Area, Los Angeles, Brooklyn NYC, etc. have logged double-digit gains in recent years.

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So who’s going to pay bubble-valuation prices for the millions of suburban homes Baby Boomers will be off-loading in the coming decade as they retire/ downsize? We know one part of the answer: it won’t be Millennials, as they don’t have the income or savings to afford homes at these prices.

These trends promise to remake the financial geography of cities (large and small) and suburbia–and in the process, radically shift the financial assets of households, renters and owners alike.

By Max Keiser | Financial War Reports

Parent Plus Student Loans: How to Screw Parents and Kids in a Single Shot

It’s easy to get student loans thanks to the aptly named “Parent Plus” program, a subprime loan trap that ensnares parents plus their college-age children. The program was enacted by Congress in the 1980s, but president Obama promoted it heavily.

The results speak for themselves: Nearly 40% of the loans are subprime. The default rate exceeds the rate for U.S. mortgages at the peak of the housing crisis.

Kids graduate from college with useless degrees, plus parents and kids are stuck with massive bills that cannot be paid back.

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It’s Easy for Parents to Get College Loans—Repaying Them Is Another Story.

Student loans made through parents come from an Education Department program called Parent Plus, which has loans outstanding to more than three million Americans. The problem is the government asks almost nothing about its borrowers’ incomes, existing debts, savings, credit scores or ability to repay. Then it extends loans that are nearly impossible to extinguish in bankruptcy if borrowers fall on hard times.

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As of September 2015, more than 330,000 people, or 11% of borrowers, had gone at least a year without making a payment on a Parent Plus loan, according to the Government Accountability Office. That exceeds the default rate on U.S. mortgages at the peak of the housing crisis. More recent Education Department data show another 180,000 of the loans were at least a month delinquent as of May 2016.

“This credit is being extended on terms that specifically, willfully ignore their ability to repay,” says Toby Merrill of Harvard Law School’s Legal Services Center. “You can’t avoid that we’re targeting high-cost, high-dollar-amount loans to people who we know can’t afford to repay them.”

The number of Americans with federal student loans, including through programs for undergraduates, parents and graduate students, grew by 14 million to 42 million in the decade through last year. Overall student debt, most of it issued by the federal government, more than doubled to $1.3 trillion over that period.

The financing fueled a surge in college enrollment. Between 2005 and 2010, enrollment grew 20%, the biggest increase since the 1970s. The Obama administration supported such lending in an effort to widen access to college education.

Nearly four in 10 student loans—the vast majority of them federal ones—went to borrowers with credit scores below the subprime threshold of 620, indicating they were at the highest risk of defaulting, according to a Wall Street Journal analysis of data from credit-rating firm Equifax Inc. That figure excludes borrowers, such as many 18-year-old freshmen, who lacked scores because of shallow credit histories. By comparison, subprime mortgages peaked at nearly 20% of all mortgage originations in 2006.

Roughly eight million Americans owing $137 billion are at least 360 days delinquent on federal student loans, nearly the number of homeowners who lost their homes because of the housing crisis. More than three million others owing $88 billion have fallen at least a month behind or have been granted temporary reprieves on payments because of financial distress.

Joint Effort

In 2005, president Bush signed the bankruptcy reform act of 2005 making student loans not dischargeable in bankruptcy.

President Obama came along next and encouraged parents who had no idea what they were getting into to sign loans to put their kids through college.

Parents plus their kids are mired in debt that cannot be paid back. Thank you Congress, President Bush, and President Obama.

Surefire Way to Discharge the Loans

There is one way to get rid of these loans. Die.

Stop the Madness

Wherever government meddles, costs rise dramatically.

The solution is to stop the meddling: Stop all the loan programs, stop all the aid programs, stop insisting that everyone needs to go to college, and start accrediting programs and course offerings from places like the Khan Academy.

Not a single student aid program aided any students. Rather, escalating costs went to teachers, administrators, and their pensions as student debt piled sky high.

By Mike “Mish” Shedlock

Are Bonds Headed Back To Extraordinarily Low Rate Regime?

The U.S. 10-Year Treasury Yield has dropped back below the line containing the past decade’s “extraordinarily low-rate” regime.

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Among the many significant moves in financial markets last fall in the aftermath of the U.S. presidential election was a spike higher in U.S. bond yields. This spike included a jump in the 10-Year Treasury Yield (TNX) above its post-2007 Down trendline. Now, this was not your ordinary trendline break. Here is the background, as we noted in a post in January when the TNX subsequently tested the breakout point:

“As many observers may know, bond yields topped in 1981 and have been in a secular decline since. And, in fact, they had been in a very well-defined falling channel for 26 years (in blue on the chart below). In 2007, at the onset of the financial crisis, yields entered a new regime.

Spawned by the Fed’s “extraordinarily low-rate” campaign, the secular decline in yields began a steeper descent.  This new channel (shown in red) would lead the TNX to its all-time lows in the 1.30%’s in 2012 and 2016.

The top of this new channel is that post-2007 Down trendline. Thus, recent price action has 10-Year Yields threatening to break out of this post-2007 technical regime. That’s why we consider the level to be so important.”

We bring up this topic again today because, unlike January’s successful hold of the post-2007 “low-rate regime” line, the TNX has dropped back below it in recent days. Here is the long-term chart alluded to above.

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/04/17/20170420_bonds_1.jpg

And here is a close-up version.

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/04/17/20170420_bonds_2.jpg

As can be seen on the 2nd chart, the TNX has just broken below several key Fibonacci Retracement levels near the 2.30% level – not to mention the post-2007 Down trendline which currently lies in the same vicinity. Does this meant the extraordinarily low-rate environment is back?

Well, first of all, the Federal Reserve only sets the overnight “Fed Funds” rate – not longer-term bond yields (at least not directly). So this is not the Fed’s direct doing (and besides, they’re in the middle of a rate hiking cycle). Therefore, the official “extraordinarily low-rate” environment that the Fed maintained for the better part of a decade is not coming back – at least not imminently. But how about these longer rates?

Outside of some unmistakable influence resulting from Fed policy, longer-term Treasury Yields are decided by free market forces. Thus, this return to the realm of the TNX’s ultra low-rate regime is market-driven, whatever the reason. Is there a softer underlying economic current than what is generally accepted at the present time? Is the Trump administration pivoting to a more dovish posture than seen in campaign rhetoric? Are the geopolitical risks playing a part in suppressing yields back below the ultra low-rate “line of demarcation”?

Some or all of those explanations may be contributing to the return of the TNX to its ultra low-rate regime. We don’t know and, frankly, we don’t really care. All we care about, as it pertains to bond yields, is being on the right side of their path. And currently, the easier path for yields is to the downside as a result of the break of major support near 2.30%.

Source: ZeroHedge

Premium Homes Dominate Inventory For Sale

Don’t Call It A Comeback: How Rising Home Values May Be Stifling Inventory

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By Ralph McLaughin | Chief Economist For Trulia

U.S. home inventory tumbled to a new low in the first quarter of 2017, falling for eight consecutive quarters. Homebuyers have now been stifled by low inventory for the last two years despite prices rising to pre-recession highs in many markets.

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In this edition of Trulia’s Inventory and Price Watch, we examine how home value recovery may be limiting supply in markets that have recovered most. We find that homebuyers in markets with the biggest gains are facing the tightest supply.

The Trulia Inventory and Price Watch is an analysis of the supply and affordability of starter homes, trade-up homes, and premium homes currently on the market. Segmentation is important because home seekers need information not just about total inventory, but also about inventory in the price range they are interested in buying. For example, changes in total inventory or median affordability don’t provide first-time buyers useful information about what’s happening with the types of homes they’re likely to buy, which are predominantly starter homes.

Looking at the housing stock nationally and in the 100 largest U.S. metros from Q1 2012 to Q1 2017, we found:

  • Nationally, the number of starter and trade-up homes continues drop, falling 8.7% and 7.9% respectively, during the past year, while inventory of premium homes has fallen by just 1.7%;
  • The persistent and disproportional drop in starter and trade-up home inventory is pushing affordability further out of reach of homebuyers. Starter and trade-up homebuyers need to spend 2.9% and 1.6% more of their income than this time last year, whereas premium homebuyers only need to shell out 0.9% more of their income;
  • A strong recovery may be partly to blame for the large drop in inventory some markets have experienced over the past five years. On average, the more valuable a market’s housing is compared to pre-recession levels, the larger drop in inventory it is has seen.

https://dwtd9qkskt5ds.cloudfront.net/blog/wp-content/uploads/2017/03/InventoryReport2017Q1_inline3.png

2017 Ushers in a Dramatic Shortage of Homes

Nationally, housing inventory dropped to its lowest level on record in 2017 Q1. The number of homes on the market dropped for the eighth consecutive quarter, falling 5.1% over the past year. In addition:

  • The number of starter homes on the market dropped by 8.7%, while the share of starter homes dropped from 26.1% to 25.9%. Starter homebuyers today will need to shell out 2.9% more of their income towards a home purchase than last year;
  • The number of trade-up homes on the market decreased by 7.9%, while the share of trade-up homes dropped from 23.9% to 23%. Trade-up homebuyers today will need to pay 1.6% more of their income for a home than last year;
  • The number of premium homes on the market decreased by 1.7%, while the share of premium homes increased from 50% to 51%. Premium homebuyers today will need to spend 0.6% more of their income for a home than last year.

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How and Where a Strong Housing Market May Be Hurting Inventory

In the first edition of our report, we provided a few reasons why inventory is low: (1) investors bought up much of the foreclosure home inventory during the financial crisis and turned them into rental units, (2) price spread – that is, when prices of homes in different segments of the housing market diverge from each other – makes it difficult for existing homeowners to tradeup to the next the segment, and (3) slow home value recovery was making it difficult for some homeowners to break even on their homes. While there is evidence that investors indeed converted owner-occupied homes into rentals as well as evidence from our first report that increasing price spread is correlated with decreases in inventory, little work has examined how home value recovery affects inventory. This is perhaps due to the tricky conceptual relationship between home values and inventory: too little recovery might make it difficult for homeowners to sell their home but cheap to buy one, while too much recovery might make it easy for them to sell but difficult to buy.

https://dwtd9qkskt5ds.cloudfront.net/blog/wp-content/uploads/2017/03/inventory_bar.png

In fact, we find a negative correlation between how much a housing market has recovered and how much inventory has changed over the past five years. Using the current value of the housing market relative to the peak value as our measure of recovery, we find markets with greater home value recovery have experienced larger decreases in inventory over the past five years. The linear correlation was moderate (-0.36) and statistically significant. We also found that markets with the strongest recovery, on average, have experienced the largest decreases in inventory.

For example, the five-year average change in inventory of housing markets currently valued below their pre-recession peak (< 95% of peak value) isn’t that different from ones that have recovered to 95% – 105% of their peak. (-27.6% vs. -30.1%). However, the average change in inventory in well-recovered markets (> 105%) is 0more drastic at -45.4%.

The disparity also persists when looking at changes in inventory within each segment, although the difference is largest for starter homes. On average, markets with less than 95% recovery or 95% to 105% recovery had a 34.2% and 31.7% decrease in starter inventory, while markets with more than 105% home value recovery had a whopping 58.2% drop. These findings suggest that a moderate home value recovery doesn’t affect inventory much, but a strong recovery does and impacts inventory of starter homes the most.

Required Pension Contributions of California Cities Will Double in Five Years says Policy Institute: Quadruple is More Likely

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The California Policy Center estimates Required Pension Contributions Will Nearly Double in 5 Years. I claim it will be much worse.

In the fiscal year beginning in July, local payments to the California Public Employees’ Retirement System will total $5.3 billion and rise to $9.8 billion in fiscal 2023, according to the right-leaning group that examines public pensions.

The increase reflects Calpers’ decision in December to roll back the expected rate of return on its investments. That means the system’s 3,000 cities, counties, school districts and other public agencies will have to put more taxpayer money into the fund because they can’t count as heavily on anticipated investment income to cover future benefit checks.

Including the costs paid by cities and counties that run their own systems, the fiscal 2018 tab will be at least $13 billion to meet retirement obligations for public workers, according to the analysis, which is based on actuarial reports and audited financial statements.

Barring any changes to pensions, “several California cities and counties will find themselves forced to slash other spending,” the group wrote in its report. “The less fortunate will simply be unable to pay the bills they receive from Calpers or their local retirement system.”

Quadruple is More Likely

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The California Policy Center Report details 20 cities and counties reporting pension contribution-to-revenue ratios exceeding 10%. San Rafael, San Jose, and Santa Barbara County head the list at 18.29%, 13.49%, and 13.06% respectively.

The report “reflects the impact of CalPERS’ recent decision to change the rate at which it discounts future liabilities from 7.5% to 7%.

Lovely.

A plan assumption of 7.0% is not going to happen. Returns are more likely to be negative than to hit 7% a year for the next five years.

As in 2000 and again in 2007, investors believe the stock market is flashing an all clear signal. It isn’t.

GMO 7-Year Expected Returns

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Source: GMO

*The chart represents local, real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward looking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forward‐looking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years.

Forecast Analysis

GMO forecasts seven years of negative real returns. Allowing for 2.2% inflation, nominal returns are expected to be negative for seven full years.

Even +3.0% returns would wreck pension plans, most of which assume six to seven percent returns.

If we see the kinds of returns I expect, even quadruple contributions will not come close to matching the actuarial needs.

by Mike “Mish” Shedlock