The Next Crisis: Public Pension Funds

Ever since theWall Street crash, there has been a bull market in Google hits for “public pensions” and “crisis.” Horror stories abound, like the one in Yonkers, where policemen in their 40s are retiring on $100,000 pensions (more than their top salaries), or in California, where payments to Calpers, the biggest state pension fund, have soared while financing for higher education has been cut. Then there is New York City, where annual pension contributions (up sixfold in a decade) would be enough to finance entire new police and fire departments.

Chicken Little pension stories have always been a staple of the political right, but in California, David Crane, the special adviser to Gov. Arnold Schwarzenegger, says it is time for liberals to rally to the cause.

“I have a special word for my fellow Democrats,” Crane told a public hearing. “One cannot both be a progressive and be opposed to pension reform.” The budgetary math is irrefutable: generous pensions end up draining money from schools, social services and other programs that progressives naturally applaud. (more)

Central Banks Warn of New Crisis If Debt Continues to Soar

Governments must slash budget deficits decisively and central banks should not wait too long to raise borrowing costs as side effects from measures prescribed to tackle the global recession may create the next crisis, the Bank for International Settlements said.

The global economy and financial markets were on the mend, though the recovery remained fragile in the advanced economies and in the euro zone the debt crisis put the recovery at risk, the BIS said in its annual report, published on Monday.

Global leaders meeting in Toronto agreed to take different paths for shrinking budget deficits and making banking systems safer and Washington in particular has warned against cutting too fast.

The head of the BIS said there was no time to waste. "We cannot wait for the resumption of strong growth to begin the process of policy correction," BIS general manager Jaime Caruana told the bank's annual general meeting. (more)

800,000 mortgages in California are 30+ days late or in foreclosure. Only 132,000 show up in the MLS. Why there will be no housing bottom for Californ

The latest data on new and existing home sales shows us evidence that housing has benefited from a bear market bounce but that has now come to an end. The drop in existing home sales was sizable but the drop in new home sales came in at a record breaking figure. The difference here comes from the large amount of distress inventory still moving at lower prices. The amount of troubled mortgages still filtering through the system is large and gives us pause for caution. Much of the boost can be said to have come from massive government intervention. In California there is now money going to banks to match a principal reduction for those homeowners in distress. In other words, the focus is on problems and not having a more stable market for housing. Over the last year, we also saw many people moving off the sidelines spurred by low interest rates, tax credits, and the perception that housing had hit bottom. For California, the data signifies that there will not be a bottom until at least 2012 and that is what we will examine in this article. (more)

College: Big Investment, Paltry Return

If there's one truism that goes virtually unchallenged these days, it's that a college degree has great value. Beyond the great books, beyond the critical reasoning skills, and beyond the experience itself, there's another way that a college degree has value: Over the course of a working life, college graduates earn more than high school graduates. Over the past decade, research estimates have pegged that figure at $900,00, $1.2 million, and $1.6 million.

But new research suggests that the monetary value of a college degree may be vastly overblown. According to a study conducted by PayScale for Bloomberg Businessweek, the value of a college degree may be a lot closer to $400,000 over 30 years and varies wildly from school to school. According to the PayScale study, the number of schools that actually make good on the estimates of the earlier research is vanishingly small. There are only 17 schools in the study whose graduates can expect to recoup the cost of their education and out-earn a high school graduate by $1.2 million, including four where they can do so to the tune of $1.6 million. At more than 500 other schools, the return on investment, or ROI, is less—sometimes far less. College, says Al Lee, director of quantitative analysis at PayScale, "is not the million-dollar slam dunk people talk about." (more)

Whitney: Beware of Housing Market

RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve

Entitled "Deflation: Making Sure It Doesn’t Happen Here", it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.

The speech is best known for its irreverent one-liner: "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost."

Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE). (more)

Krugman: The Third Depression

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense. (more)

Silver Posting Best Streak Since Hunt Conspiracy as Economy No Impediment

Silver, the precious metal most used in industry, is attracting investors betting on both faster and slower economic growth as prices extend the longest run of quarterly gains in three decades.

Doubling as a store of value for buyers concerned about the economy and as an industrial material for those bullish on growth, silver is outperforming metals from copper to zinc this year and keeping pace with gold. It will rise as much as 15 percent to $22 an ounce before December, from $19.145 today, according to Daniel Brebner, an analyst at Deutsche Bank AG whose fourth-quarter outlook was accurate to within 0.7 percent. (more)

Five common investing mistakes to avoid

Russell Investments recently posted a list of companies joining and leaving the Russell 3000 index on June 25. In anticipation of this event, many investors have either bought the stocks of companies being added to the index or sold those being deleted from it. Big mistake.

In fact, it might be better to do the exact opposite, because stocks deleted from an index tend to have significantly higher factor-adjusted returns than index additions, and stocks added to an index have "poor long-term returns," according to a study published in the Financial Analysts Journal in 2008 by Jie Cai, an assistant professor of finance at Drexel University, and Todd Houge, a chartered financial analyst and professor of finance at the University of Iowa.

1. Don't sell stocks deleted from an index, or buy stocks added to an index

The Russell 3000 index represents about 98% of the investable U.S. equity universe, and on June 25 about 261 companies will be added to the index and about 205 companies will be deleted from it.

That fact alone shouldn't prompt investors to make buy or sell decisions, said David Zuckerman, a certified investment management analyst and chief investment officer of Zuckerman Capital Management LLC. (more)

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