Desperately Seeking Returns: The Yield Crisis Expands

Wow, that was timely.

On Monday, we wrote you with some news… good and bad.

It was about the nation’s pension crisis.

Again, our timing was spot on. The financial news woke up to a sad headline on Monday.

General Electric told 20,000 of its current employees that they’ll no longer accrue fresh pension benefits.

Sorry ’bout dat.

It’s a painful move that will cut the sputtering company’s whopping $27 billion pension shortfall by just $8 billion.

The move surely has folks in Washington paying attention.

Lots of voters are suddenly getting less than they planned on. It’s a great reason to blow some taxpayer dollars.

We’ll All Pay

It’s just like we said in the final words of our essay on Monday:

If you think that banks were too big to fail and that General Motors was worth a taxpayer bailout… wait until you see the lengths politicians are willing to go to save the retirements of their best voters.

It’s why this bull market will scream on for far longer than we think.

And it’s why we tell folks to buy stocks… and mix themselves a nice, stiff drink.

Remember, despite giving the shaft to 20,000 current employees, GE is on the hook for a lifetime of payments to more than 500,000 former workers.

Thanks to a 10-year bull market, those payouts aren’t yet in danger of getting slashed.

And you can bet if/when they are, Washington will provide the company with an ample backstop. Whether it’s through regulation, tax cuts, bailouts or propping the stock market up with vast sums of fake money (the tactic du jour), those half a million voters will get paid.

It’s the rest of us – the folks who are paying for our retirements with old-fashioned hard work and investing acumen – who will pay the toll.

It’s why, as we said on Monday, you’re crazy if you’re not in the stock market and riding this bull market money train as it speeds out of the station.

As more funds and the countries and companies behind them get desperate, the train will only accelerate.

Off the Rails

We’re already seeing desperate countries change the rules of the game.

Take what’s happening in Denmark, for instance.

It’s the home of this crisis.

Interest rates in the country have been negative for far longer than anywhere else in the world. It’s hell on investors.

Now the Danish government wants to change the rules.

Proponents for the tweaks say the current system forces funds to buy low-risk assets, which pushes their prices higher… sending their yields even lower.

It’s a nasty downward spiral that threatens to get a whole lot worse.

That’s why the folks in charge want to change the way pension funds do math. Current rules in Europe are designed to protect funds (and the many folks who depend on them) from market volatility.

The new rules would lift those protections… and open the door for pensions to jump into higher-risk, higher-yielding assets.

What could possibly go wrong?

It’s good news for stock investors (at least until it isn’t)… but only the history books can tell us how the poor pensioners will fare.

Our guess is everybody will eventually get ripped off.

Inflation doesn’t take prisoners.

Going Up

Like we said, markets will soar as pension funds are forced to pour more and more cash into stocks in order to meet their growth requirements.

We’re already seeing signs of funds getting addicted to the action.

Alaska, for instance, has the highest pension liability per capita in the country – $46,774.

And just this week, we learned its pension fund is adding to its equity stakes.

It bought 161,000 shares of Apple… after the stock has soared 44% this year.

It grabbed 24,000 shares of Boeing… despite a scandal that threatens to embattle the plane maker for years to come.

And it bought 456,000 shares of General Electric… as cries of fraud echoed across Wall Street.

Of course, Alaska’s pension fund is not alone.

Across the world, pension managers are flooding into stocks as they desperately search for returns.

It’s all part of a crisis of yield that’s quickly gaining momentum.

Staying solidly invested in stocks is your best bet for now, especially as inflationary pressures build.

But smart pension funds and the investors who track them are quickly taking advantage of other income-generating strategies.

We’ll share more on them… later this week.

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