Hussman posts pension system tsunami warning
Stalling engines: The outlook for
U.S. cconomic growth your long-term investment portfolio
“I’ve detailed this dynamic extensively in the financial markets. Given present valuation extremes, the skateboard is so far ahead of the car that we expect S&P 500 annual nominal total returns to average just 0.6% over the coming 12-year period, even if underlying economic growth accelerates to historically normal rates. Combine that with depressed interest rates, where poor 10-12 year total returns are baked-in-the-cake, and our estimate of the prospective total return on a conventional portfolio mix of 60% stocks, 30% bonds, and 10% T-bills has never been lower.
Given that typical pension fund return assumptions are vastly above our current estimates, it follows that we expect a rather severe pension funding crisis in the coming years. If the resolution of the present valuation extremes is anything like what has followed other speculative peaks like 2000 and 2007, investors will likely face a substantially different (and better) menu of investment opportunities within a small number of years. Dry powder has considerable option value.”
MK note: In this month’s edition of News & Views we talk about pension fund instability as a possible unforeseen negative “left field” event that could deliver the next systemic crisis to financial markets’ doorstep. Mr. Hussman communicates that same concern along with additional concerns about the economy itself wherein he cites “challenging arithmetic already baked into the cake.”
WARNING! Do not read the article linked above if you believe that the stock and bond markets are perpetually solid long-term investments without periods of regression, losses and stalled wealth building. Do not read this article if you do not want your media-oiled assumptions about the markets and your portfolio challenged.
SOMETHING TO CONSIDER? Given the returns Hussman forecasts, perhaps that portfolio mix cited above would be better-served with a 10%-30% diversification into gold and silver – the level USAGOLD recommends depending upon your level of concern. If you are locked-into a government or corporate sponsored pension or retirement fund, you might want to consider a diversification on the personal side.