Another Katyn Tragedy

We woke up to the tragic news this morning that Poland had lost its president, central banks head, army chief of staff, and other important political figures in a plane crash. The incident is made all the more tragic by the fact that the delegation was headed to a memorial of the Katyn Massacres.

In our Opportunistic Portfolio model, we hold a 2% position in Market Vectors Poland ETF (PLND). While this is sad news for Poland, we don’t think it will have any lasting impact on the country’s current economic outlook (though a closer look at the central bank’s succession policies might be in order). Thus, we’ll gladly bring the position back to its target weight should this news have a negative impact on its price.

URLs:

http://news.bbc.co.uk/2/hi/europe/8612825.stm

http://news.bbc.co.uk/2/hi/europe/8612843.stm

http://www.novinite.com/view_news.php?id=115084

http://en.wikipedia.org/wiki/Katyn_Massacre

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC is a state registered investment advisor. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy nor a solicitation to sell any security, or to engage in any investment strategy. Some clients of the firm own shares of PLND.

Good column by Ron Rhoades

 Good column by Ron Rhoades on RIABiz.com, in which he predicts what types of financial reforms might come out of Congress in the current session. He echoes some concerns we’ve raised (emphasis added):

There are many parts of the overall financial services reform legislation that are incremental improvements over what we have today, and which should be supported. I hope the upcoming amendments will address “too big to fail” and reduce the perverse compensation incentives which tend to drive improper risk-taking activities.

I am deeply troubled, however, by the lack of oversight of all credit default swaps and other forms of derivatives. There are likely to remain many gaps in regulation which can continue to be exploited.

Additionally, much of the bill appears to fragment, rather than to consolidate, banking regulation. Regulation needs to be robust – to paraphrase James Madison, if securities industry participants were all angels, regulation would not be needed. But regulation also needs to be efficient. Our country cannot afford inefficient regulation of the same functional areas through duplicative, often over-lapping agencies.

This point, on disclosure as panacea, was particularly interesting, and lends some support to our call (and others’) for bringing basic financial education (legal might be a good idea too) into primary education:

The fundamental problem is that the SEC continues to emphasize disclosure above all else. While I support better disclosures of compensation practices and conflicts of interest, we must be realistic in what disclosure can accomplish. Disclosures are usually ineffective, as research into behavioral biases has demonstrated.

Today the financial world is far more complex for consumers than it was in 1940. Hence, disclosures utterly fail to overcome the huge “knowledge gap” between financial advisors and their clients.

The full column is available here: http://www.riabiz.com/a/748005?subscribed=true

Days of reckoning for state pensions?

Northwestern professor Joshua Rauh has published a paper in which he estimates that (1) state pension funds will run out of money in an average of 10 to 20 years and (2) the current gap between state pension assets and liabilities is equivalent to 25% of outstanding federal debt.

Rauh points out that actuarial practices understate the gap, and that with 8% annual return on pension assets [optimistic in our view], annual contributions to pension funds would have to double over the next ten years to close the gap. That’s a heck of a tax increase and/or shift in social spending at the state level. And given the contractual nature of defined retirement benefits, the fact that they are not indexed to nominal asset values in any way, and the importance they are afforded in most state constitutions, it seems unlikely that any ground can be made up on the benefits side of the equation.

States potentially have the option of scrip’ting away part of the problem by issuing their own currency (a more permanent version of California’s IOUs). The problem there is that many pension beneficiaries may live outside of the state they worked for, and that such measures might run afoul of pension guarantees.

Thus, it seems inevitable that the federal government will become more deeply involved in this issue in coming years. And while a great deal has been made of a ‘Keynesian revival’ in economic policy over the past few years, the pension crisis, like demographic cycles, actually seems to call for a revival of Abba Lerner’s ‘functional finance’, and the neo-chartalist school in general.

Essentially, if tax related or other burdens associated with pension fund solvency would impose deflation and/or penalties on real output, then the sanest way to resolve the crisis would be to employ the federal government’s capacity to issue interest and non-interest bearing debt (Treasury bills/notes/bonds and U.S. dollars, respectively), as we did with the financial system.

While straightforward in theory and operation, functional finance could prove a bit messier in its outcomes, given that U.S. dollars are still the global reserve currency. As we’ve pointed our previously, goods subject to the Law of One Price, primarily commodities, could very well ”inflate” in price, even if core U.S. price indices are relatively tame. That combination can have a regressive impact on households, and asymmetric impacts by industry.

If mishandled, it would mean that we’re shifting some of the adjustment costs in state pension assets to people outside and inside our borders who had nothing to do with the problem, while others would benefit unduly. Messy stuff.

URLs:

http://kelloggfinance.wordpress.com/2010/03/22/the-day-of-reckoning-for-state-pension-plans/

http://www.kellogg.northwestern.edu/faculty/rauh/research/RauhASPSSUSC2010.pdf

http://www.sscommonsense.org/page04.html

http://www.cfeps.org/pubs/wp-pdf/WP10-Wray.pdf

http://www.ucm.es/info/ec/ecocri/cas/Febrero.pdf