Sunday, September 28, 2008

Bailout Mystery--It's the Retirement Funds

All of a sudden we need 700 billion to save us from impending doom? Everyone up on the Hill in Washington understands what is going on. You’d think that they would explain what changed their minds to make them go along with this bailout. Plus you'd like to think that they would inform us of the problem. All you hear is that this will put confidence back into the financial system. People will be able to borrow again. The last I heard, it’s hard to force someone to borrow money if they don’t want to. It’s a little like that saying, ”You can lead a horse to water, but you can’t make him drink it.”

We know two things. This action is going to restore confidence and the perceived problem is simple enough for a Congressman to comprehend. The impending calamity has to be big, simple to understand and easy to project the outcome of impending doom without creating a general argument.

Our government is already insuring the banks and anything else on Wall Street that sneezes. The housing market, they bought it. But there is one thing that hasn’t been touched and it fits the description above, Retirement Funds.

From my understanding, retirement funds can project out what will be drawn from the fund and can buy complex financial securities that guarantee the desired cash flow for future redemptions. This way they keep fully invested. This model could have a severe break down if the complex financial securities lock up and cease to be fungible (can’t be sold). In this situation, the fund would be forced to sell stocks to raise cash for retiree redemptions. I would suggest that Ben and Paul have been getting calls from retirement income funds advising them that the present situation is in an extremely bad way. It seems to follow that many of these funds could have been burned holding hedge funds to boot.

Here is a link to an earlier post of mine from last year with some background on mutual funds. It gives more information on the holdings of these funds and the redemption criteria.

Maybe the government is about to supply the needed liquidity for the retirement funds to cash out a lot of their bad paper. The Fed is probably hoping that the people cashing out will be putting the money into a FDIC insured bank, which is good for the economy. This increases the money supply and helps keeps interest rates absurdly low.

Why the panic in Congress? We probably have a full blown RETIREMENT FUND RUN IN PROGRESS. A lot of Silver Foxes could be quietly withdrawing their retirement funds to safer places. I think this is Ben and Paul’s little secret. If a retirement fund fails, it could start a major panic of redemptions. And if you read the link, you know that the funds own 23% of our stock market. A sell order of that magnitude could be “Game over” for stocks.

This could be an interesting week.

Copyright 2008 All rights reserved


Anonymous said...

Several of my coworkers already have a plan for this week. When the post-bailout rally occurs, they are all going to move their entire 401K funds from stock funds (sold high) over to our Stable Value Fund (bought low?), which is cash and treasuries. I did that last winter and for months, endured their laughing sneers. My 401K reaches an alltime high daily, albeit slowly. Yes, I do realize that inflation is eating away at it.

Jim, what do you think these current events will do to the GOP's idea of putting Social Security in the stock market?

Should be a wild week!

Saginaw, Texas

Anonymous said...

Jim, Such an emotional day here. I was angrey when I learned of the near pre-vote bail-out. Then I laughed as usual with you to your clothes-line dry sense of wit. Then per usual, U awoken me to this money circle siphoning scenario That gave me a "hate government" moment yet overjoyed that I read your blog in all the great simplified format you give us!! So much Thanks!

Anonymous said...

TO: John- Sag Texas

Thx for the heads up of what coworkers are planning. Very useful to hear the "word on the street".

Good Q on "putting" Soc Sec TO the stock market.


Jim in San Marcos said...

Hi John

I did pretty much the same thing last April. I must admit I had some difficulty understanding some of the selections offered.

Keep out of long term bonds. They sounds safe, and they kind of are, if you can wait 30 years. Those could take a 50% haircut if interest rates jump up.

I'll check into the SS item. I haven't read anything on it.

Jim in San Marcos said...

Hi Crashproof

Here is hoping that none of us get caught flat footed in this mess. Bernanke and company called for a band aid when they really needed a diaper.

Glad you like the dry humor, sometimes a reader or two will think I'm serious. Thank you for the atta boy.

Anonymous said...

Out of the market since I started paying attention to the blogs about 6-7 months ago-
everything in safe fund- have been tempted along the way to jump back in a little bit-
but would get cold feet and I am so GLAD I did-
sucks being so close to retirement though- this is when the $ was finally supposed to start working for me:) I am really hoping for an upturn:):) I can trust- need it-
My husband keeps saying "everyone is in the same boat" but it is not comforting...
I wanted my own boat- I have to admit I miss the bubble:)
Catholic girl

Lisa said...

let the party begin!

As always, your wisdom (and humor above all) are much appreciated.

Tyrone said...

I moved my 401K out of stocks a year ago, also to some snickers. I spoke to some older guys (50'ish) with a Mil in their accounts, and they said, "I'm in it for the long haul." I countered with, "If you know it's unlikely to rise, lock in the small gain in the stable value fund. But if it is likely to fall 10-20%, don't watch your account go down by $200K." Blank stares.

BTW, I locked in some silver today.

Jim in San Marcos said...

Hi Tyrone Lisa and Catholic Girl

If we just wait say, 2 years from now, stocks that pay dividends could be a very good buy.

Of course, they will be selling for about 90% less. So now is the time to wait. Keep your powder dry for the main event.