Illinois Ponders Pension Moonshot Gamble: $107 Billion Bond Sale

Mike Mish Shedlock

What better time than now to borrow $107 billion to invest in stocks? That's what Illinois is actually considering.

Springfield lawmakers are so desperate to shore up the state's massively underfunded retirement system that they're willing to entertain an eye-popping wager: Borrowing $107 billion and letting it ride in the financial markets.

The legislature's personnel and pensions committee plans to meet on Jan. 30 to hear more about a proposal advanced by the State Universities Annuitants Association, according to Representative Robert Martwick.

Illinois owes $129 billion to its five retirement systems after years of failing to make adequate annual contributions. Because the state's constitution bans any reduction in worker retirement benefits, the government's pension costs will continue to rise as it faces pressure to pay down that debt, a squeeze that has pushed Illinois's bond rating to the precipice of junk.

GMO 7-Year Forecast

Illinois vs GMO

While Illinois is pondering a moonshot gamble, note that GMO expects real returns to be -4.7% per year, on average, for seven years.

"Real" factors in inflation which GMO estimates will "mean revert" to 2.2% over 15 years.

If correct, assume U.S. stocks will lose 2.5% a year for 7 years and U.S. bonds will gain 1.2%.

I will take a stab that pension obligation bonds will yield 7% or so. Heck, assume a generous 6%.

The state proposes borrowing money at 6% per year while losing say 2% a year.

That's a loss of 8% per year, every year, for seven years.

One Word - One Sentence

One Word: Crazy

One Sentence: These Illinois legislators are seriously nuts.

But hey, this is Illinois. Nothing less that craziness can be expected.

Mike "Mish" Shedlock

Comments (37)
No. 1-37
Seb
Seb

Wow!! That’s the stock market top you all heard it here. No doubt. You guys thought bitcoin was a bubble. You ain’t seen nothing yet.

Seb
Seb

Sorry for the bad grammar. Should have checked before I posted.

flubber
flubber

Wow! Yikes! Holy crap! OMG! LMAO!

AWC
AWC

Maybe Illinois could be first to introduce 200 year bonds, and lock in that 8% loss for generations? Hey, if you’re going for stupid, might as well go all in.

AWC
AWC

All said, there are only two choices for the “Potent Directors” at this point. Default or Destruction of the Currency. The former puts responsibility in the laps of the current PTB, where the latter puts the blame off onto future apparatchiks. Therefore, the latter it will be.

Wrldtrst
Wrldtrst

Eyebrow raised for using that GMO forecast.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

GMO has quite a good track record for long-term forecasts

Bam_Man
Bam_Man

But....but...Isn't the stock market creating TRILLIONS in "wealth" this year?

Bam_Man
Bam_Man

This will end well. Guaranteed.

DrEE
DrEE

Heads they win, tails we lose. If the stock market crashes, I expect Illinois to demand a federal bailout from their man-caused disaster.

TexasTim65
TexasTim65

With 100 billion in cash they could engage in some pump-n-dump schemes in the various 'coin' markets. Their huge cash could push up a coin of choice (pump) and then dump to the fools rushing in. Since it's all anonymous they can rinse-n-repeat with no one the wiser :)

Jefferson D
Jefferson D

Wonder how they chose stocks over bitcoin, race tracks, other states lotteries, and Las Vegas. Who is the greatest fool exactly that ends up paying for this when it doesn't work out? The bond buyers, the Illinois taxpayers, or the federal taxpayers. Really I think it's just printing more debt on the US treasury.

formula57
formula57

In the light of this Illinois manoeuvre, can we now call the top of the equities market?

MissionAccomplished
MissionAccomplished

Funny how 'consitutions' are selectively toilet paper depending on the needs of TPTB

Wrldtrst
Wrldtrst

It's still away from market and biased in favor of the argument you wish to make, making your use of it look worse. Maybe you can make your next post on EMH and how many people 'bear's the market. Not that I believe in it completely, but I would never dream of modeling something away from it. In what is essentially a 50/50 game, do that several times, and you will blow yourself to pieces. I assure you if you ask someone there to trade a 5 year out call/put using their forecast as the underlying you would get laughed at, they would default to where the market 'is', whereas you stick to their forecast.

Ok, off to the kennel and airport. Have a happy weekend.

Wrldtrst
Wrldtrst

Bear was obviously intended to be beats - damn autocorrect!!!

Wrldtrst
Wrldtrst

just for the record. 5 yr out SPX is 3023. The point is sufficiently made without doing what you shouldn't have done.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

" I assure you if you ask someone there to trade a 5 year out call/put using their forecast as the underlying you would get laughed at, they would default to where the market 'is', whereas you stick to their forecast."

So where the Hell did I propse that?

Mike Mish Shedlock
Mike Mish Shedlock

Editor

HMO and hussman both have good long-term CAPE analysis. They have both been correct on bubbles , but not timing them.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

This is a simple statement of fact, not subject to debate.You threw in a bunch of BS about 5-year out puts and calls.

Wrldtrst
Wrldtrst

you used the -2.5% for yield, (sorry if I'm inaccurate on #'s - but using a cell phone, so it's hard to read back and see the exact number). So with that, you tell me what underlying you are using 5 years out (Roughly 2500?). You also left out receiving the dividend stream.

Wrldtrst
Wrldtrst

You threw in a bunch of BS about 5-year out puts and calls. - not if you are using a fwd expectation 5 years out of 2,500, I didn't. Hussman or the market. hmm... which do you think Morgan and Goldman are using to price those 5 year out calls and puts. I bet every penny I have that they are using 3023.

MorrisWR
MorrisWR

Forecasts are like...fill in the blank.

I have no problem believing a negative 7 year equity forecast with the way the stock markets have behaved the past year. Lots of precedent for a correction if you use technicals alone. People are easy to read and they herd as they always have. This bull will end at some point and I do not believe it will be 8 years down the road.

_aleph_
_aleph_

The day the bond issue is approved, I'm calling a top in the stock market. Couldn't ask for a better contrarian signal.

QTPie
QTPie

Good plan, they’re just 8 years too late.

Grumblenose
Grumblenose

OK, the stock market is stuffed. The bond market is stuffed. Gold is (as always) maybe stuffed but no one knows. Where the heck am I supposed to put my money?

Six000mileyear
Six000mileyear

A government's participation (buy, sell, or regulate) in a trend typically occurs at the end of the trend. This makes for an excellent contrarian signal to sell ones portfolio.

Blacklisted
Blacklisted

If you haven't noticed, the world is changing as trust in govt collapses under the weight of hubris, corruption, and debauched behavior of the powerful. Mismanagement, and unequal enforcement or ignorance of the rule of law by govt's at all levels is driving capital from public to private. This obviously includes the lack of prosecutions of banksters, and IRS and FBI agents; but it also includes MSU ignoring Nassar, PSU ignoring Sanduski, and Pope's ignoring their petophile priest. History repeats because the passions of man never changes.

Central Banks have been buying equities for years, as rates went negative and the trust in UNSECURED govt debt faded. Whether it's dumb luck or forced recognition of the obvious, IL buying equities is a smart move, which means I don't see them doing it.

Like a good Marxist and career politician that thinks they can manipulate markets and society by suspending the actions of the invisible hand, you are trapped in a world you wished would never change. It's why you didn't see Trump, Bitcoin, gold's decline and the rise in stocks. Old theories and rules don't work in a world that is beyond the timeframe of programers, analysts, and pundits. It's the same reason the Black Scholls model failed and brought down LTCM - https://www.armstrongeconomics.com/products_services/socrates/trading-v-socrates/.

Whether you want to acknowledge it or not, more and more foreign capital will be forced into dollar-based assets, as the soveriegn debt crisis sweeps the globe. Since the crisis is rooted in govt malfeasance, who will want to purchase govt debt? Stocks, gold, cryptos, and other assets that store value and human effort will be the beneficiary. Since stocks offer the only market big enough to absorb the flows out of govt bonds, blue chip stocks will benefit the most (outside cryptos).

It would be nice if govt would simply look in the mirror and reform, but that's just not the way it has EVER happened. Govt always drags society off the cliff trying to hold on to their perks and power. Besides, look in your muni's CAFR. They already own massive amounts of income producing assets, including stocks, that never make their way into budgets. How could they sell raising taxes if the voters knew they were sitting on massive "rainy day" funds, which are only meant for their rainy day?
http://cafr1.com/listings/Listings.html

Calls for a top in stocks over the last 7 yrs has been an "excellent contrarian signal", and you haven't seen anything yet. Volatility this year will get the masses off-sides, as the majority must always be wrong. The dollar pullback right now is a classic example.

Blacklisted
Blacklisted

One sentence: who is stupid enough to loan IL money?

El_Tedo
El_Tedo

You can't be 7 years early and still be considered right. Every market cycle eventually corrects, or even crashes, that doesn't make pera-bears 100% accurate.. Hussman has been the wrongest person on Earth, besides perhaps David Stockman, the past 9 years.

Ambrose_Bierce
Ambrose_Bierce

the reality of modern finance is that you own bonds and you own stocks at the same time, you leverage the bonds the buy stocks. conventional thinking goes that state government can't run a deficit, but they print bonds which adds to the global liquidity. They it turn buy those stocks for which they provided the liquidity. The fundamental relationship is valid.

RonJ
RonJ

"Whether it's dumb luck or forced recognition of the obvious, IL buying equities is a smart move, which means I don't see them doing it." It was a smart move back in 2009 or so. Not so any more. Parabolic moves always fail. IL would fail to get out of the way when the fail occurs, even if the DOW goes to Armstrong's ultimate projection high, parabolics rapidly retrace in the opposite direction.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

Lets' say the state did this in 2012 - The state would look like heroes, doubling its pension assets assuming it was all in stocks. Then lets' take back that entire move over the next 7 years. The state would be further behind. because it would still be paying 6% per year on the borrowed money. The plan is insane. Just to break even the investment needs to return 6% a year to beat the interest payment!

Michaelf
Michaelf

Seems rational. If the gamble pays off-well and good. If it doesn't, declare bankruptcy. Their going bankrupt any way so if your going down for $1 billion, why not $100 billion. End result is no different.

Carl_R
Carl_R

There seem to be two questions that are impossible to answer. First, who would buy Illinois bonds? Second, how is the pension fund going to get a 6% return? I know a magic answer to both! Have Illinois issue $100 million in bonds, and sell them all to the Pension fund! Just like magic, the pension is fully funded, and has a nice 6% return, exactly matching what they need. How will Illinois ever repay the bonds? Shhh... Obviously they aren't, but in the meantime they've kicked the can down the road, and after all, isn't that the goal? No one actually wants to face the problem; they just want to kick it far enough down the road that someone else will have to deal with it. What better way to kick the can than to instantly fully fund the pension fund by making a fictitious journal entry.

El_Tedo
El_Tedo

Meg Whitman did something like this in the New Jersey in the late 90s and we all know how well that turned out. We're the highest tax state in the union, with arguably the most precarious pension scheme in the county, besides Puerto Rico. I know Illinois is sometimes ranked as worse than NJ, but Illinois still has lower taxes than NJ, so they have, perhaps, more wiggle room to try and catch up.

Flip312
Flip312

I think you can put a different interpretation on this. It will be much harder for Illinois to default on bonds than pension obligations (despite what the Illinois Supreme Court says) and so by shoring up the pension fund, there is a lower likelihood of the pensioners being stiffed (or they will be stiffed less). Pretty smart move on the unions' part.


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