10 October 2008

Pension funds go off the rails

Global systemic crisis – End of 2008: Pension funds go off the rails
- Excerpt GEAB N°23 (March 16, 2008) -

If you were a subscriber to the GEAB, you would have read what will follow as early as March 16, 2008:

According to LEAP/E2020, by the end of 2008, a formidable debacle will affect pension funds all over the world, endangering the entire system of capital-based pensions. This financial calamity will bear a particularly dramatic human dimension because it will come at the precise moment when the first wave of baby-boomers phase out of the labour force in the US, EU and Japan: pension fund revenues are collapsing at the very moment when they should be making their first large series of payments to pensioners. In this 23rd edition of the GEAB, our team anticipates the evolution of the upcoming pension fund crisis, details which countries are the most exposed (in particular in Europe) and provides a number of operational and strategic recommendations to face the situation.

Meanwhile, in the present issue (on subscription, LEAP/E2020 anticipates what the global systemic crisis (now obvious to everyone) will bring along in the next few months, as regards in particular to the negative side effects of the US Federal Reserve’s bank loans currently contributing to weaken even more the US financial system, and as regards also to bank exposure in the US and in the most exposed European countries. Simultaneously our team analyses the effect of today’s US economic and financial crisis on the probability and consequences of an attack on Iran by Israel and the US before the next US presidential election.

In any event, with the announcement of an emergency plan to save the US 5th largest private bank, Bear Stearns (1) (preluding to its being sold or its failing in the coming weeks), it turned out that a large financial institution indeed went bankrupt in the first quarter of 2008, as anticipated by our team in GEAB N°19 (2).

Meanwhile, the US dollar resumed plummeting against Euro, Yen, Yuan; gold soared over 1,000 USD per ounce, oil reached 110 USD per barrel, global stock markets lost 20 percent in three months, and the Fed’s most recent attempt to stop the financial crisis through a 200 billion USD bank loan plan has already proved to fail... the bases of the financial and economic order that prevailed in the last decades are collapsing under our eyes, at an increasing pace… all the signs of a systemic crisis are gathered (3).

The whole world is now aware that we are faced to a crisis of unprecedented scope and nature. This level of awareness enables our team to refine some of their anticipations. About currencies for instance, our team undertook to review their estimation of the value of the US dollar against the three other strategic currencies - Euro, Yen and Yuan. LEAP/E2020 now estimates that the EURUSD exchange rate will reach 1.75 at the end of 2008 (instead of the 1.70 estimation made in 2006); the USDYEN rate should fall down to 90 and the USDYUAN down to 6 (4).

US Dollar Index (benchmark currency basket (5)) on 03/14/2008 - Source FxStreet
Faced to the extent of the Very Great US Depression currently unfolding (6), LEAP/E2020 is glad that the US authorities took into consideration the numerous protests (7) and decided to maintain the publication of US economic indicators on the website EconomicIndicators.Gov. In such difficult times, it is important that statistical information on the US economy remains easily available to everyone. The money of a great number of private and public, individual and collective operators depends on this transparency.

In the same sense, the Federal Reserve of Atlanta distributes for free a DVD entitled « Crisis Preparedness: Reconnecting the Financial Lifeline » and designed to help operators of all kinds to anticipate a crisis and get prepared to it (8). In the perspective of a collapse of the real economy in the US (expected to happen in September 2008 according to LEAP/E2020’s anticipations (9)), these official advices take a special meaning. For instance, like we have been repeating for months, the DVD keeps saying that in the event of a severe crisis « Cash becomes king », whether the crisis is linked to a natural disaster or a human-made one, as shown by the fact that US insurers have already lost more money because of the subprime crisis than because of the Katrina hurricane, though the worse natural disaster in the history of the US (10).

Non-Borrowed reserves of US depository institutions (1950 – 02/2008) - Source Federal reserve of Saint Louis
To finish with, graphics such as the one above illustrate in a striking manner that the situation is infinitely worse that what the cleverest leader (and they are not many) can imagine. It shows that the US financial system, and that of a large part of the world, is lethally hurt. US banks have no more money; it is as simple and dramatic as that. Contagion will now enter a second phase of development, generating a new series of bank failures by this summer, as anticipated in GEAB N°20, entailing a dislocation of the global financial system in the second semester of 2008.

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