WWhen caution is thrown to the wind, we begin to recognize that the market can enter a dangerous euphoric state from which a long term bear market can begin. And, while it might be easier to put your head in the sand, I urge you to take what I am about to say to heart, as it will likely have ripple effects for generations. future.
Recently, I read that the board of directors of the country’s largest pension fund voted to use borrowed money and alternative assets to meet their ROI goal. What is even more striking is that this same pension fund lowered its ROI target just a few months ago.
California’s $ 495 billion public employee pension system’s decision reflects prospects for darkening safe, publicly traded investments by households and institutions and sets the tone for increased risk-taking by pension funds to. across the country.
Without changes, Calpers said its current asset mix will produce 20-year returns of 6.2%, below the 7% target the fund started with in 2021 and the 6% target. 8% implemented during the summer.
Board members voted 7 to 4 in favor of borrowing and investing an amount equivalent to 5% of the fund’s value, or roughly $ 25 billion, as part of an effort to achieve the target of 6.8%, which they voted not to change. Directors also voted to increase riskier alternative investments, raising private equity holdings to 13% from 8% and adding a 5% allocation to private debt.
To make matters worse, and as I’m sure many of you may already know, not only are Social Security and Medicare programs approaching a fiscal cliff, and our federal debt is growing. uncontrollable, but as the risks increase within these pension funds, so do the moral hazards facing retirees in our country.
While some might not consider this to be as bad as I say above, I may have agreed with you if there was any potential for this bull market to continue to expand into the over the next decade or more. But, that’s not what I see. On the contrary, I foresee the perfect storm approaching on the horizon.
You see, as our national debt spirals out of control, I predict that interest rates will likely rise over the next decade, forcing the US government to use more of its budget to pay the interest owed on the national debt. . That alone is a recipe for disaster.
But, we are also heading for a fiscal cliff for Medicare and Social Security. Just one of these cliffs is a recipe for disaster. And, when I see pension funds, many of which are already underfunded, taking more risk as I approach what I believe to be the dawn of a decades-long bear market, it’s yet another. problem which in itself is a recipe for disaster. Since all of these issues are likely to converge over the next few years, well, we’re headed for the perfect storm. And, retirees seem to be caught in the sights of a bazooka pointed directly at them.
Now, for those who think I’m an alarmist, negative nelly, melodramatic, or permanent bear, well, let me dispel that notion for you. You see, I have always viewed the markets with objectivity. Let me give you some examples.
In early 2016, many expected the market to brace for a crash. Still, I expected the market to drop from the 2100SPX region to the 1800SPX, only to be followed by a “merger”, in which I thought the stock market would at least rally to the 2600SPX region, with a rally potential as high as 2880SPX. As we now know, the market has certainly met my expectations.
In March 2020, many believed that we had just started a major bear market. Still, I expected the market to bottom out at 2200SPX and start a rally with a minimum target of 4000SPX and an ideal target in the 6000SPX region. Well, as we now know we seem to be on our way to my ideal 6000SPX region.
However, alongside these very bullish expectations that I have maintained over the years, I also have a dire projection once we hit the 6000SPX region. You see, I think once this rally is over over the next couple of years, I see great potential for a decades-long bear market to set in. I’ve laid out my expectations in this last article, and you can read it for a bit more detail:
Once again, before you run away and believe me to be an alarmist or perma-bear, I again want to note that I am neither a perma-bear nor a perma-bull. Like many members of ElliottWaveTrader.net stated, I’m just perma-profit. I do not retain any bias because I look at the market objectively. And, objectively, I fear for society as we look beyond 2023. And, it looks like our older population may take the brunt of the financial shock.
It’s almost inevitable that we will likely see Social Security and Medicare benefits cut during tough times. And, if pension funds remain underfunded and start taking greater risks in the years to come, it will only exacerbate the problems that retirees will face if the decades-long bear market that I foresee breaks down. installed.
Anyone who has read me in the many years that I have written publicly, you will know that while I am human and could clearly be wrong, our macro calls to the market have rarely missed a beat. And I predict thunderstorm clouds will form as we approach 2023, as the perfect storm appears to be developing.
Although I intend to exhibit to members of ElliottWaveTrader.net some of the steps investors might take as we approach the end of 2022, one of the areas I will focus on is moving money to some of the strongest banks in the United States. For this, I have partnered with a banking analyst, and in January 2022, we will release a list of the 15 strong banks that we have identified in the United States. I will personally be transferring much of my own money to these banks for security purposes before the storm begins in earnest.
Another suggestion that I highly recommend many retirees to focus on is reducing your cost of living, as well as your debt. The simpler your needs are, the easier it will be for you to get through the pain period I foresee in the next two decades.
While I will wait until the end of 2022 to see how the different markets align so that I can start making other preparedness plans, I strongly urge those who read my words to consider two of the suggestions I have. presented above before the lean years were upon us.
In the part of the Bible that religious Jews are about to read in the coming week, the Pharaoh of Egypt had a dream that Joseph interpreted as foreshadowing 7 years of imminent plenty, followed by 7 years of famine. . But, in our case, we may only have two years of plenty left, and that could be followed by 20 years of famine. So, you may want to start your preparations in the last two years left to us.
In the meantime, I see a significant pullback potential for the S&P 500 as the first quarter of 2022 approaches, followed by a very strong rally that may target 5500SPX by the end of 2022 or early 2023. You may want to -Be taking advantage of this opportunity to earn a little more return on the stock market during the years of plenty, while strategically realigning your holdings to weather the storm to come. Afterwards, it will probably become much more difficult.
Avi Gilburt is a widely followed Elliott Wave analyst and founder ElliottWaveTrader.net, a live trading room with his analysis on the S&P 500, Precious Metals, Oil and USD, as well as a team of analysts covering a range of other markets.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.