The Baltimore City School system has been deliberately starved of money over these past few decades mainly because the system is almost entirely underserved families and students. So chronic neglect has created crumbling school buildings. As you read below Baltimore is not short of money.....it is short of justice and a victim of the Maryland money shuffle. Johns Hopkins is leading a privatization of public schools in Maryland but in particular Baltimore and it is here that K-12 is being hit with privatizing as a stepping stone to the rest of Maryland. Now, if your goal were to turn K-12 into individual businesses with charters attached to businesses how best to remove the inconvenient status of 'public' from these schools? How about handing the school buildings themselves to Wall Street by losing them to leveraged financial instruments? THAT'S RIGHT!!! WALL STREET NOT ONLY GETS THE SCHOOL BUILDINGS NICE AND NEW, THEY ARE WELL ON THE WAY TO MAKING THEM VOCATIONAL TRACKING AS WELL.
The Maryland Assembly is scheduled to vote on approving State funds for this plan and O'Malley is a driver of all of this even as he waits to see if it passes before he endorses it. He knows how fraught with malfeasance this school building scheme is and he doesn't want to be associated with it unless he has to. As you see below, all of these people rallying for this school building funding have no idea the dangers that lie ahead because local media outlets have not mentioned it once. All these families know is that the school buildings are crumbling and they want them fixed. SEE WHERE MEDIA IS USED TO MAKE PEOPLE UNABLE TO ADVOCATE FOR THE RIGHT POLICY??? In this case though, the malfeasance is so stark as to hold banks and pols accountable.
The Baltimore City Schools and the city has all the money it needs to rebuild all schools without becoming connected to a Wall Street financial instrument and $2.4 billion commitment to new debt!!!! As Reutter knows, being the monetary wonk he is, the US is as leveraged now at $600 trillion as it was before the crash of 2008 but this time the bets are many times more risky meaning we are going to crash again soon and it will be harder than the last one. Wall Street is deliberately targeting the municipal bond market this time around so we have a muni-bond market that is ready to implode. All across America the same pols that let the subprime mortgage fraud go wild are now tying state and local governments to credit muni-bonds placing the public right in the thick of the coming collapse. Who lost big with the last crash.....pensions, municipalities, and the 99%. Who do you think is propping the European sovereign debt market that is about to collapse as Greece and maybe Italy and Spain default? That's right......pensions, municipalities like Baltimore, and the European people all in the line for losses far larger than in 2008.
When the muni-market is maxed the interest rate is low; when it crashes and everyone dumps their investments the interest rate will rise to 2-3% or more. That is inflation by many hundreds of millions of dollars in interest alone. This time though, when the economy crashes all government coffers are maxed and there will be no help.....the city will default on all of these financial obligations. What happens when the city or state defaults on this $2.4 billion mix of financial schemes? We know the banks and big investors buying the municipal bonds have already bought the CDS that insures them against any losses with this coming bond market collapse. Wall Street is all prepared just as with the CDS for subprime loans and AIG. They have even chosen the next insurance company to take the fall as AIG did in 2008. DOES THIS SOUND LIKE THE SITUATION YOU WANT TO PLACE MOST OF YOUR PUBLIC SCHOOL SYSTEM? OF COURSE NOT.
Remember, Wall Street still owes billions to the State of Maryland for the last massive fraud, much of which is due Baltimore. Remember as well that the State court awarded the Baltimore City Public Schools and Historically Black Colleges $700,000. That is money owed the city of Baltimore. Remember, Maryland's Attorney General collected $1 billion in mortgage fraud settlement as an interest payment towards billions more and placed $700 million right into the State coffers rather than sending it to the communities ravaged by subprime fraud.....which are the communities having the schools needing rebuilding.
DO YOU SEE WHY IT IS NOT ONLY A BAD IDEA BUT MALFEASANCE TO ENTER INTO THIS AGREEMENT FOR SCHOOL BUILDING AND WE WILL BE TAKING THIS TO COURT!!!!!!
Thousands rally for city school repairs, with mayor as headliner Advocates gathered in Annapolis last night to push for passage of a $32 million block grant bill to start repairing Baltimore's decrepit public schools. Fern Shen February 26, 2013 at 1:35 pm
Borrowing some mojo from the Superbowl-winning Ravens, Baltimore Mayor Stephanie Rawlings-Blake addressed a charged-up, cheering crowd in Annapolis last night rallying for funding for dilapidated city schools.
Looking out on the sea of city residents outside the Statehouse (a crowd organizers estimated at more than 3,000) the mayor picked up on the tune she heard some singing: the football team’s unofficial theme song this year, “Seven Nation Army.”
“The chant that got us to the Lombardi Trophy, that’s the same chant that’s going to get this bill passed!” she said, prompting a roar from the crowd.
The bill in question would create an annual $32 million block grant in the budget for city school building upgrades, locking in state funding Baltimore already receives so that it can be used to leverage bonds to pay for the massive amounts needed.
The block grant bill is the foundation of the advocates’ 10-year plan to renovate or replace the city’s aging school buildings, with their leaking pipes, malfunctioning boilers, grimy windows, lack of air conditioning, lack of modern science labs and computers and other flaws.
Total needs are estimated at a daunting $2.4 billion.
A crowd in Annapolis said to be over 3,000 demanded state funds to renovate out-of-date Baltimore public schools.(Photo by Fern Shen)
The block grant measure is intended to create a funding stream for the first five years of the plan. After months of pep rallies and strategy sessions in Baltimore, last night’s raucous rally marked the Annapolis phase of the advocates campaign.
Students, teachers, parents and more than a thousand members of faith groups poured out of over 60 school buses and into the state capital.
The Politics: Busch but no Miller
The lineup of elected officials standing before them on the dais last night said much about where the measure stands politically.
Members of the Baltimore City Council were there, as were members of the city’s delegation to Annapolis, who say the school funding bill is their top priority.
Also addressing the crowd were Lt. Governor Anthony Brown and House Speaker Michael E. Busch, who noted that most city schools have not been renovated since the 1950s, when he attended one. “It’s too long to wait for new schools,” Busch said.
“Whether you’re educated in Bethesda or Chevy Chase or Baltimore City, our kids deserve a world class education,” Brown said.
Former Legg Mason CEO Mark Fetting added his support for a major physical overhaul of city schools. (Photo by Fern Shen)
A couple of Prince George’s County legislators were up there as well, but the most important one – Senate President Thomas V. Mike Miller – was not.
Miller has been skeptical about the plan and lawmakers from other parts of the state have also expressed doubts about whether the city can properly manage the massive project.
As if to reassure them, organizers brought up speakers “from the foundation and corporate community,” including Mark R. Fetting, until recently CEO and chairman of Legg Mason Inc.
Overhauling Baltimore’s crumbling public school would benefit the city and the state, Fetting said, adding “we need to make sure it’s done with fiscal discipline . . . and we can do it.”
Channeling Her Inner Ed Reed
But Rawlings-Blake was clearly the chief applause-getter last night.
After initially hanging back on the school construction initiative (mounted by the American Civil Liberties Union of Maryland and fellow members of a broad-based alliance, the Baltimore Education Coalition), the mayor is now giving it her full-throated support.
Students from schools across the city came to the rally. (Photo by Fern Shen)
“When they said Baltimore needed to put more skin in the game, we did it,” she said last night, noting her success in winning passage of a city bottle-tax to generate dedicated school repair funds that will be used to match the state’s contribution.
“When the confetti falls on sine die on the last day of session,” the mayor vowed, “we will have a deal for Baltimore city schools.”
To lawmakers from outside Baltimore who would deny city children in Maryland’s poorest jurisdiction equal school facilities, she had this message: “look in the mirror.”
And as if that wasn’t enough, she closed by singing “Seven Nation Army” to the crowd, who needed only a half-a-bar to recognize it and join in.
For members of this crowd, which pretty much blanketed Lawyers Mall, there was no doubting, no hanging back.
“We need 21st Century schools,” said Betty Baze, of Cherry Hill, who volunteers her time to tutor pre-schoolers there. Baze praised the school staff and fellow tutors (from AmeriCorps and AARP) but said the conditions in the building are deplorable.
“When it’s so hot in the summer, when you have to bundle up inside the classroom in the winter, when you can’t drink from the water fountains, when the bathroom plumbing is constantly backed up, you can’t learn,” said Baze, who attended Arundel Elementary School as a child in the 1950s and finds it “much different, much deteriorated” today.
Betty Baze came to support Cherry Hill schools. (Photo by Fern Shen)
Along with the adult speakers, the organizers brought up schoolchildren who performed music-and-dance numbers (“Pass that bill!” sang the City Springs Stompers) and described how poor conditions in their schools might hold them back.
(To achieve his dream of getting admitted to MIT, a Roland Park Elementary student said, “I need great computers and great computer labs.”)
“The water is always backing up in the bathrooms, the windows are dark and dirty, the paint is chipping down from the ceiling,” said Jessica Good, who came to Annapolis in hopes of bringing about change to Gwynn’s Falls Elementary Middle School. “It’s a horrible environment.”
Good said her parents went to the school, her five-year-old daughter attends the school and she went there as well.
“It’s been those bad conditions building up over three generations,” she said. “It’s overdue for a change.”
THINK ABOUT THE ARTICLE BELOW ALONG WITH WHAT YOU KNOW IS HAPPENING IN EUROPE WITH THE DEBT CRISIS AND MILLIONS OF PEOPLE PROTESTING .......DEFAULTS HAVE WALL STREET WORRIED. ALTHOUGH THEY HAVE TAKEN THESE TWO YEARS TO MAKE SURE THEY HAVE ALL THE FINANCIAL INSTRUMENTS THEY NEED TO SHIELD THEMSELVES, PUBLIC BACKLASH WILL BE STRONG.
Muni buyers, beware
By Carolyn Bigda @Money September 28, 2012: 5:08 AM ET CNN Money
Muni bond default risk is rising -- three California cities filed for bankruptcy this summer.
(Money Magazine) Cracks are starting to appear in the municipal bond market. If you're investing for income, it's time to pay attention. Consider: Three California cities filed for bankruptcy this summer -- unusual in such a short period -- and ratings agencies warn that more trouble is coming. "We expect local governments to be struggling with this through 2013," says Robert Kurtter, managing director, public finance, at Moody's Investors Service.
Berkshire Hathaway (BRKA, Fortune 500) recently disclosed it was terminating half its contracts that insure against muni bond defaults -- a sign, perhaps, that Warren Buffett is increasingly worried about the public sector's fiscal health.
Policymakers looking to shrink the federal deficit are discussing limits on the tax benefits of munis, normally exempt from federal and, in some cases, state income taxes.
Related: Best banks 2012
Yet the muni market skates along seemingly carefree, handily beating the returns of taxable bonds. Last year the Barclays Capital Municipal Bond index returned 10.7%, including capital gains and yield; it's up more than 5% this year.
With Treasury rates so low, investors have been scooping up munis en masse, especially lower-quality credits that offer fat yields.
"Most of the flows into the market this year have been chasing recent performance," says Matt Fabian, managing director of Municipal Market Advisors.
That strategy rarely turns out well. While you don't need to bail on munis, to avoid trouble follow this more prudent path instead.
Buy high, sell low
Quality, that is. Lower-quality, or junk, munis can be good deals when the price is right. Not now.
Demand has pushed average yields down to 5.9%, from 7% a year ago (as bond prices rise, yields fall), even as default risk grows. "The bull market in munis has lifted all boats, no matter if it's a dinghy or a cruiser," says Marilyn Cohen, president of Envision Capital.
Sell those dinghies now. The market for high-yielding junk is notoriously fickle. "If something goes wrong, the whole sector can go bad," says John Flahive, director of fixed income at BNY Mellon Wealth Management.
Here is part two of handing it all to Wall Street. Even as Baltimore City Council and the Mayor along with Maryland Assembly and the Governor tie Baltimore's schools to the oncoming economic crash they are throwing the public sector pensions including the teachers' pensions as well. When an over-leveraged city defaults these public sector pensions are lost in either bankruptcy or outright dismissal.
Band together and demand those losses from deliberate fraud.....these funds were thrown into risky stocks just before the collapse!!!
VOTE YOUR INCUMBENT OUT OF OFFICE!!!!!
Financial Capitalism and the US teachers’ pension fund fraud
By Danny Weil on February 11, 2013 8:51 am Daily Censured
An “internal study” of the California Teachers’ Retirement System (Cal STRS) indicates that the public school pension fund faces a $64 billion deficit, according to the Sacramento Bee, dated February 4, 2013 (http://blogs.sacbee.com/capitolalertlatest/2013/02/california-teachers-pension-fund-faces-64-billion-deficit.html#storylink=cpy=).
The California State Teachers Retirement System produced the report in response to a legislative resolution. The release of the “internal study” followed on the heels of chiding by the Legislature’s budget analyst, Mac Taylor, who indirectly admonished neo-liberal Gov. Jerry Brown for ignoring “huge” unfunded liabilities associated with the teachers’ retirement system and state retiree health benefits” in his new ‘budget’.
Cal STRS receives money from the state, from local school districts and from teachers themselves, but the source of the funds income is also highly dependent on investment earnings. Like most pension funds throughout through-out the nation, Cal STRS was decimated during the recent Great Depression that continues unabated. And while the California Public Employees Retirement System (PERS) has the power take money directly from the state treasury as it sees fit, STRS cannot; they must receive specific appropriations from the Legislature in order to fund the state teachers’ pensions.
Fully funding the California teachers’ pension fund, we are told, would require $4.5 billion more a year — excluding projected investment earnings. The system in its report stated that the shortfall would be ‘eased’ by setting lower funding targets and/or stretching out contributions (ibid). This means less money for current and future retirees. The most important financial move, Cal STRS fund managers said, is to begin closing the deficit, rather than allowing it to widen further. Sound like calls for austerity? Sure does, sure is. But wait, there’s more, and it is truly nauseating, frightening and painfully keeping with the logic of capitalist economics.
Pension funds are now dressed up hedge funds with current and future disastrous consequences
According to a recent article found at Dollarcollapse.com, pension funds are now morphing into hedge funds, a virtual back alley crap game or what Dollarcollapse calls “rolling the dice in exotic investments”, for Wall Street and their minions (http://dollarcollapse.com/investing/pension-funds-become-hedge-funds-roll-the-dice-on-exotic-investments/).
In the report written by author, John Rubino on January 28th, 2013, he notes that there was a time when running a pension fund used to be one of the more facile jobs in finance. Money came in steadily and predictably from member contributions and the funds were then invested in AAA grade bonds and blue chip stocks. The target was to meet a modest, but assured, annual return of 8% interest (ibid). Not anymore. That was before the financialization of capitalism and the economic collapse.
Now, as the author correctly notes, the pension funds in effect have two criminally incompetent overlords trying to serve two contradictory economic demands. On the one hand, at the national and state level the US borrows too much and lets its banks go on an unregulated ‘wilding’ with dire consequences for working people. This causes and has caused severe debt crisis’ to which the overseers of capital respond by lowering interest rates to the point where investment grade bonds, once the heart and soul of pension funds, yield next to nothing.
At the state and local level, the corporate owned governors and mayors refuse to raise taxes on their real constituency, the corporations and the rich, which would have the beneficial effect of balancing the funds; they instead pressure funds to continue to make their ‘vig’ of 8%. This, even though not only is this stupidly optimistic, but it is wildly impossible. So, what are the pension fund managers doing now? They are doing what financial capital requires: they are acting like gambling casinos by increasingly turning the whole pension fund investment strategy into a dangerous explosive landmine, twisting them into hedge funds, all to the detriment of working people and to the advantage of Wall Street.
This is how financialization works. It is a particular phase of capitalism where everything is monetized and commodified. Take the Texas Teachers’ Retirement system as just one example.
Texas Teachers’ Retirement system
In his article, Rubino goes on to write about the Texas Teacher Retirement System. According to Rubino:
“On the 13th floor of a sleek downtown office building here, the trading desks are manned overnight. The chief investment officer favors cowboy boots made of elephant skin. And when a bet pays off, even the secretaries can be entitled to bonuses” (ibid).
We are not talking about a high flying private hedge fund but instead, these desks are manned for the Teacher Retirement System of Texas, similar to Cal STRS. The public pension fund has 1.3 million members that include school teachers, bus drivers and cafeteria workers throughout the state. They all labor under the assumption they will have retirement benefits they worked their entire lives for.
Yet rather than reduce risk in the wake of declines in interest rates, the pension fund manikins are now getting hostily aggressive, loading up on private equity investments and other non-traditional investments that they say promise to return pension funds to the halcyon days of steady and safe returns.
The Texas Teacher Retirement System fund has $114 billion dollars and now boasts some of the riskiest bets in its history with $30 billion dollars committed to private equity, real estate and other ‘so-called ‘alternative investments’ since early 2008, as the economic crash washed ashore like a Tsunami. Amongst the ten largest U.S public pensions, this makes it the biggest such investor in Wall Street backed equity investments. The funds currently have an average alternatives allocation of a whopping 21%! Don’t let them fool you again.
According to tracker, Wilshire Trust Universe Comparison Service, the Texas Teacher Retirement System brought in an annual return of 3.1% between December 31, 2007 and December 31, 2012. This was more than the average media return of 2.6% for similar years (ibid).
The argument made by the pension investment officials for their investment in Wall Street is that investment in private equity is necessary to help offset declines in other investments it is embedded in. So, we are told that investment in Wall Street is necessary to assure adequate pay-outs to current and future retirees. Sound familiar? The Chief Investment Officer for the workers’ pension moneys, Britt Harris, says he can perform miracles in light of the deteriorating state of US financial capitalism and “smash” the reality that government pension funds area on the short end of most investments — another one of those economic genies of trading.
So, with this particular shortsightedness and love for free markets, in November 2011 the Texas fund made one of the largest single commitments in the private equity system’s history: they invested $3 billion dollars in KKR and another Wall Street parasite, the Apollo Global management group (APO). Three months later, unbeknownst to the vast majority of fund members, they bought $250 million dollars of the world’s largest hedge fund firm with member monies – Bridgewater Associates out of Connecticut. This marked the first time time in history that a U.S public pension fund has purchased such a large stake in private equities, betting member dollars as if they were players in a casino roulette game.
The result was a return for the fiscal year ending on August 31, 2011 that was 7.6%. Now pension ‘managers’ say they can help the fund reach its goal of 8% annually over the long haul and they are proceeding full speed ahead. In a ten year period ending in August of 31, 2012 the Texas Teacher Retirement System had an annual return of 7.4% (ibid).
Of course none of the investments had the approval of working people who fund the retirement system. This is partly due to the enormous task of investing but mainly due to lack of democratic decision making and oversight which is the nasty business that pension fund managers, in cahoots with Wall Street, loathe. Nothing could be worse than having the wolves of capital in their elephant skin boots subjected to transparency and member oversight.
And just where were the teacher unions and bus driver unions and cafeteria worker unions when all this was happening? They were nowhere in sight. Their ‘bosses’ either didn’t know, care or understand the haughty risk the pension weasels were making on behalf of their members. The fat cat union bosses have shown a penchant for Wall Street and neo-liberalism in general, favoring begging over bargaining and fancy luncheons with powerful paid for politicians and wealth managers over their fiduciary duty of member oversight. They prefer to be team members rather than looking out for their real members, working people who are drastically declining in numbers as privatization clouds the horizon and economic decimation provides the meat for the noxious roux.
The average teacher, bus driver and cafeteria worker simply wants to do their job and to make a living, feed their children and provide for retirement, a chore that is not possible under the current regime of capital. Mis-education and a lack of critical thinking skills have left workers prey for the wolves of high-finance while the pension managers ski in Aspen, buy fancy boots and otherwise screw over workers by investing in a system of mendacity and despair that has proven time and time again to be a time bomb. All this while Wall Street gets fatter, bonuses are given out with impunity and privatization squeezes the life out of civil society.
Leveraging workers’ pension through debt
This grand charade is all about leveraging debt, which is the specialty of Wall Street and their cronies. “Leverage’ relies on borrowing more and more sums of cash and then using derivatives (phony insurance) to make large investments in Wall Street. In this way the funds don’t have to put up as much cash – money they don’t have anyway. It is like borrowing on credit cards to buy stocks and bonds but it is much worse, for it is not an individual problem, it is a socio-economic one that promises to drive the funds right down the same path as the banking crisis and housing “bubble” that brought down whole countries and economies, like Greece. All of this is great for Wall Street and death for workers.
But never mind: for the money changers, such as the world’s largest hedge fund firm, Bridgewater Associates and a numerically growing number of hedge fund bosses state, this type of leveraging is not like that which crashed banks, devasted lives, washed worker bodies onto the shoreline of despair and economic ruin and left them in peonage; it, they say, is “different. Not to worry this time, these deacons of depravity and greed say they are firmly and safely in control of the financialization scheme which of course is tantamount to saying that an alcoholic is in control of his or her own addiction or the military industrial complex has a firm hand on the tiller of cost control.
They have even bent the language to their own self-serving advantage, a sophist’s tool, and they now call this ‘financial strategy’ “risk parity” (ibid). There are many such criminal firms such as AQR Capital Management and the Clifton Group out of Minneapolis who are greedily sucking their fingers in anticipation of their own bonuses, capital gains and primitive accumulation strategies which promise to make them even more super-rich than they currently are and allow managers and executives to reap heady bonuses.
When questioned, the minions of Wall Street who serve as the real shadow managers of the funds say that they are using a modest amount of leveraging and assure workers and you, the reader, that this is what makes their strategy brilliant and different from those employed by investment banks. Do not be beguiled, this is the same strategy that created the largest transfer of wealth into the pockets of the one percent in the history of the world.
Of course it is not only a self-serving lie and unthinkable ruse, but it is unsustainable. The chickens will come home to roost just as they did in the bankster fraud and housing debacle. Cannibal financial groups like Bridgewater and their founder Ray Dalio, like the matchstick men they are, have pitched the idea to other pension fund ‘trustees’ and have even made a documentary style online video about the Ponzi scheme.
They all employ the same rapacious rap. According to an interview with Bridgewater con-man, Ray Dalio:
“Ironically, by increasing your risk in the bonds you are going to lower your risk in the overall portfolio” (ibid).
This is the voice of American greed and it resounds well within the halls of depravity that is Wall Street which profits off of economic demolition and looks to take stumbling pensions down the road of economic purgatory.
The California State Teacher Retirement System
And of course this leads us back to Cal STRS. With a shortfall such as that borne by the California pension fund, one can imagine this Nigerian web scam to be swallowed by the pension bosses here in California and elsewhere, who manage workers’ money for a profit, but do so with disdain for the workers’ themselves and a penchant for tying themselves to the crap game of casino capitalism. These con artists avoid having to answer questions about such “innovations” such as day trading during the high tech stock bubble and house flipping during the housing boom, practices that are hardly innovative but more about yawing financial appetites and greed. Remember these hideous practices were also sold under the auspices of ingenuity at the time they were fathomed but soon became to be known as criminal practices and investment ruses that were devastating for working people.
My wife is currently receiving disability retirement benefits from the California State Teacher Retirement System. In this year, her check payment for February was lower than that paid in January. She has written Cal STRS to find out why and is awaiting a reply Cal STRS says they will have put in her “in-box” online at their website in 20 days. But as the clock runs out on her health and her funds quickly deliquesce, one can only view the financialization con with disgust and wonder how many other retired teachers who have devoted their lives to children will be affected.
This is all part of the privatization plot favored by Jerry Brown, enemy of the working class and cozy operator for the ruling class. To avoid having to raise taxes on corporations and the rich who invest in him, Brown and the pension fund managers have created low hanging fruit for Bridgewater and other such criminal enterprises. Remember, we are talking about billions of dollars here, even trillions of dollars in public pension funds.
So now you know the sordid tale of pension funds and pension leveraging, a seat at the black jack table for workers and a prime example of rapture capital accumulation for the rich. If the practices are allowed to continue should you be a public school teacher, much like a worker who pays into Social Security, you will eventually find there is no security, that the system is rigged and the hefty bubble subject to burst.
Meanwhile, Wall Street fat cats get fatter, receive hefty bonuses for wrangling the funds into Wall Street, and get larger all while more elephants are slayed and workers’ lives for the bootlicking fund managers drown in unpayable debt as worker retirement becomes merely a sultry dream to be replaced by homelessness, financial ruin, suicide, sorrow and decimation.
If you thought such heady political gimmicks like proposition 30 would help stave off economic devastation for underfunded schools or even staunch the bleeding inherent in the mendacious system of financial capitalism, you were wrong. The only thing that can bring about security and equality for those who work and the public educational sector is class consciousness, education, organization and mobilization. Anything less is a fool’s game. It is time working people in conjunction with the students and communities they serve go on the offensive and not be forced to crouch into the corner of defensiveness. But this will largely have something to do with how we see the world and how our perceptions are managed by a ruling class that understands very well this moment in history; a ruling class that like other monarchies of old, is more class conscious than its labor counterparts.
Meanwhile, my wife waits for an answer in her on-line ‘inbox’ from the unaccountable Cal STRS fund managers who don’t give a damn about how much she contributed to society, her growing physical disability or her future. We will let you know if and when we get their reply. In the meantime, organize, educate and mobilize: this is the only hope we have.
Historic Stock Market Risk Continues to Warrant Extreme Caution February 9th, 2013
by Erik McCurdy, Prometheus Market Insight
Our computer models analyze a large basket of fundamental, technical, internal and sentiment data in order to calculate our Secular Trend Score (STS) and our Cyclical Trend Score (CTS). The historical data used by our models extend back to the market crash in 1929 and have enabled our STS to correctly identify every secular inflection point and our CTS to correctly identify more than 90% of all cyclical inflection points during the last 84 years. Additionally, when analyzed together, these data identify extremes in the risk/reward profile of the stock market.
As of last week, stock market risk has increased to the highest 1 percentile of all historical observations, joining a select group of time periods. The following chart displays the seven time periods that have exhibited a risk/reward profile as bad as present conditions.
Click to enlarge
Note that following each of the previous six instances, the stock market experienced a severe decline of at least 30%. Fund manager John Hussman has performed similar analysis and the syndrome identified by his data and research aligns closely with the time periods identified by our computer models.
Present market conditions now match 6 other instances in history: August 1929 (followed by the 85% market decline of the Great Depression), November 1972 (followed by a market plunge in excess of 50%), August 1987 (followed by a market crash in excess of 30%), March 2000 (followed by a market plunge in excess of 50%), May 2007 (followed by a market plunge in excess of 50%), and January 2011 (followed by a market decline limited to just under 20% as a result of central bank intervention). These conditions represent a syndrome of overvalued, overbought, overbullish, rising yield conditions that has emerged near the most significant market peaks – and preceded the most severe market declines – in history:
- S&P 500 Index overvalued, with the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) greater than 18. The present multiple is actually 22.6.
- S&P 500 Index overbought, with the index more than 7% above its 52-week smoothing, at least 50% above its 4-year low, and within 3% of its upper Bollinger bands (2 standard deviations above the 20-period moving average) at daily, weekly, and monthly resolutions. Presently, the S&P 500 is either at or slightly through each of those bands.
- Investor sentiment overbullish (Investors Intelligence), with the 2-week average of advisory bulls greater than 52% and bearishness below 28%. The most recent weekly figures were 54.3% vs. 22.3%. The sentiment figures we use for 1929 are imputed using the extent and volatility of prior market movements, which explains a significant amount of variation in investor sentiment over time.
- Yields rising, with the 10-year Treasury yield higher than 6 months earlier. The blue bars in the chart below identify historical points since 1970 corresponding to these conditions.
Click to enlarge
I can’t stress enough the importance of seeing the larger picture here – it would have been easy to miss the forest and get lost in the weeds and trees of daily and weekly market advances at each point identified in the chart above. Pursuing short-term returns in those environments would have been a mistake, because the initial losses typically came in the form of vertical “air pockets.”
I’m keenly aware that the reflexive answer to these concerns is to disregard the messenger. After all, here’s a guy who had compiled a great record by early-2009 (anticipating a market loss which incidentally erased every bit of return achieved by the S&P 500 in excess of Treasury bills, all the way back to June 1995), and yet, seemingly unable to invest his way out of a paper bag during the recent bull market advance. Fair enough – I don’t deny for a second that my insistence on making our discipline robust to extreme economic and financial uncertainties also shot us in the foot in the recent bull market upswing – but that unfortunately doesn’t alter the objective evidence, or the severity of present conditions.
We have discussed this historic extreme in stock market risk many times during the past year, with our objective being to emphasize the gravity of the current situation. The environment of euphoria that accompanies the speculative, final phase of cyclical bull markets causes many investors to increase their exposure to stocks at the worst possible time. It happened in 2000 and 2007 and it is happening again right now. We emphasize often the importance of maintaining a big picture perspective, because it enables you to analyze short-term market behavior in its proper context. It is certainly possible that stocks will experience additional strength during the next several weeks, but the latest cyclical top is overdue and it could form at any time, so we remain fully defensive from an investment perspective.