I have been so very fortunate during my 35+ years in the investment industry to work with and learn from so many incredibly bright individuals.  One particular individual, Charles DuBois, is a former colleague of mine from my days as a member of the Invesco quant group. Charles was an early pioneer in quantitative investing dating back to the late ’70s, and he continues to be an incredible resource today.  It is through Chuck that I have learned about MMT (Modern Monetary Theory), and because of his introduction to this subject I’ve had to relearn so much of what I thought I knew about economics.

The following letter to the editor was written by Charles.  It is but one example of his many insights on U.S. monetary policy.  Please don’t hesitate to reach out to me if you’d like to receive other examples of his forward thinking on these issues.

To the Editor:

Beware Balanced Budgets!

Part 5 of “Saving America” (December 26) is a thoughtful and thorough review of how a balanced Federal budget could be achieved over time.

However, under current and projected circumstances, such a balanced budget, if achieved and maintained, would likely send the nation into prolonged recession or worse. The U.S. runs a trade deficit of about $500 billion annually. This means that $500 billion flows out of the domestic private sector – as money paid to buy imports exceeds money received from selling exports by this amount.

Public sector budget deficits offset this financial drain. For example, a $500 billion deficit means that the private sector is receiving $500 billion more from government spending than the private sector is losing from paying taxes. If the budget were “balanced”, this needed offset to the trade-related financial outflow would disappear.

Reflecting this straightforward arithmetic, countries with meaningful trade surpluses, such as Germany, can maintain balanced budgets without incurring private sector economic distress. However, countries, such as the U.S., with persistent trade deficits, can not afford balanced budgets. Be careful what you wish for.

Thanks to the folks at Asset.TV for providing KCS with an opportunity to present our views on how DB plan sponsors can become more liability aware.  The presentation addresses the KCS / Ryan ALM 6 step roadmap on getting more in tune with the plan’s liabilities while using the output from our analysis to drive investment structure and asset allocation decisions.

We hope that you find our comments both insightful and practical. Please don’t hesitate to reach out to us if you’d like to learn more about using your plan’s liabilities to help derisk your pension plan while stabilizing funding costs. Also, our thoughts on this subject can be found in the January Fireside Chat, which is available on both the KCS website (kampconsultingsolutions.com) and blog (Kampconsultingblog.com).

Happy New Year from KCS! We wish for you an incredible 2017, one filled with great health, family, friends, and prosperity.

We are pleased to share with you the latest edition of the KCS Fireside Chat series.

In this article we highlight our process to become more liability aware within a defined benefit plan. 2016 was a good year for DB pensions, as returns were stronger and liabilities weaker, as the present value of liabilities fell when interest rates rose during the second half of the year. If rates were to continue to rise and returns were to be somewhat normal, DB plans could witness improved funded ratios in 2017. As we discuss in our newsletter, plan sponsors should take action to secure the improved funding status.

2016 was our fifth full year in business, and we thank all of our clients for making it such a wonderful year for KCS. In addition, we also want to thank the many organizations that support us on a day-to-day basis, especially Ryan ALM and CMIT. Lastly, we continue to embrace our mission to help preserve DB plans. We know that it is an incredible challenge given the rapid demise of these offerings, but we will continue to fight the good fight!

We’ve been highlighting the U.S. retirement crisis since KCS’s inception in 2011. As frequent readers of our Fireside Chat series and this blog will recognize, we’ve placed the blame firmly on the demise of the traditional defined benefit plan and the greater (almost exclusive) use of the defined contribution plan as the primary culprit.  FINALLY, we have some realization from the financial world (thanks, WSJ) that there is indeed a retirement crisis and acknowledgment that the benefits of the DC plan may have been overstated.

The article highlights all the ugly stats that we’ve been throwing out, including; only 13% participation in a traditional DB plan for the private sector (down from 39% in 1979), only 30% participation in any type of retirement plan for the private sector, retirement savings of <$3,000 for the median family with a significant percentage of those not having any savings, etc.  The numbers are staggeringly poor!

The “financial experts” have determined that an individual should retire if they have an account balance that is roughly 8 times their current income.  Oh, boy, we are in deep trouble!  Excessive fees, misaligned product (relative return versus absolute-oriented), poor oversite, and longer lives are just some of the reasons why this crisis is unfolding.  However, the biggest culprit is asking untrained individuals to become portfolio managers in funding and managing this responsibility. This hasn’t worked and it is NOT going to work going forward.

We need to protect those defined benefit plans still in existence (both private and public), further help those employees mired in only a DC plan while trying to create new retirement vehicles that will provide an annuity-type product for the masses to stretch throughout their retirement (such as Double DB). These actions must be taken unless we are confident that our government can foot the bill for a greater percentage of our population to live on welfare later in life!

A very interesting article appeared in The Record (Bergen) on Christmas Day. The title was Retirement Savings vs. Student Loan Payments, by Janet Kidd Stewart.

We have been discussing this topic for years. Given the financial demands on individuals, whether they be in their 20s or 60s, the ability to fund a retirement program is being compromised. Wage growth has been stagnant since the late ’90s, and the labor force participation rate keeps on falling and is currently 62.7% (11/16), with roughly 95 million age-eligible workers on the sidelines.

In addition to being burdened with incredible student loan debt, many individuals are paying a much larger share of their medical insurance premiums, while incurring rising housing and rental costs. In the wake of all this debt and expense is the need to fund a retirement program through a defined contribution plan, as the private sector is just about out of the defined benefit game.

Regrettably, funding retirement accounts hasn’t been the highest priority for most households, and according to the the National Institute on Retirement Security (NIRS), the median U.S. household has just $3,000 in retirement savings! We believe that a retirement crisis is unfolding in the U.S., and the social and economic impact will be devastating.

There are many who believe that irresponsible behavior (spending more than one earns) is leading us down this path, but we believe that our economy’s lack of quality jobs, flat wages, and exorbitant educational costs are crippling many, both young and old.  Sure, there will always be those that spend recklessly, as seen by the incredible total of auto loans and revolving credit debt that has been amassed, but we believe that it isn’t the norm.

Obviously, we’d welcome the revival of the traditional DB pension with the monthly payout until death, but we are not naive enough to expect that plans that have been shuttered will once again rise from the ashes.  However, we can do a better job to make sure that those DB plans still active today start on a new path to better funding by focusing more attention on the promise that they have made.

For those of you in a DC plan, we know and appreciate how difficult it is for the untrained (that is most of us) to manage this responsibility.  We at KCS have strategies and ideas on how to make your participation in a DC plan a more successful venture, but it all starts with funding whatever you can afford as early as possible.  Let us help!

We are not generally in the habit of endorsing a company or product, but given our on-going concern about the U.S. retirement crisis, we feel compelled to highlight an effort being put forward by Asset.TV.  I first was introduced to this organization roughly 5 years ago, and the growth in their scope and reach has been amazing.

We often question the lack of advocacy within the investment industry for the traditional defined benefit plan.  However, Asset.TV is an organization that can be proud of their effort to elevate critical retirement-related issues, while bringing to their subscribers unique perspective and content that challenge the status quo.

According to Asset.TV, they launched a new platform called the Retirement Channel several months ago as a landing page for fine content (both video and written) that focuses on the issues concerning the macro retirement industry. Content comes from all providers in the space on Asset TV and we promote the channel with a monthly wrap up video highlighting the sponsors on our platform. The monthly update videos are promoted via a dedicated email to 230,000+ professional investors.

As a rule of thumb across the website: All Asset TV content is intended to be insightful and used for research. No product pitches or endorsements; they take a third party, unbiased approach when creating content for investors to ultimately make their own conclusions.

There are many successes within the retirement industry that should be highlighted, but regrettably there are many more failures, and the greatest of these is our failure to be able to retire a significant percentage of our population with the financial means to actually enjoy a retirement.  The social and economic ramifications of this failure will be grave.  With organizations, such as Asset.TV, hopefully our industry will be able to improve the outcomes for those who are most in need!

2016 has been a wonderful year for my family and me.  I want to wish you a Merry Christmas, Happy Chanukah, Happy Holidays, and a wonderful 2017, filled with happiness, great health, many friends, and prosperity. I hope that our paths cross in 2017, and I look forward to assisting you in any way possible!

The U.S. Federal Reserve raised the discount rate 25 basis points as expected.  But, was it warranted? Markets have certainly been going gangbusters, but the economy has been muddling along, and it appears that fourth quarter growth is likely to be more tepid than the third quarter’s >3% results.

The recent equity market reaction to President-elect Trump’s upset victory seems out-sized based on the underlying fundamentals of corporate America. Corporate investment is still lagging, and capacity utilization was estimated at 75% in November.  That is the same level that we were at during the market  correction in 2001. Regrettably, real wage growth has been stagnate for nearly two decades further tempering demand for goods and services.

Pension America, at least those that mark liabilities to market, should be happy that U.S. long rates have risen substantially.  The 10-yeat Treasury’s yield is at 2.55% today, up 25 bps from the beginning of the year, but a whopping 1.23% from the low of 1.32% established on 7/6/16.  Asset performance in the fourth quarter should be strong and liability growth should be negative.  The combination should help plans see meaningful improvement in their funded status.

But, if equity markets are ahead of themselves from a fundamental perspective, while bonds have sold off more rapidly than the economics dictate, plan sponsors may be sitting on a potential negative scenario.  The fact that most plans have little exposure to US bonds, which are highly correlated to plan liabilities, exacerbates this situation.

We believe that DB plans should de-risk when possible, even plans that are not well-funded.  We’ve written about this on many occasions.  Our preferred implementation is through a cash-matching strategy, as opposed to a duration matched program. With Treasury bond rates up, an implementation using Treasury STRIPS is cheaper today.

Interestingly, high yield bond rates have actually continued to fall making an implementation using high yield a little more expensive.  Although, there is still a huge advantage creating a cash-matched strategy using high yield and lower quality investment grade (BBB and A) bonds, but the advantage has been narrowed.

If a cash-matching strategy is not in the cards at this time we’d recommend that you review your current asset allocation versus your policy normal levels, especially in small cap value, which had an extraordinary result in November. Capturing profits is a good thing.

It has been a little more than 5 1/3 years that KCS has been in operation as an asset / liability consulting firm.  As we enter the holiday season I want to take this time to thank the many conference organizers for providing the KCS team with the opportunity to share our thoughts and views with the retirement community more than 50 times during the life of the firm.

We sincerely believe that we have something to offer the pension community, especially when one considers our diverse backgrounds spanning more than 200 years of collective experience for the six of us, but really who is KCS? Well, despite our lack of name recognition and size, we have been given an amazing opportunity to get our views into the marketplace, and we can’t thank you enough!

We don’t want to slight any organization that has provided us with an opportunity to speak, but there are several organizations that stand out in giving us the greatest opportunity to provide education and insight, including: Opal, IFEBP, IMI, FPPTA, and FRA.

We hope that those who have heard us present find that we bring a thoughtfulness to our views.  You may not always agree with our conclusions, especially since we often take a contrary view from more traditional providers of consulting services. However, they’ve been developed over many years observing what has and hasn’t worked.  Furthermore, we look forward to having our views / ideas challenged by the pension community.

As you’ve heard us say many times, our retirement industry is under great stress right now. We need to rally together to create change that will preserve defined benefit plans for the masses. It would be wonderful to think that perhaps some words of wisdom from a senior member of the KCS team has been a positive influence in that effort.

The following article appears in the WSJ today. It speaks to an issue that we, at KCS, have been discussing for years.  Specifically, with U.S. wages staggering, the ability to fund a retirement plan through a defined contribution plan is getting more and more difficult, if not impossible.

The American Dream is fading, and may be very hard to revive
http://www.wsj.com/articles/the-american-dream-is-fading-and-may-be-very-hard-to-revive-1481218911?emailToken=JRrzdvBzZH+Qh9c3Z8wg1FBtZ6wFEe6CT1WSIGrHM02JtWeQr+utxqM6wtKxrSaqTFc/7d1B8WMlVHjRiXBmGdOW3qRyj1a6djwE8sGdi1Tbax2C

According to several researchers at universities, including Harvard, Stanford and the University of California, 92% of 30-year-olds in 1972 out-earned their parents at the same age.  Regrettably, only 51% of 30-year-olds can say the same thing today.  Wages have stagnated since the late 90’s, and adjusted for inflation, they are actually below 1999’s level.

So, we repeat, who thought that it was smart policy to shift a significant portion of our private sector from company funded defined benefit plans to defined contribution plans? Many of our 30-year-olds are burdened with excessive student loan debt because of incredible increases in tuition expense.  At the same time, the companies that they work for have dramatically reduced their support of company sponsored medical insurance, the cost of which has also far outpaced inflation.  These increasing burdens further reduce one’s ability to fund a retirement plan – so they don’t!

It shouldn’t be a shock then to read about median DC account balances that are ridiculously low, while also learning that roughly 50% of our population hasn’t saved anything for retirement.  You are kidding yourself if you don’t believe that there is a retirement crisis unfolding in this country.  There will be grave social and economic implications as a result.  It is time to rethink this failed policy choice!