When caution is thrown to the wind, we begin to recognize that the market may be moving into a dangerous euphoric state from which a long-term bear market can begin. And, while it may be easier to bury your head in the sand, I strongly urge you to take to heart what I am about to say, as it will likely have ripple effects for generations to come.
Recently, I read that the board of directors of the nation’s largest pension fund voted to use borrowed money and alternative assets to meet its investment-return target. What makes this even more striking is that this same pension fund lowered their investment-return target just a few months ago.
“The move by the $495 billion California Public Employees’ Retirement System reflects the dimming prospects for safe publicly traded investments by households and institutions alike and sets a tone for increased risk-taking by pension funds around the country.
Without changes, Calpers said its current asset mix would produce 20-year returns of 6.2%, short of both the 7% target the fund started 2021 with and the 6.8% target implemented over 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 about $25 billion, as part of an effort to hit the 6.8% target, which they voted not to change. The trustees 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 am sure many of you may already know, not only are the Social Security and Medicare programs approaching a fiscal cliff, and that our federal debt is rising out of control, but as risks rise within these pension funds, so do the moral hazards being faced by our country’s retirees.
While some may not view this as dire as I may be stating above, I may have agreed with you if there was potential for this bull market to continue to extend for the next decade or more. But, that is not what I am seeing. Rather, I am foreseeing the perfect storm approaching on the horizon.
You see, as our national debt rises out of control, I am foreseeing that interest rates will likely be rising over the next decade, forcing the US government to use more of its budget to pay interest owed on the national debt. That alone is a recipe for disaster.
But, we are also heading towards a fiscal cliff for Medicare and Social Security. One of those cliffs alone is a recipe for disaster. And, when I see pension funds, many of which are already underfunded, taking on more risks as we approach what I believe is the dawn of a multi-decade bear market, this is yet another issue which, alone, is a recipe for disaster. As all these issues likely converge over the next several years, well, we are heading into the perfect storm. And, retirees seem to be caught in the crosshairs of a bazooka pointed directly at them.
Now, for those that think I am being an alarmist, a negative nelly, melodramatic, or a perma-bear, well, allow me to dispel you of that notion. You see, I have always viewed markets objectively. Allow me to give you some examples.
Back in early 2016, many expected that the market was setting up for a crash. Yet, I expected the market to drop from the 2100SPX region down towards the 1800SPX, only to be followed by a “melt-up,” wherein I believed the stock market would rally to at least the 2600SPX region, with potential to rally as high as 2880SPX. As we now know, the market certainly met my expectations.
Back in March 2020, many expected that we had just begun a major bear market. Yet, I expected the market to bottom at 2200SPX, and begin 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 well on our way to my ideal 6000SPX region.
However, along with these very bullish expectations I have maintained over the years, I also have a dire projection once we strike the 6000SPX region. You see, I believe that once this rally completes over the next two years or so, I see strong potential for a multi-decade bear market to take hold. I have outlined my expectations in this past article, and you can read it for a bit more detail:
Again, before you run off and believe me to be an alarmist or a perma-bear, I want to again note that I am neither a perma-bear nor a perma-bull. As many of the members of ElliottWaveTrader.net have stated, I am simply perma-profit. I retain no bias, as I look at the market in an objective manner. And, objectively, I fear for society as we look past 2023. And, it would seem that our older population may take the biggest brunt of the financial hit.
It is almost inevitable that we will likely see Social Security and Medicare benefits cut during tough times. And, if pension funds continue to remain under-funded, and begin to take on greater risks in the coming years, this will only exacerbate the issues retirees will face should the multi-decade bear market I expect take hold.
Anyone that has read me for the many years during which I have been writing publicly, you will know that, while I am human and can clearly be wrong, our macro calls about the market have rarely missed a beat. And, I foresee that the storm clouds will be forming as we look towards 2023, as the perfect storm seems to be developing.
While I intend to outline to the members of ElliottWaveTrader.net some of the moves investors may take as we approach the end of 2022, one of the areas I will be focusing upon is moving money to some of the strongest banks in the United States. To this end, I have joined forces with a banking analyst, and, in January 2022, we will be publishing a list of the 15 strong banks we have identified in the United States. I will be personally moving a lot of my own money into these banks for safety purposes before the storm begins in earnest.
Another suggestion I would strongly urge many retirees to focus upon is to lower your cost of living, as well as your debt. The simpler your needs, the easier it will be for you to come through the period of pain that I foresee in the coming two decades.
While I am going to wait until the end of 2022 to see how various markets align in order to begin to make further plans for preparation, I would strongly urge those reading my words to consider two of the suggestions I presented above before the lean years are upon us.
In the portion of the bible that religious Jews are about to read in the upcoming week, the Pharaoh of Egypt had a dream which Joseph interpreted as foreshadowing an impending 7 years of plenty to be followed by 7 years of famine. But, in our case, we may only have two years of plenty left, and it could be followed by 20 years of famine. So, you may want to begin your preparations during the final two years we may have left.
In the meantime, I am seeing a potential for a sizeable pullback in the S&P 500 as we approach the first quarter of 2022, to be followed by a very strong rally which can target 5500SPX by the end of 2022 or early 2023. You may want to use this opportunity to earn a bit more return in the stock market during the years of plenty, while you also strategically re-align your holdings to weather the upcoming storm. Thereafter, it will likely get much more difficult.
Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets.