Over the past years, pension fund managers have had to resort to increasing their holding of riskier assets to maintain the ROI. Currently state pensions have increased their stock holdings to around 40 to 50%, historically their stock holdings were about 25 to 35%.
As the ROI on bond, especially the higher rated bonds, are falling funds were forced to seek high risk investments for the higher returns. Most pension funds have rules that limit the fund managers from investing in lower grades of assets. Typically in the past, they invested the bulk of their money in real estate and high rated bonds.
With the majority of pension funds invested more than 50% in stocks, the Fed has increased their SOMA holdings by $11 billion. When the rules of fractional lending are applied, this translates into $100 billion in liquidity. It is apparent that the Fed will pump this into the stock market to prop up the prices keeping the stock market bubble inflated.
The problem with growing bubbles is once the bubble can no longer be inflated by slight of hand, they burst. The better case would be to deflate the bubble in a controlled fashion but that is easier said than done. Examples of bubble bursting are the tulip debacle and more recently is the bitcoin value losing about 50% of its value. I believe that the roller coaster in bitcoin is not finished.
In a way to reduce the overall risk, pension managers are shifting the holding from active to indexes. The index is more an instrument that trails the market as it is an average of how a group of stocks move rather than a specific stock.
Since the Fed can’t manipulate the interest rates by a more direct method, such as lowering the interest rate. With the interest rate just a few points above zero, there is not much room for manipulation. They can and have discussed NIRP but I think they are realizing that people have woken up to the folly of such a policy. They are gambling on the manipulation of the stock market. The stocks have been manipulate for several years now and has kept market valuation at record highs. The ace in the hole is a tax payer bailout or QE.
The hope is the market manipulation plan will keep the pensions from failing long enough for them to devise another slight of hand plan. The market is not in the best of financial shape as it is. One familiar just needs to examine the stock prices versus the company’s EPS to realize that the stocks are very over priced. The method they have been using over the past several years is by companies borrowing low interest money and using the money to buy their own company’s shares.