Pension Bill Clears Senate

Legislation that would require companies to fully fund their defined benefit pension plans. Additionally the legislation would increase the annual premium the Pension Benefit Guaranty Corp. charges the companies it insures.

The legislation would be good for shareholders, employees, taxpayers, and companies that compete with companies that underfund their pension plans.

Unfortunately, I still think most people fail to grasp the massive burden that providing retirement income to baby boomers will have on our society. Even the coming crisis in Social Security is not fully understood by a lot of people. The pension funding problem is huge and it is good to see the Senate dealing with it.

On the political front, the legislation was held up by two Democrat Senators concerned that making companies fund their obligations may force them to drop their pension plans.

Undoubtedly, many companies will drop pension plans when they are forced to properly fund them. The real problem is that many of these companies never intended to fund their pensions and would have dumped them on taxpayers at some point in the future when the burden eventually became too heavy (think airlines). At least if they drop their plans now current and future retirees have more time to plan for a future without a pension, the taxpayers will know how much of the pension they will be forced to fund, and honest competitors won't have to compete with companies carrying fictional pension benefits.

Underfunding a pension is fundamentally unfair to shareholders, workers, taxpayers, and competitors and the Congress should stop it.

Timothy Burger
timothyb(at)timothyburger.com

A Hole Below the Water Line

The Economist declares that GM has a hole below the water line today. The basic analysis is stuff you have heard before, bad products plus ineffective management plus high legacy costs equal massive losses. The Economist doesn't think GM will be able to pull it out.

In my mind the key to any turnaround at GM is creating great products, and then reshaping your brand portfolio in a way that makes sense to consumers. For example: if Pontiac is your "sporty" line then they shouldn't also have a mini van.

"Critics, such as Dan Gorrell of Strategic Visions, a Californian consulting firm, say GM concentrated more on finance and marketing than designing and making cars. Indeed, after the company’s annual meeting, Mr Wagoner conceded: “If we had a chance to rerun the last five years, we probably would have done a little more thinking about making sure that each product was distinctive and had a chance to be successful.”"

Timothy Burger
timothyb(at)timothyburger.com

Stronger US Asset Prices (and a Strong Dollar)

The guys at GaveKal (via John Mauldin) are making an interesting arguement why the emergence of new economic power in developing nations will support asset prices in the US and the US dollar.


"As mentioned [in the book], one of the first implications of the 'platform company' model is that industrial jobs (those close to the hearts of our bearish friends and left wing politicians) in the 'creative world' disappear, only to reappear in Mexico, China etc... Over time, the job market in the developed economies moves to a minority of very creative individuals who work for themselves, and a majority of fellows who work in the service industry for the creative minds and/or the tourists coming in from the industrial world....

"If we assume that a new part of the world is getting richer (China, India, Russia, Brazil, etc.), then we should probably assume that some entrepreneurs in those countries are making it big. This assumption is not a stretch; there is enough anecdotal evidence to support (if you doubt that some new entrepreneurs are making it big, go to the Louis Vuitton store in Shanghai on a weekend). If we further assume that, in the countries getting richer, we will start to witness the emergence of institutional savings (pension funds, mutual funds, family offices, etc.), then we should expect big 'savings flows' from the rapidly growing developing world into the Western world.

"In simple words, the emerging markets' newly rich will feel like investing a part of their newly created wealth in regions of the world where property rights are well protected and where there is a rule of law. The excess trade balances earned by the 'industrial world' have, in fact, little choice but to be reinvested in the assets of the 'creative world'. The pension funds of the 'industrial world' will buy the companies which give their countries work. The successful individuals in the 'industrial world' will also buy real estate in the 'creative world' (because it also happens to be the 'fun world'). This implies that the assets in the 'creative world' and especially the prestige assets will always border on the overvalued. Similarly, given the ability to change a producer if he becomes a little bit too demanding, asset prices in the industrial world will remain a little bit undervalued at all times...

"Which brings us to the following point: balance of payments consists of two parts:

1. The Capital Balance: if the above holds true, that part will always be positive for countries with well developed financial markets.
   
   
2. The Current Account: since the two parts add to zero (by construction) it means that the current account in countries with well developed financial markets (US, UK, HK etc.) should always be in deficit, and massively so...

"Taking this a step further, we can assume that, as a result of the constant capital flows, the countries with a well developed capital market will have an overvalued currency and a very low level of long rates. Which in turn leads to robust real estate markets and higher asset prices.

"We call this 'the dollar asset standard'. Basically, diversified and safe assets in the Western world replace gold as the standard of value in the eyes of new savers in Asia, Latin America, or Eastern Europe.

Timothy Burger
timothyb(at)timothyburger.com