Stocks Will Crash – and Crush (California’s) Pension Funds & Taxpayers: Report
by Wolf Richter
WolfStreet.com
July 14, 2016
The Price-Sales ratio (among others) has blown through the roof
The California Policy Center published an interesting study – “interesting” in all kinds of ways, including its outline of the doom-and-gloom future of California’s state and local pension plans if stocks turn down sharply, preceded by its prediction that stocks will turn down sharply because valuations are totally unsustainable.
The huge, simultaneous, Fed-engineered rallies in stocks, bonds, and real estate – typically the three biggest holdings of state and local pension funds in the US – have inflated the balance sheets of these funds, thus elegantly, if only partially, papering over their fundamental problems. Most of these funds have a similar doom-and-gloom future when the asset bubbles get pulled out from under them. Plenty of pension funds don’t even need a market correction: they’re already in serious trouble despite the asset bubbles.
So what happens when these asset bubbles burst, or when, to be merciful, just one of them bursts?
Ed Ring, president of the California Policy Center and author of the evocatively titled study, “How a Major Market Correction Will Affect Pension Systems, and How to Cope,” uses a long-range cash-flow model with a number of variables to simulate different scenarios for California’s state and local pension funds. To figure out what a stock market crash might look like, he looked at three key stock market ratios for the S&P 500:
The S&P 500 Aggregate Price/Earnings Ratio
The Rest…HERE
