Resultados de la búsqueda

Wall Street had an awesome first half of 2023 after the S&P 500’s worst year in 2022 since 2008. The S&P 500, the Dow Jones and the Nasdaq Composite were up 15.9%, 3.8% and 31.7% in the first half, with the Nasdaq experiencing the best first half in 40 years. Ashigh inflation continues to be a concern, the Federal Reserve will likely hike rates further after just one pause in the June meeting. Tech shares were the showstopper of the market rally in 2023. Naturally, investors are wondering what awaits. For them, we have jotted down a few predictions for the second half of 2023. Inflation Will Cool Down But Likely Remain Stubborn After hitting multi-year highs, inflation rates started showing signs of cooling down in late 2022. The Personal Consumption Expenditures (PCE) index advanced 3.8% versus April's 4.3%, and excluding volatile food and energy, the core PCE index gained 0.3%, down from 0.4% in the previous month. But the rates are far higher than the Fed’s target of 2.0%. We do not expect inflation to slip to the 2.0% range in 2023. Amplify Inflation Fighter ETF IWIN should thus be watched for gains as long as inflation remains stubborn (read: Another Inflation-Sensitive ETF (FTIF) Hits the Market). Recessionary Fears Seem Exaggerated While the bond market predicts a recession, as indicated by the flattening of the yield curve, the U.S. GDP growth rate seems decent. The U.S. economy grew an annualized 2% sequentially in Q1 of 2023, way higher than the second estimate of 1.3%, and forecasts of 1.4%, per tradingecnomics. The Fed, too, boosted its 2023 economic growth expectations to 1% GDP gain, up from the 0.4% estimate in March. Consumer sentiment is decent. Upbeat retail sales give cues of consumers’ decent savings. The jobs market is also strong. This makes the case perfect for consumer discretionary ETF investing. Vanguard Consumer Discretionary ETF VCR is a good pick here. Corporate Earnings to Remain Steady First-quarter corporate earnings came in better than expected. Earnings estimates for Q2 have come down only a bit since the start of April, with several sectors starting to see positive estimate revisions. These sectors include Construction, Industrial Products, Autos, Tech, Medical and Retail. WisdomTree U.S. LargeCap ETF EPS should thus be in focus. It is a fundamentally weighted index that measures the performance of earnings-generating companies within the large-capitalization segment of the U.S. stock market. Value Stocks Continue to Pull the Strings As rates hover around solid levels, value stocks will likely prevail in the second part of 2023. High-flying growth companies often focus on increasing future revenues and reinvesting their earnings into product research and expansion. Hence, they often fail to focus on shareholder value maximization. Moreover, these companies often rely more on loans and are thus more susceptible than value stocks to rising rates. SPDR Portfolio S&P 500 Value ETF SPYV currently has a Zacks Rank #1 (Strong Buy). Eurozone Likely to Outperform the United StatesVanguard FTSE Europe ETF VGK has gained 11.3% this year against a 14.5% increment in the S&P 500, while iShares MSCI Eurozone ETF EZU is up more than 16%. With the U.S. and U.K. rates being higher than the Eurozone, we expect the winning momentum in Eurozone ETFs to top that of the S&P 500 and the United Kingdom. Source: 5 ETF Predictions for Q3 of 2023

ROSARIO Crisostomo thought she had been cheated when she counted the money sent by her son from the United States. But there was no scam, only a Mexican currency going from strength to strength. Once a laggard of the international foreign exchange market, the peso is among the world’s best performing currencies this year. A combination of high interest rates in Latin America’s second-largest economy, financial stability as well as inflows of remittances and foreign investment have seen the Mexican currency post double-digit percentage gains against the US dollar in 2023. “I thought they were cheating me, telling me that the dollar was low to give me less, but then I saw that they weren’t,” Crisostomo told AFP from the town of Piaxtla, in the central state of Puebla, where she lives with her grandson. Some 4.6 million households across the country receive remittances – the country’s largest source of foreign currency – largely thanks to the Mexican diaspora in the United States. The government estimates that in 2023, remittances could exceed last year’s record high of more than US$58 billion. This month, the Mexican currency reached its strongest levels against the greenback since 2016, earning itself a new nickname – the “super peso”. On Friday (Jun 23), it stood at around 17.1 per US dollar, compared to 25 in March 2020 when the coronavirus pandemic began. Analysts say the peso’s strength is in part due to the high level of the Mexican benchmark interest rate, which is now 11.25 per cent. The lending rate has been raised to fight inflation but has also attracted investors seeking higher returns. The peso has also been boosted by the so-called “nearshoring” trend of US companies such as electric carmaker Tesla moving their production closer to home in Mexico instead of Asia, experts say. “When investors look for where to invest and look at emerging markets, there’s no other country with a narrative like Mexico with nearshoring,” said Carlos Capistran, an economist at Bank of America Merrill Lynch. In a country that has suffered major currency devaluations in the past, the peso’s strength has been mostly hailed as good news. Leftist President Andres Manuel Lopez Obrador refers to it as “the Mexican miracle”. The touted benefits include a decrease in the size of Mexico’s foreign debt, when its value is considered in pesos. On the other hand, the strong currency reduces the earnings of exporters. “But I would say a strong peso is better than depreciation or devaluation, in general terms,” Lopez Obrador said. Rogelio Garciamoreno, a farmer and vice-president of the private National Agricultural Council, is both a winner and loser from the “super peso”. “The prices of many inputs in dollars are falling. We hope to buy them at a better price,” he said. The flip side is that the peso’s strength is bad for food exports. “These products are priced in dollars. It hits us very hard because we received fewer pesos than we thought,” Garciamoreno said. The United States accounts for 80 per cent of Mexican exports. The peso’s appreciation also impacts “maquiladoras” – factories set up mainly by US companies in northern Mexico that use local workers to manufacture products to sell in the US. “This big devaluation of the dollar is bad for the maquiladoras because they need more dollars to pay the payroll and taxes,” said Jesus Manuel Salayandia of the National Chamber of the Transformation Industry. However, some say the days of the “super peso” could be numbered. Financial analysts expect a slight depreciation in the Mexican currency, partly due to narrowing interest rate differentials. While Mexico’s central bank says it expects to hold its key lending rate at the current level for “an extended period”, the US Federal Reserve has flagged a possible further half percentage point of increases this year. Capistran expects that the peso will return to levels around 19 per US dollar towards the end of 2023. That would be good news for Crisostomo, who is struggling with rising living costs. “Everything’s going up. Food’s going up. But now we have less,” she complained. Source: Mexico's 'super peso' creates both winners and losers

If you are someone who has just entered the 30s club, give yourself a pat on the back for making it out of your 20s & into what is said to be the most pivotal decade of one's life. This is the age where a lot of people are likely to engage in family planning, buy a new house, experiment with career changes, relocate to a new place, and so on. Moreover, your 30s are a major financial crossroad that will map out the blueprint for your future finances. This is the best time to take complete control of money matters & start establishing a strong foundation for wealth creation. Check out our blog on how to make money in your 30s to get an insight into boosting your finances at this age. Do you want to use this decade of your life to grow your wealth & make accurate investment choices that will be beneficial in the long run? If so, we have got just the right financial commandments you need to help you financially thrive in your 30s & beyond. Here are 5 important money management tips to help you handle finances efficiently in your 30s: 1. Restructure your budget You have probably heard of this many times through college or even in your late 20s. But in reality, how many people do you know that actually maintain & stick to a budget? Having a monthly or weekly budget to go by is incredibly helpful especially when you are looking to get your finances in order. At this age, you should have a monthly investment plan in place that will help to boost your savings. Ensure to set aside at least 10% of your income as savings once you receive your salary for the month. Track your expenses & cut down on unnecessary splurging sprees. This will help you prioritize your goals and start building towards a financially abundant future. 2. Get rid of pending debt Once you analyze your expenses & track your monthly costs, you will get a clear picture of your financial liabilities like pending loan repayments, debts, credit card dues, etc. It is a good idea to pay off high-interest payments like credit card bills as first priority. It is best that you create a financial plan to help you clear all your pending loans and debt amount as soon as possible. This will give you the financial freedom to pursue other monetary goals like high-return investments or other suitable investment tools. 3. Diversify your investments Maintaining a savings fund alone is not going to generate wealth. Irrespective of your income, aim to invest a part of your savings using financial tools that will help your money grow exponentially over time. It is an ideal time to tap into long-term investments like Public Provident Funds (PPF), shares, mutual funds, etc. Diversifying your investments accurately can lead to profitable returns from multiple sources that could benefit you in both the short & long term. Spreading out your investments largely reduces the risk appetite, which is ultimately the goal when investing across a range of financial instruments. 4. Contribute to your retirement funds This is another financial tip that you must have probably heard from your elders or finance experts & there is a reason for it. Creating a retirement fund & consistently contributing to it is one of the most helpful moves you can make to secure your finances post-retirement. The earlier you start building your retirement funds, the more secure your future will be. Gold bonds, ULIPs, mutual funds, etc are some good financial tools to invest in to build a significantly large retirement fund. Additionally, you should also direct some money towards an emergency fund, something you can use in times of need without having to dip into your savings or retirement money. 5. Improve your credit score It is important to do a yearly credit report check in order to identify any errors & get in touch with the credit bureau to rectify them on time. This is an important move to make in your 30s since buying a new house or refinancing a mortgage is perhaps one of your goals at this age. You may have to take out a loan to cover such costs, for which a good credit score is a must. Your credit score will have a direct impact on the terms of your loan & the interest rate. In fact, a low credit score could also lead to loan rejections, which is why it is essential to rectify any mistakes & tidy up financially. Managing your home finances while simultaneously exploring good investment options to boost your finances can be quite taxing. A misinformed decision or a small mistake could lead to you paying a heavy price in the future. Read this blog on 10 money mistakes you must avoid in your 30s to start building a financially secure future the right way. The key is to spend less than you make & align your money requirements with returns in order to stay at the top of your financial game in your 30s. Source: 5 Money Management Practices You Need In Your 30s

Since the early 1990s, when the period of the “Great Moderation” began and the combination of technological progress, deregulation and globalization generated a virtuous cycle of growth with low inflation, central banks were living in the sweet spot. With inflation stabilized around the 2% target, or even below, all they had to do was manage the business cycle, raising rates very gradually when the economy grew above potential. Although the objective was price stability, the reality is that central banks were dedicated to stabilizing growth and unemployment, since inflation depended on fluctuations in demand.Monetary policy during those decades was straightforward and did not require difficult or controversial decisions. Debates focused on minor issues, such as assessing if the effort to avoid weak inflation was excessive – for example, the potential side effects of zero interest rates or asset purchases. Granted, it was a difficult period in which central banks had to manage the financial crisis and avoid a repeat of the Great Depression, but central banks were the heroes that prevented catastrophes. The debate was about how much to ease financial conditions. All that changed last year. The powerful shock waves of the Covid-induced shutdown and subsequent rapid reopening has compressed into two years an economic cycle that would typically last eight to 10 years, replacing the “Great Moderation” with the “Great Volatility.” Now the debate centers on how much to tighten financial conditions – that is, how much to raise interest rates to reduce economic growth and increase unemployment – in order to reduce inflation. To ease one pain – the rise in prices – central banks have to generate another pain – the economic slowdown. And, even more stressful for central banks, they must decide how much to tighten financial conditions while not really understanding why inflation has risen so much or how long it will last. It’s like driving in the dense fog. Because a sudden increase in inflation may seem like a failure for a central bank, even if it is not. The decades of the “Great Moderation” entrenched the image that central banks had a strong control over inflation, when the reality is that it was a mix of good policies and good luck: during the “Great Moderation,” the structural trends were disinflationary and the shocks relatively minor. All central banks had to do was to be disciplined and not make big mistakes. In the “Great Volatility,” the trend has been reversed. Structural trends – the re-regionalization of supply chains, the wide use of sanctions, tariffs, energy policy as geopolitical weapons, the fight against climate change – are inflationary, and the shocks have become bigger and more frequent. In the US, up to two thirds of the price increases are due to exogenous supply shocks, against which the central bank can do little. In the eurozone, it is likely that almost all the price increases are due to shocks of this nature. Why, then, are central banks raising rates at high speed? On the one hand, because unemployment has fallen rapidly to historical lows and interest rates must therefore be adjusted to slightly restrictive levels. On the other hand, because in the face of exogenous shocks it is necessary to anchor inflation expectations and thus avoid the so-called “second round effects” – a process by which workers see price increases and request wage increases, companies pass these wage increases to their prices, and then workers ask for new wage increases, etc… For now, these second-round effects have not occurred, as nominal wages have risen well below inflation. In fact, the evidence suggests that the price increases have been largely due to rising business margins. After a decade in which companies competed for market share, scared of global competition, they have taken advantage of widespread volatility to increase margins and prices. Nevertheless, to ensure that there are no second round effects, and to prevent further margin increases, central banks want to slow down the economy by raising rates to a sufficiently restrictive level. Nor are the dynamics of inflation expectations clear. After decades emphasizing its importance as an anchor for monetary policy, the reality is that we do not really know what they are or how they are formed. Medium to long-term inflation expectations (five to 10 years), after a brief period of volatility following the Russian invasion of Ukraine, have remained firmly anchored around the target – the proverbial Martian who landed on Earth and saw a graph of such expectations would not be able to guess that inflation has since skyrocketed to double digits. But, what has caused this anchoring? The credibility of central banks, which have raised rates rapidly? Or do expectations simply mirror the volatile evolution of energy prices, rising and falling in unison? The same is true of short-term inflation expectations (one to three years). These have risen rapidly, but the evidence indicates that they mostly reflect the current rise in inflation, stemming mainly from food and energy prices, rather than a conviction that inflation will continue to rise at this rate beyond the next year. Nor is it clear that small businesses weigh inflation expectations when deciding how much to raise prices. But if there are no second-round effects and expectations have not been unanchored, why so much emphasis on raising rates quickly and saying that a recession will not be enough to contain inflation? Because central bankers are buying inflation insurance. Perhaps when the fog lifts, it will prove that the insurance was excessive. But this new regime of “Great Volatility” requires greater precautions, in both directions. The key is not to overshoot the caution. The acceleration of rate hikes since the summer has likely added unnecessary volatility to the economic outlook. Many academics, and central bankers, after many years bemoaning the emphasis on low inflation, are now exaggerating their anti-inflation worries. Which is a mistake: inflation that is too low is just as bad as inflation that is too high. Both detract from future growth. In fact, this episode of high prices should be used opportunistically to finally stabilize inflation at a higher level than before Covid, at a level more in line with the 2 percent target. If there are no new shocks, inflation will slow in the coming quarters, the fog will lift, and central bankers will be able to better calibrate monetary policy. In the “Great Volatility,” shocks determine the behavior of the economy and inflation, and no scenario should be ruled out. Central banks must be well-prepared to react, in a symmetric fashion. Source: From the ‘Great Moderation’ to the ‘Great Volatility’ - El País

After a year of rising interest rates, higher prices and volatile markets, financial advisers say now is the time for Americans to plot a new course for 2023.On Wednesday, the Federal Reserve increased the benchmark federal-funds rate by 0.5 percentage point. Though November’s consumer-price index shows that inflation has cooled a bit, Americans should take pains to protect themselves for the uncertain economic times ahead, advisers said. Fed rate increases touch every corner of Americans’ financial lives, raising the cost of borrowing money to buy a home or car, and making it more expensive to carry a credit-card balance. With budgets stretched thin, credit-card balances ballooned this year. Since many Americans are also concerned about job security and the risk of a recession, advisers say to think longer term about your goals and safety net. Rather than just make vague New Year’s resolutions to shore up your finances, it pays to put in place structures that help you adhere to your goals, said Adam Galinsky, a professor at Columbia Business School. “People should take a step back and say, ‘Where do I want to be, given this economic market? How can I set up commitments today?’” he said. Here are three strategies financial advisers suggest for 2023. Don’t try to time the interest rates This time last year, interest rates on a 30-year fixed-rate mortgage were 3.10%, according to Freddie Mac. As of the week of Dec. 8, they had more than doubled to 6.33%. Rates for car loans and credit cards had similar increases. These higher borrowing costs convinced many people to delay making big purchases in the hope interest rates would fall. That may be a mistake, said Malik Lee, founder of Felton & Peel Wealth Management. He suggests people retool their long-term plans and financial strategies for a high-rate environment. “If you’re looking to buy something—a house, a car—these rates are not going back down to 3%,” he said. “So I’m telling my clients, we don’t want to time the market.’” Though no one can predict when rates will come down, people shouldn’t count on them returning to 2021 levels soon, advisers said. “I’ve heard it said ‘you marry a property but you date an interest rate,’” said Kristen Euretig, financial adviser and founder of Brooklyn Plans. “You do have options going forward if rates do go down, and if they go up, then you still got it at a price that was better than it could have been if you waited.” The deciding factor should be one’s financial status and preparedness, not any particular external timing, she said. Refresh your emergency plan If you haven’t built up emergency savings, now is the time, Ms. Euretig said. Lower prices for gas and energy may free up room in people’s budgets for some much-needed emergency planning. Financial advisers typically recommend people save three to six months of reserves to prepare for unexpected hardships. This fall, several major employers cut positions or froze hiring. Concerns about job security are all the more reason to build a robust safety net, Ms. Euretig said. “It’s not my client’s favorite goal to save for, but it is something I feel strongly about: Everyone needs an emergency fund,” she said. “I like to call it a stability fund, because saving for your own financial stability is perhaps more motivating.” And keep saving Beyond building an emergency fund, people should try to capitalize on higher interest rates on savings products. Moving money into higher-yield accounts can help turbocharge every financial goal from making big purchases to revamping an emergency fund, Ms. Euretig said. At the start of this year, online savings accounts such as Ally and Goldman Sachs’s Marcus were offering 0.5% in interest. Shopping around now for today’s best interest rates could pay much more. This week, those same accounts are offering as much as 3% in annual percentage yield. That means savers holding $1,000 in an account with Marcus, for example, would earn $30 in interest over 12 months—$25 more than they would have held at the previous rate. Should you have more time and money, there are other savings products to consider. Inflation-protected U.S. savings bonds, known as I Bonds, are offering rates double that of online high-yield savings accounts. The composite rate for I Bonds issued between November 2022 and April 2023 is 6.89%, according to the Treasury Department. Rates on products such as certificates of deposit and Treasury bills, or T-bills, will also beat the rates on high-yield savings accounts, but the rate will vary depending on the length of maturation. “With the higher interest rates, there’s an incentive to save, and with layoffs, there’s also an incentive to save,” Prof. Galinsky said. “And when you combine that with a higher consumer-price index, people might say, ‘2023 is my year of saving.’” Source: What Fed Interest Rate Increase Means for Your 2023 Financial Plans - WSJ

Can you afford to retire? The answer is much more likely to be no today than it was a year ago—especially for those old enough to ask themselves the question. The resurgence of inflation is eroding the real value of savings. Higher interest rates have caused a repricing of bonds and stocks. The result is that the pot of assets many future pensioners are hoping to live off has shrunk fast. Pundits have long predicted that, as populations age and the number of workers for every dependent falls, those retirement savings would come under pressure—a problem they have dubbed the “pension time-bomb”. The fuse now looks much shorter. The soon-to-be retired are often advised to shift their assets into bonds and out of stocks as they prepare to stop working, to protect their savings from big stockmarket corrections. So-called “life-cycle” pension funds are usually invested almost entirely in stocks during their owners’ younger years, a strategy meant to capture the higher returns that listed equities tend to generate over long periods. As workers near retirement, these funds usually swap most of their equities for government bonds, which are supposed to hold their value. But with less than a month to go, 2022 looks set to be an appalling year for bonds. The typical portfolio of those closest to hanging up their boots has lost 17% of its value since January. A year ago, a 65-year-old who had saved a healthy $2.5m for their retirement and invested 80% of it in government bonds and 20% in stocks globally would have typically drawn an income of $100,000. If inflation stayed modest, they would have been able to draw a similar real income for the next 30 years. The asset-price crash, however, means that the value of the pot has fallen to around $2.1m—allowing them to draw nominal annual payments of just $83,000. Soaring inflation, meanwhile, has eaten up another 10% of that income, leaving them with just $75,000 in real terms. And the shrinkage is hardly over. Should inflation remain above 2% for a while—say it averages 3% a year instead—then a retiree who made it to 90 might well be living on just 65% of the real income they might have expected until recently. This impoverishment could fast become reality for millions. A lot of baby-boomers turned into pension-boomers in 2021. The Federal Reserve Board of St Louis reckons there were 3.3m more retired people in October 2021 in America than 20 months before. More than half of Americans over 55 have left the labour force, up from 48% in the third quarter of 2019, according to the Pew Research Centre, a think-tank in Washington, dc. This reverses a decades-long increase in the share of people working past 55, which has slid back to the levels of 2007-09 in just a year. A similar pattern is evident across the oecd club of mostly rich countries. Survey data already suggest some of those who recently retired are considering returning to work. Those who do not, or cannot, probably face leaner years than they had expected. But individuals are not the only ones who will bear the burden of the adjustment. Some of it will also be shouldered by governments, through social-security and national-insurance schemes. And part of it will be borne by a creature that is becoming ever rarer: the defined-benefit (db) pension plan. Many of those considering retirement today spent much of their lives working during the golden age of db schemes, when firms or employers in the public sector, such as schools and local governments, agreed to pay workers an annuity after they stopped working. Of the $40trn held in retirement assets in America today, $17trn is held in such schemes. A typical db payout is worth 2% of a worker’s final salary, multiplied by years of service. So a teacher employed for, say, 40 years, who retired when her salary was $80,000, would be paid $64,000 per year for the rest of her life. In this way the employer shouldered all the investment risk the individual would otherwise have to face; db schemes, not their members, are the ones bearing the mighty losses in asset prices this year. Some plans also adjust payouts for inflation. Over recent decades, ageing populations and rising life expectancies have together pulled down interest rates; bigger savings pools chasing a finite volume of assets meant capital became cheaper. It gradually became clear to firms and public-sector agencies just how hard keeping their pension promises was going to be. From the 1980s the private sector therefore began to phase out its offerings of such plans: the share of employees enrolled in db schemes in America dropped from nearly two-fifths at its peak to just a fifth by 2008. Then the strain of the financial crisis prompted many firms to reclassify db plans as defined-contribution schemes, where workers simply contribute a set amount to the pot with no guarantee of what they get back after retirement. Public-sector employers have had much less success in reducing their exposure to these overgenerous pension schemes, however. The result is that around $13trn of America’s db assets are managed by state, local and federal governments. Many of the biggest db schemes, and some of the biggest pension funds in existence today, are run by public institutions, such as the California Public Employees’ Retirement System (Calpers) and the Ontario Teachers’ Pension Plan (otpp), and have assets worth hundreds of billions of dollars. The portfolios of many schemes are suffering just as many more of their members are getting ready to ask for their money. The way to measure how easily a pension plan will meet its liabilities in the future is to look at its “funded ratio”. This compares the pot of investments it currently holds against the expected future value of the promises it has made to those paying in. The sum has three moving parts: the value of the current investment pot, the discount rate used to calculate the present value of future payouts, and the stream of those expected future payments. The third factor is the hardest to figure out, because future payouts are based on undetermined final salaries and on how long the recipient and their spouse, who is often eligible for payments, might live. Olivia Mitchell, a professor of insurance and risk management at the Wharton School of the University of Pennsylvania, points out that the income stream a db pension scheme might owe to someone joining the plan today could stretch more than a century into the future, if you include payments made to partners. Still, it is the other two elements—the value of the investment pot and the discount rate—that decide whether funded ratios soar or sink. The easiest way to run a pension is to match assets with liabilities, by buying long-term bonds that pay out when pensioners come knocking. If yields on American government bonds are the benchmark, say, then the pension manager might simply buy lumps of them. Should the value of those assets plunge, the pension plan would still be able to meet its expected future liabilities: it would only have to hold the bonds to maturity and distribute the yield it was promised when it bought them. That strategy only works, though, if the plan is “fully funded”: that is, if the cash it has to begin with is worth 100% of its expected liabilities. If it is underfunded—perhaps because contributions are not high enough, or because it made some poor investments in the past—then putting all of its assets into the investments that earn the discount rate on its liabilities will set a fund up for bankruptcy down the road. Many underfunded pensions have had to take risks—by holding equities, for example—in a bid to fill their funding gaps. A combination of bad investment years (such as 2001 or 2008), falling discount rates, ageing populations and the political infeasibility of asking employees to contribute more has pushed a lot of db schemes into the red in recent years. In isolation, falls in the value of the pot are bad. But although higher interest rates hurt asset values, they can also be helpful for pension schemes, because they reduce the present value of future payouts. This year has therefore not been a bad one for all pension plans. Indeed, corporate pensions in America have done rather well. After a bumper 2021, the average corporate pot was fully funded at the end of the year, for the first time since 2007. Corporate funds then moved to reduce their investment risk early by swapping many stocks for bonds—an asset-allocation shift so huge and rapid that it may have contributed to the end of America’s stockmarket rally at the start of this year. Corporate plans elsewhere have not been so lucky, if only because their stockmarkets did not do as well to start with. Many British corporate plans, for example, are still underfunded. In recent years that has led them to adopt strategies in a bid to protect themselves against falling interest rates; one, called “liability-driven investing” (ldi), nearly blew them up over the summer. To ensure they did not look more underfunded when rates fell, many British funds loaded up on derivatives that would pay out when rates dipped, but required them to cough up cash when they rose. As rates rocketed, many funds faced margin calls so big that they threatened to absorb all the cash the funds had to hand. Only when the Bank of England intervened did the danger of bankruptcy ebb. The big losers of 2022, though, are public pensions. Whereas over the past 12 months the average funding ratio for a private plan has risen from 97% to around 110%, that of public pensions in America, which stood at 86% a year ago, their highest since the financial crisis, has dropped to 69%—close to a four-year low. There are two main reasons for the slump. One is that the discount rates used by public plans, rather than being benchmarked to a given asset market, are instead set by external committees. The trouble is that these committees did not reduce discount rates by as much as interest rates fell over the decade that followed the financial crisis, which made it difficult to raise them by much this year, as interest rates rose again. This means the liabilities those pension funds must face in the future remain nearly as high as before. At the same time, funds’ investments have performed poorly. As yields on bonds fell across the developed world in the 2010s many underfunded plans moved into riskier investments, such as leveraged loans, private equity, venture investing and even cryptocurrencies. otpp held a stake in ftx, a crypto exchange once valued at $32bn that went spectacularly bust last month. Funding ratios can dip only so far before pension funds get into serious trouble. “Once a plan is only 40% funded,” grimaces Mike Rosborough, a former portfolio manager at Calpers now at AllianceBernstein, a research firm, “there is often no going back.” It becomes almost impossible, at those kinds of levels, for the pension plan to pay out the annual liabilities it owes to those who have already retired from the income it makes on its assets. It is instead forced to sell those assets off. This quickly becomes a self-perpetuating, vicious cycle: the more assets it has to sell, the smaller the pot, and the more underfunded it becomes. This can go on until the assets hit zero—at which point the plan becomes “pay as you go”: it uses the contributions of current payers to pay former workers, or is bailed out by taxpayers. This may never become a problem for Calpers. California is a rich state which has been directing extra funding to its pension plans from its budget surplus for years. But it is becoming a scary possibility in American states like Kentucky, Illinois, Connecticut and New Jersey, where public pensions are around just half-funded. Even with all their problems, pensioners that depend on underfunded public db plans are miles better off than those relying on Social Security (the American equivalent of National Insurance). Transfers are mostly paid using contributions from current workers. That first started to look shaky in 2008, when withdrawals exceeded contributions for the first time. Payments have since been partly financed from a trust based on past surplus contributions. But the excess of withdrawals over contributions means that this trust is projected to run out in 2035, after which the state will have to make up the difference. The fate of many db and social-security pensioners alike could ultimately depend on the government’s willingness to bail them out. Source: Can you afford to retire? - The Economist