Sometimes knowing what is going to happen (or thinking you do) is like getting the booby prize. It’s just not fun. Back in 1998 and 1999 we participated in Y2K information meetings, where the audience could ask questions of the police chief, power company, etc. My part was to address the economic and financial impacts of what was unfolding. Back then, I knew that there was going to be a lousy investment market, so much so that I realigned my business away from the “buy-and-hold-is the only-way-to-invest” mentality that then gripped my industry. I moved into strategies that would Adapt to Changing Markets®. Back then when I mentioned the markets could get as nasty as 1973-74 when the S&P 500 index dropped 45% of its value, people thought I was crazy. Within two years it was happening and the S&P lost 48% of its value.

When asked if people should buy gold to protect themselves, I spoke of deflation when most folks had never heard of it, and said wait on the gold. Gold finally bottomed in the Spring of 2001.

The recent Prescott Daily Courier article, Corporate Pension Muddle Gets Progressively Ugly, August 29, 2004, reminded me of another topic of which I have glimpsed the future. Alan Greenspan addressed Congress recently and said that reform of pensions and Social Security were needed before we all had “abrupt and painful adjustments” thrust upon us. Strong words! The gist of the Courier article was how United Airlines was asking to terminate its “defined benefit” pension plan as part of its plan to get out of Bankruptcy. This is the type of pension plan where retirees are promised a defined income for the rest of their life. This is a huge liability for UAL. UAL hopes to the debt to its pensioners canceled by the bankruptcy court because the company simply can not pay it and survive.

United Airlines is the tip of the iceberg, though. Of the 500 companies in the S&P 500 index, 360 of them have this type of pension plan. In 2002, Credit Suisse First Boston estimated that the collective pension fund liability for the 500 companies is under-funded by $246 billion. Morgan Stanley estimated $300 billion. And these numbers are predicated upon the rosy investment earnings record of the 1990s continuing indefinitely. As we know, that isn’t happening. When investment returns fall short, the shortfall must be made up from increased deposits to the pension fund out of company earnings. The real problem is that the amount of pension funding required to make up current shortfalls and make up for poor earning years is greater than the core earnings of all 500 of the Fortune 500 companies.

If you think about this, a stark reality emerges. The shareholders of these 360 companies really own nothing because the pension liabilities of the company have eaten it all up, and the beneficial owners of all of the earnings will be the workers, not the shareholders.

I imagine Karl Marx must be smiling somewhere.