This is an opinion editorial by Mickey Koss, a West Point graduate with a degree in economics. He spent four years in the infantry before transitioning to the Finance Corps.
I’m going to use the California Public Employees Retirement System (CalPERS) as a proxy for your general pension system. According to investopedia, the CalPERS invested roughly a third of their money into bonds with a target annual return for the fund at 7%. Bonds are referred to as fixed income because of their predictable coupon payments. They’re used for income, not capital gains.
Recycling a chart from one of my previous articles — let’s assume the weighted average of coupon rates on government bonds is 2% to simplify some math (because it is according to the Treasury). At a 2% income rate on a third of your money, that means pension funds need to make 9.5% annual returns on the rest of their money, every year, without fail or they run the risk of not being able to fund their pension payments. There is no room for error.
So what happens when you start to feel the pressure but need to keep buying bonds by mandate, despite the lack of income? You start to lever up your positions, a technique that nearly blew up the pension space in the UK just a few weeks ago.
The Washington Post has a pretty good roll up of the situation but in essence, pensions were forced to lever their positions to increase yields and cash flows because of the prevalence of quantitative easing and low interest rates.
Channeling my spirit animal, Greg Foss, by levering a position 3x you can increase your yield from 2% to 6%, but leverage cuts both ways. A 50% loss turns into 150% and starts eating into your other positions and investments. This is exactly what happened in the U.K., necessitating a bailout to prevent pension fund liquidations and systemic impact to the banking and lending system.
Enter bitcoin, stage left. Instead of leveraging positions to increase yield I think pension funds will be forced to adopt alternative investments like bitcoin to help grow their fiat denominated asset base and service their payouts to pensioners.
I wrote an article recently about the debt spiral concept. While central banks are raising rates right now, they can’t keep going forever, inevitably putting pension funds right back into the low-yield environment that caused the systemic problems before.
Bitcoin has no risk of liquidation. Bitcoin does not require leverage. Instead of making risky bets, perpetuating the culture of moral hazard and socialized losses, pension funds can use bitcoin as an asymmetric opportunity in order to bolster their returns.
I see this as an inevitability as more and more asset managers come to the realization that it is their duty to return pensioners what was promised. Once one sets the precedence, the dominoes will fall. Don’t be last.
This is a guest post by Mickey Koss. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.