Archive for March, 2017

Why PERA’s Cumulative Returns Matter

Posted by Joshua Sharf in PERA on March 9th, 2017

PERA’s unfunded liability often comes into sharper after a year of low returns.  Its detractors point to last year’s 1.5% return, for instance, as evidence that PERA’s expected rate of return is too optimistic (it is).  Its defenders argue that a single year’s returns are less important than the long-term (they are).  They then point to a time frame, say, the last 7 years, where PERA has averaged 9.7%.

But it’s not just average returns that matter.  It’s cumulative returns, and there, even a couple of bad years can wreak havoc on a defined benefit plan.

Let’s look at PERA’s returns since 1990:

A few really bad years to start off the century, and we all remember 2008.  But aside from that, mostly above expected, and a few years slightly below expected.  If you had invested $100 in PERA Mutual Fund in 1990 and let it sit for a quarter century, you’d be about where you should be, based on each year’s expected rate of return.  Most years, you’re even ahead of the game, before the dot-com burst and the housing bubble burst bring you back to earth.

But of course, you don’t put $100 in in 1990 and let it sit.  You put $100 in every year.  Instead of looking at this from the perspective of each year going forward, let’s choose the perspective of 2015 looking back at each year.  That is, for each year where you’ve invested $100, let’s see how you end up in 2015.

For $100 invested in 1990, you’d expect to have about $800, and we already know that that’s what you’ve got.  For $100 invested in 2000, though, you’d expect that to be worth $355 today, but it’s only appreciated to $228.  That’s because in January 2000, you invested before the bad years of 2000-2002.  So money invested in every year from 1995-2003 is worth less now than PERA’s expected return would project.  In fact, there are only a few years where the cumulative return through 2015 is better than expected, because 2000-2002 and 2008 wipe out all the gains beyond expectations.

Not surprisingly, this means that your PERA Mutual Fund is short of expectations in 2015, by just over 9%.  You’d expect to have just over $9000, but instead you’re just under $8200.

Naturally, PERA’s actual situation is much more complex than this.  But the point remains – it’s not enough to do as well as you’d expect over a long period of time, even in the absence of required annual payouts.   In order to keep the plan solvent, you need to do better than that.

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Russia Elects A US President

Posted by Joshua Sharf in 2016 Presidential Race, History, National Politics on March 7th, 2017

In 1960.  At least that’s what Khrushchev thought.

Khrushchev took a particularly keen interest in the 1960 US presidential election.  Having engaged Nixon in the famous 1959 “Kitchen Debate” while on tour in the US, he became convinced that the firm anti-Communist would be impossible to do business with.  He determined to help elect whoever the Democratic nominee was.

First, he tried to convince Adlai Stevenson to run again.  Stevenson declined to openly seek a third straight nomination, mostly out of pride and a desire to be asked rather than have to ask.  But he was certainly not about to be goaded into it by the Soviets.

Then, when John F. Kennedy became the nominee, Khrushchev tried to intervene in the election on his side.  Quoting from Dan Carlin’s podcast on the Cuban Missile Crisis:

In the book Inside the Kremlin’s Cold War by Vladislav Zubok and Constantine Pleshakov, it’s interesting to read exactly how much Khrushchev was hoping Kennedy would become the president. But not because he thought he was weak, but because he thought he might be another Franklin Roosevelt, someone who could reach out and have another relationship the way Stalin’s and Roosevelt’s relationship was seen to be.

Khrushchev apparently did everything he could to help Kennedy get elected. He told KGB officers in Washington to analyze the situation, and if there was anything they could do diplomatically or with propaganda to help, to do it. He called Kennedy, ‘his president’ after he was elected, and told Kennedy at the first eye-to-eye meeting they every had, ‘I got you elected.’

Zubok and Pleshakov go on (p. 238) to detail that they were rebuffed when they rather clumsily tried to approach Robert F. Kennedy directly.  However,

In the end, Khrushchev did influence the U.S. presidential elections by his belligerent rhetoric, as well as by demonstrating that a constructive U.S. – Soviet dialogue would be impossible so long as Eisenhower or Nixon remained in the White House.  Twenty years before the revolutionary leadership of the Islamic Republic of Iran used American hostages to influence a U.S. presidential campaign, Khrushchev did the same by holding captive two pilots of the U.S. reconnaissance plane RB-47, shot down in July 1960 over the Soviet North.  Along with fears of the “missile gap,” Kennedy successfully exploited the issue of the captive pilots in his barbs against the Eisenhower-Nixon administration.

Correctly or incorrectly, Khrushchev believed this was a decisive factor in the elections.  From his memoirs, Khrushchev Remembers, page 458, he details how he mentioned this to Kennedy at the Vienna summit:

By this time President Kennedy was in the White House.  Not long before the events in Berlin came to a head, I met Kennedy in Vienna.  He impressed me as a better statesman than Eisenhower.  Kennedy had a precisely formulated opinion on every subject.  I joked with him that we had cast the deciding ballot in his election to the Presidency over that son-of-a-bitch Richard Nixon.  When he asked me what I meant, I explained that by waiting to release the U-2 pilot Gary Powers until after the American election, we kept Nixon from being able to claim that he could deal with the Russians; out ploy made a difference of at least half a million votes, which gave Kennedy the edge he needed.

Of course, at the time, nobody accused RFK or JFK of actually colluding with the Soviets to ensure JFK’s election.  (That would have to wait for another election, and another Kennedy.)

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