Monday, September 19, 2011
Perception is 9/10ths of Reality
New Jersey is burning $5.2 billion a year. If the market is flat over the next 5 years, New Jersey will have a minimum of $118 billion in obligations and will be sitting on $31.8 billion. But what happens if the S&P falls to 450 or 600?
S&P 500 at 600 would be a drop of 24% from here. Assuming the pension plan assets dropped the same, plan assets would fall to $44 billion. On a drop to 450 on the S&P, plan assets would fall 43% from here to approximately $33 billion.
At $5.2 billion a year, New Jersey’s pension plan would be completely out of cash in about 6 years in my worst-case scenario of a drop to 450 on the S&P.
However, even on a drop to 600 or 700 on the S&P (highly likely in my estimation), New Jersey, would run out of cash rather quickly putting in $1 billion a year and taking out $5.2 billion a year while assuming growth rates of 8.5% that are totally unrealistic.
Wherever the market bottoms, be it here, or S&P 600, or S&P 450 (some are calling for even lower than that), the recovery will be weak, just as in Japan. There is every reason to assume a chart of the S&P will look something like this.” State of New Jersey is Insolvent
Nikkei Monthly Chart