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Pension plans vacuuming earnings from companies like Caterpillar

Wall Street Journal’s Heard on the Street column mentions Caterpillar and a few other corporate giants that have gaping holes in their pension obligations that they must attempt to close.

The pension headache is hitting companies already under huge pressure to cut costs. Caterpillar recently announced 20,000 job cuts and warned that it may post its first quarterly loss since 1992.

Caterpillar’s U.S. pension had $10.4 billion in assets at the end of 2007 — $700 million less than its obligations. Caterpillar’s pension assets likely shrank by about $2.8 billion last year, assuming the 70% of its portfolio dedicated to equities fell 40% and, generously, the 25% invested in debt rose 5%. The company says it will contribute close to $1 billion to its pension this year. But that could still leave a hole of as much as $2.5 billion.

Did you get that? Seventy percent of Caterpillar’s investments to fund its retirees’ golden years is invested in stocks. I’m sure this is true of every other company out there still providing pensions. After all, stocks offer the highest long-haul returns, right? Except when they do fun things like lose half their value in six weeks.

Add to this the mega-billions invested via 401(k) and a troubling picture emerges: basically an entire society built on a foundation of asset inflation, from stocks to derivatives to real estate. And right now we’re experiencing massive asset deflation in a society built for prices to go only one way: up. We should be thankful the lights are still on.

Inflation results from too much money chasing too little product. Over the past 10 years in particular the new money came from two sources: China, which was actually building wealth, and Wall Street, which was papering the planet with soon-to-be worthless securities. (Remember it was the voracious appetite for U.S. mortgage paper that enabled the subprime abuses that got us here: if it hadn’t been for the absurd riches to be made in dealing this paper, none of the “lending standards are for sissies” nonsense would’ve ever happened.)

This might be the real reason the bear market isn’t going away: nobody knows where the firehose of money is coming from to start the next inflationary cycle. All those who nearly drowned in the last raging flood of cash have become too timid to turn on the tap.

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Tom Mangan posted at 8:43 am February 12th, 2009 |

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