Ad Hoc Commentary – Buffett calls Public Pensions a Financial Tapeworm

“Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made,” Buffett wrote in his annual report to shareholders of Berkshire Hathaway Inc. released on March 1. “During the next decade, you will read a lot of news –- bad news -– about public pension plans.”

We remember that:
“…Tapeworms, or cestodes, are intestinal parasites … [that] cannot live freely on its own….”

In other words, the sage called public pensions a parasite that cannot live on its own. By calling it a parasite, the sage is saying that governments will not default on public pensions. Instead, public pensions will tax the productive capacity of the nation just as parasites consume the nutrients of its host organism.

Perhaps, one shouldn’t be reading too much into an annual newsletter written by an octogenarian. However, Warren Buffett is one of the most successful investor of our times and was very prophetic when he labeled derivatives as ‘financial weapons of mass destructions’ back in 2002. In 2008, credit derivatives were widely blamed for turning a bad situation into a catastrophe:

Perhaps the sage was referring to the precedent set forth by Detroit. As The Economist reported a few days ago:
“…In order to shed much of its $18 billion debt, Detroit proposes giving unsecured bondholders, including holders of general-obligation debt, 20 cents on each dollar. Pensions will be cut, too. General pensioners will receive only 66% of their monthly pension (74% if they agree quickly). Pensioners in the police and fire departments have been offered 90%, but swift approval will net them 96%…”

So, while unsecured bondholders get 20 cents to the dollar, public pensions are receiving 66 to 96 cents to the dollar. Perhaps Warren Buffett thinks that if the tough-talking bankruptcy expert Kevin Orr could manage such a meager win against public pensions, then there is not much hope for municipals that were counting on Detroit to be the template for public pension reduction.

If that is the case, the next crisis will center on public pensions. It could easily be the hottest domestic topic for the 2016 US Presidential elections. Ordinary Americans should get ready for much higher taxes.

Digressing to the subject of Ukraine, now that Putin had largely secured Crimea, he will likely only stage his next major move in the fall. After all, Russia’s main advantage is the gas weapon, which understandably works best in the colder months of fall and winter. And a few months of waiting is probably what Putin thinks is required to allow Ukraine’s finances to fester into the open, and to allow for cooler heads to prevail. However, the Europeans and Americans, if they plan to do anything at all, should act sooner than later because time is in Putin’s favor.

Good luck in the markets.