Blog: Dermot Cole
Permanent Fund and its advisers should say where the forecasts went wrong
Published Tuesday, February 10, 2009
When the principal consultant and the executive director of the Alaska Permanent Fund appeared before the Senate Finance Committee Tuesday, this is what I would have liked to hear: “We didn't see the collapse coming. We missed it. Just like most of the other high-paid experts."
A simple statement in plain English would be a good starting point in helping Alaskans understand why the state’s main savings account was transformed from a $40 billion fund into a $29 billion fund in a little more than a year.
Mike Burns, the executive director of the fund, said the savings account has been an “incredibly successful socio-economic experiment,” though “it’s not as successful as it was a year ago.”
Burns said that total deposits to the fund over the decades have totaled $13.4 billion, while $16.7 billion has been paid in dividends and the fund now contains about $29 billion.
Yes, the fund remains a success when looked at through the long lens of history, but the recent past has not been so successful.
Michael O’Leary, executive vice president of Callan Associates, referred to the “painful history of 2008,” and said it was a “terrible market environment for all market classes.”
But he didn’t address this topic: Last summer the permanent fund and its advisers did not say anything about going over a cliff.
With the gift of hindsight everything is clear and there is no uncertainty, but the fund and its managers should address this directly.
Perhaps the defense from the fund is that most investment professionals did not see the cliff before they were in mid-air, which is why so much of Wall Street is in ruins. Or that the fund does not invest for the short term.
The S&P 500 lost 37 percent during the year, while the permanent fund lost 25 percent, which was about average for public funds, according to O’Leary.
In January, the permanent fund issued a press release saying that even the endowments of Yale and Harvard suffered huge losses in 2008. Presumably, those funds are run by smart people.
In July 2007, the five-year outlook for the permanent fund from Callan Associates said that the median forecast for the account was that it would contain $42.2 billion in this fiscal year.
It suggested a range in market value of $34.4 billion on the low side to $50.2 billion on the high side.
If I read the chart correctly, they saw no chance that the fund would be worth what it is today. I asked the permanent fund for clarification on that point, but did not get a response Tuesday.
If you go to the permanent fund Web site now and click on the link that is supposed to take you to the five-year outlook for the future, you get a message that says “APFC staff are in the process of updating the five-year outlook.”
They should also update us on what happened in 2008, whether their response to the chaos was reasonable and address the five-year forecasts of recent years and their accuracy.
Once again Mr. Cole. You are right on.
I saw it coming, my in-laws saw it coming, Glen Beck saw it coming, Congressman Ron Paul saw it coming and his supporters saw it coming.
"Presumably, those funds are run by smart people." - I say, smart but blind. No common sense people. BTW, we took the little money that we had in the stock market out before it collapsed, so did my in-laws.
EuMesmo, so you must be amused by recent events and the suffering of the little people... Tell us, great prognosticator, what does the future hold?
Krissy, I'm not amused by suffering. My point is that this financial crisis was predictable. Check this website: http://valuefreedom.blogspot.com/2008/05...
You will see that this guy knew exactly what was to come. He was a lone voice of honesty crying in the wilderness of the dishonesty of Congress. His warnigs start in late 70's, so, start at the bottom of the page year by year and you will see how this whole mess was planned.
The hand writing has been on the wall for some time now, that;
1.) the housing market was in serious trouble, (blind)
2.) the financial industry was bouncing along like happy drunks with pound-foolish piggy banks (greed), and
3.) any regulatory over-sight had been 'removed from effective control' with political interference. (ignorance).
BLIND, GREED and IGNORANCE is a dangerous combination.
It is easy to second guess, and hide-sight is much better than foresight...but the important factor is not so much where we are at with the present situation, as it is where are we headed, Have we learned any lesson from the 3 witches, or are we headed down the trail same direction with even worse results?
Dermot, a small quibble. After the bad day the market had on Tuesday I'd say the fund is closer to 28 billion than 29 billion. APFC has not updated their figures (from Tuesday's loss) as I post this.
The massive loss of our money over the last year was avoidable. Key people were challenged about the asset allocation strategy of the fund during the Palin transition. The typical response heard was, essentially- 'this is how everyone else does it'. (My words). More specifically one heard talk about long term averages, etc.
The problem is that it is very difficult to get people to think outside of the box. For most managing the Fund, the safest thing that they can do is to do pretty much what everybody else is doing. It takes less work, less brainpower, and a whole lot less stress to stay with the herd.
What is really troubling is that the 12 billion APFC managers have lost was enough to build the Susitna Hydroelectric Project, (with enough money left over to build the road to Nome) or to build the Alaska Gas line.
The Legislature, the Public, and the Governor all bear some responsibility for not challenging those we entrusted with our money to have had the conviction to invest in Alaska. With trillions of dollars of natural resources and a critical need to build our infrastructure, opportunities to invest here and earn excellent rates of return abound. Just owning a gasline could earn Alaska 14% on equity per year. A return of 14% is double the rolling ten year, inflation adjusted, average of the Fund.
Tranquility_Base: Well stated, and I appreciate the points of clarifications... Some Alaskans have had trouble with the "export" of Alaska's revenue and lack of in-state investment since Governor Jay Hammond's administration.
When the eggs get to far away from the nest, they usually end up in someone else's omelet.
Building up the infrastructure and assets of distant real estate speculation and/or commercial paper, merely to say that we have contract collections or a moderate rate of return on fixed assets in a speculative market, with little or no control over any fluctuations in value...is a good abbreviated description of the Alaska Permanent Fund.
With the flash out the window of substantial BILLIONS of Dollars from the fund...the prospect of the re-institution of the State of Alaska personal income tax is not far behind.
Cold- back at you. You're correct, we will be 'out in the cold' shortly because of the path our 'leaders' are taking. All sorts of onerous taxes- including a tax on income as well as the loss of dividend payments- which must be appropriated by the Legislature- are in our future.
Maybe someday Dermot will write a book about how Alaska destroyed its economy. It probably will not be a best seller though, as too few Alaskans will be here to buy it.
Most folks education and experience don't seem to go beyond a stack of magazines on the coffee table.
"Lord, please give us another pipeline...
we promise not to piss this one away too !!! "
A pipeline is just a big tube, or a little tube..
it's just a dang plumbing project.
..it's not a magical cash-cow gifted from the gods who only scary expensive celebrity sorcerers like Dick Cheney can conjure up.
In todays economic climate there is only one bank in Alaska that will provide the capital to finance a pipeline in a way that makes economic sense..
any other financing proposals are just plain nuts, like the daily psychosis you get in the newspaper everyday.
As far as politicians and government and industry experts go..
I don't know of a danged one who I'd hire to paint my house..
they'd waste all summer reading the instruction manual, then finally roll the paint on in a rainstorm, and charge me a nosebleed price for a nauseating headache.
This is the 21stCentury folks..
don't believe those dyslexic braindamaged rich kids in the corner who are telling you it's the 12thCentury.
...the very thing that makes them rich, makes you poor.
Tranquility_Base: Yep, my thoughts too. Kind of sad setting back and watching it happen. I remember how much the State of Alaska use to take out of my check...and all the modern conveniences that people have now grown accustom to use and enjoy. Like more than one phone in a village and getting drinking water from some place other than a creek...and won't even go into the honey bucket trips.
Distant Thunder: You started laying that poly pipe yet? I keep waiting for the "marsh gas express" down the Koyukuk. I quit reading printed paper material...the collection of feasibility studies and government long range plans coming out of Juneau and Washington DC with absolutely no follow up to get the brain child doing something other than "thinking about it" got to be cramping my living space.
I saw it coming over a year ago. That's why all the 401-k was transfered to bonds and nothing was lost. The fund managers have lost billions by using formula investing. X% supposed to be in the stock market, so when stocks go down, they dump in MORE $$$ to keep the percentage the same. How dumb is that??? In a down market they get their clock cleaned. What idiots!
P.S. As far as the coming year goes, buy gold!
I saw it coming when Barbara had a little talk with Sandra in the ladies room at SCOTUS ...
.. most Americans must be braindead from watching too much ESPN, FauxNews, and the rest of MainScreamMedia
Nobody seemed to care about who the culprits were behind the collapse of FSLIC..
but they screamed frantically when they discovered how difficult it was to remove the Bush/Cheney bumpersticker from their car's paintjob.
Even Mugabe of Zimbabwe pales in comparison to the Hogs in the Trough on the American Pig Farm.
...got cholera yet?
Native Son: In December of 2008, I talked to Oxford Metals in Fairbanks about buying gold. They wanted a commission of 12% to 14% per ounce to sell to me which amounted to approx. $100 an ounce!! I can only imagine that they want the same "cut" to buy it back when you need or want to sell. If so, I would be paying a load fee of 25% for a total transaction, thus making a purchase of $800 cost me $1000!! So once again, the "brokers" are the ones who will make the money. I too, believe that gold would be a safe investment. In checking with many of the companies that are now running ads, I find similiar quotes and believe me, there are now plenty of these companies out there.
If you know of anyway to purchase at a resonable rate, I would sure appreciate any insight as to where to go. Thanks
Well, Jeez. Everybody from Bush and McCain on down spent all last year telling us the economy was in great shape, when the recession had started in Dec 07. If the feds are going to lie their butts off for political reasons a lot of investors are going to get burned.
i don't buy it.
Every market indicator was showing warning signs of collapse. You would have to be blind to not see this coming. I know I did and transferred all my money into stable bond funds to cut my total loss for 2008 to just 5%. Maybe I should be an investment banker, apparently I know better than all the "experts."
NINAism was the cause, no income, no assets and you get yourself a $500,000 home that is really only worth $100,000 and then you loose you minimum wage job and the bank forecloses on you and the bank is left with no income, no assets. The economists are saying that once the government really sees how much the banks are in the hole, it is going to cost the American taxpayers trillions and trillions to make them liquid again. Get a gripe on reality and face the fact the pipeline will not be built by government and it may not be built by private interest.
In the meanwhile, I can only think of the future comments when the PFD checks start getting smaller and smaller and there is no extra check to buy your heating oil. If the special session is called in May to take funds out of the State's savings accounts to pay out this year's dividend, do you think they may reduce the amount they will pay out. Will the legislature be willing to cash out $1.5 billion in savings or say we will only pay a portion of it because we need to save the money for the future.
I know almost nothing about economics and even I knew it was going to tank. We couldn't keep this up forever, living beyond our means, bad mortgages, skyrocketing housing costs, fuel costs going through the roof, etc. I agree with out_in_the_cold, BLIND, GREED and IGNORANCE = bad things happening.
Right on target Mr. Cole.
One simple question though: what in the world to we pay all these people for? Once again, if you can't do your job, and know about these things, someone should fire you, and not give severence pay.
Come on, everyone knew this was coming. Maybe we should hire Fairbanksgas.
calendar, Native Son is right. Don't buy fake gold (paper), buy the real thing. Go to the coin shop on Second Avenue and you will find a great honest local guy that will tell you the best way to buy the gold and will charge very little mark up. You will feel so good when you hold the real thing in your hand.
There must be another coin shop on Second Ave with an honest guy with little mark up. Do you work there EuMesmo?
I always fancy platinum.
No, I don't work there. I just bought a couple of silver coins there. I was impressed with the services of Mr. Jerry. (sorry, I don't know how to spell his last name)
Long term investments can not and should not be judged based on it's daily nominal value. For a dollar today is not what a dollar is a year ago or what a dollar will be in the future. Long term investing is more about risk management. If the fund was only invested in 'safe' investments it's nominal dollar value would be destoyed by inflation. And all would say why didn't we invest in shares which have returned hundreds of % points over the decades. And now as a result of a market correction a cry says why? A better questions is why did the fund rise so fast to $40 Billion? Risky assets. But a good stratagy for the long term. Deflation in prices of most things is here - homes, food, fuel... Possible $29B has the same purchasing power of $40B last year - with less taxes? We need to stop judging out investments on such short term view points. To do so would destroy even faster our nest egg.
EuMesmo, Okay, so I follow your advice and buy gold, I assume as much as I can swing. Okay, lets say that everyone starts doing it and the gold standard starts to reassert itself to the detriment of the dollar. Then the Fed (as it did before) declares gold ownership illegal and everyone is to cash it in by the end of the month for some predetermined amount which knowing the gov will be far less then I paid at the local coin shop. How is owning the real thing going to help me then, when I can no longer use gold for goods and services and because it is illegal to own is actually quite worthless?
Allah-hu-akbearable....
when the Fedz outlaw gold again they might as well outlaw barter too..
and they'll have to outlaw platinum, palladium, rhodium, iridium, tellurium, diamonds, emeralds, beryl..etc.
...even standard commodities will be attempted to be controlled by the Dept.of Bonehead Obscurity.
The Fedz will have become theMafia [if they aren't already]
..the key ingredient is the global crisis of Centrism that is unfolding before our eyes this year..
many are still calling it a banking crisis, but it's the GunvermintPot calling the BankstersKettle BLACK.
The worlds populations are wakingup to universal free communications-- we can barter on an individual local basis while buying direct from the factory worldwide now..
no middlemen... no parasites, no deadweight.
People are waking up to the truth..
it's not a pretty picture..
and it's a tad bit more disgusting than realizing one morning that we got pie-eyed drunk the night before and wound up spending the night upside-down head first in the outhouse hole.
The opposite of Progress is Congress, and it's self evident they are absolutely clueless..
just like all polititians who run for office, once they get elected they realize they are "The Dog that bit the tire of the Passing Car"...
they're as useful as a moose in the headlights.
..Direct Democracy is coming---
http://ni4d.us/
Thank Goodness there weren't more students killed at Kent State..
Nixon wouldn't have cared less, but it was there wasn't more than 5 out of 100 triggerhappy National Guardsmen that day.
Alaskans in Fairbanks wanting to buy gold??
..isn't that kinda like taking sand to the beach??
All you gotta do is ask and I'll show you how to build a proper sluicebox.
In Alaska, if you aren't a miner, then yer a whiner.. or too old to swing a shovel.
http://bb.bbboy.net/alaskagoldforum-view...
anytime of the year is good 4 gold.
I don't buy any of it! If you were some kind of "economic forecaster" and you didn't see this coming - maybe you better look into a new line of work. I've been watching the stock market for nearly 10 years now. It is highly unpredictable - but, the economy has been making it so obvious! They couldn't have Not seen this coming!!
Jerry is the best I've found locally. But don't try to get platinum. Nobody has it. Gone. Stick with gold or silver.
As for this financial mess, listen to the jokers from Obama on down. All they are really trying to fix is the credit system. They think things will be OK if everybody starts borrowing again.
But borrowing is what got us into this mess. Even at low interest rates, eventually the bankers end up with all the money. We have come to the end of the Credit Economy. We have come to the end of the Consumer Society. WAKE UP! Your life will never be the same. The jokers in Washington want to return to business as usual, but Americans are tapped out. The golden goose is dead. They can squeeze very few more interest payments out of us.
"We have come to the end of the Credit Economy. We have come to the end of the Consumer Society. WAKE UP! Your life will never be the same."
Isn't this all just like a ponzi scheme or a chain letter that has ran its course? Perhaps that is all life really is, a World Plus scheme that eventually runs its course at a species by species level. Now where do we go from here? I think nobody knows the answer at this point.
Distant Thunder, your response to my stupid gold statement seems to make as much sense as anything else I have read, and a lot more entertaining! Waking up head first in the outhouse hole and the dog that bit the tire of a passing car had me in stitches! I liked the analogy I heard on NPR the other day. Its like the movie Titanic where they have hit the ice burg, the water is coming in at an alarming pace, the band is still playing and the rich are still partying topsides, while the coal shovelers in the boiler room starting to drown. Interesting times indeed!
akbearable, so, if they out-law your guns are you to going to give them all up?
akbearable, so, if they out-law your guns are you to going to give them all up?
No, but guns are for a different purpose then gold. An illegal gun will still shoot and that is its value. If gold is illegal then where will its value be?
So who wants to go through 2009 with no PFD? If our elected representives don't get they're poop in a pile soon, there may
not be a PFD this year! Who'd ever had thought?
Jerry Cleaworth at Alaska Rare Coins is THE man to buy gold from. Much less mark up than Oxford. You may not agree with his politics ( I do, Fairbanks is lucky to have him on the council) but he is completely straight forward and reasonable in business.
Yep, the situation is starting to look like the kids game of ROCK, PAPER and SISSORS. If gold is so valuable, how come the Gold Rush era prospectors a hundred years ago were willing to give up a whole sack of the yellow rocks for evening at the RED DOG SALOON, if Diamond Toothed Gertie didn't get it first?
<<<<<<I saw it coming, my in-laws saw it coming, Glen Beck saw it coming, Congressman Ron Paul saw it coming and his supporters saw it coming.>>>>>
bull!
if these guys, inculding yourself, "saw it coming", you and they must be FILTHY wealthy since you/they shorted everything and are rolling in the bucks!!! how much did you make? your in-laws? howabout you release copies of your trading statements? has beck-o posted his somewhere???
there are ALWAYS doomsayers at all times. the old saying, "even a broken clock is right twice a day" seems about right...
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