Long ago my dear friend Peter Drucker wrote an article about the phenomenon of creeping pension fund socialism. His premise was that the capitalization of the stock markets was becoming more and more concentrated in the hands of passive pension managers, who derive no work or savings incentives from the ownership and fail to perform the owners governance responsibilities.
The result is a system where all companies are owned by the generic workers bur no workers own their own companies, a recipe for decline. The governance scandals of the past few years would not have surprised Peter.
There are two developing stories in this regard worth watching. One is the descent of vulture buyers on US manufacturers. The other is the growing equity stake the PBGC is taking in companies after bankruptcy.
The inexorable margin pressure put on American companies by global price arbitrage systematically erodes their ability to service the (pension and health care) liabilities on their balance sheets. This pushes them into bankruptcy court, where these liabilities are transformed into equity securities held by the PBGC, which is becoming the airline owner of last resort in America.
The companies, themselves, fall into the hands of vulture buyers, who operate without the burden of debt service during reorganization. this produces further pressure on prices and margins, further failures, further consolidations.
I spent the day today with an extraordinary group of managers of a great manufacturing company. They are unquestionably the best in the world at what they do. Yet they are looking at the carnage going on among their competitors with concern when thinking about how to grow their business. I wish Ben Bernanke and the FOMC members had been in the room with us today. It would certainly change the things they worry about.
This pressure is the force keeping inflation and bond yields from rising and what will ultimately break the back of the Fed’s current policy. It is not going to go away.