Image Source: PexelsHere is a brief look at some of the things I am thinking about this weekend, with topics including pension funds and the recent jobs report.

1) Pension Funds Underperforming the S&P 500
Here’s an article criticizing the poor returns in the San Francisco pension system. The fund has a target return of 7.5%, but it has only hit that target in five of the last 10 years. Given San Francisco’s budget woes, there has been some questioning of this allocation.Specifically, many are wondering why the fund isn’t allocating 100% of its assets to the S&P 500 given its strong performance over time. This is the sort of commentary you always see after long bull markets, and it’s almost always misguided performance chasing.The problem here is more fundamental though because pension funds have an inherent asset/liability mismatch. They are inherently long-term funds because they’re funding liabilities for their long-term retirees and employees. But they also have short-term cash outflows that require liquidity. So, their balance sheets end up functioning similarly to banks, which are entities that tend to lend long and borrow short.Banks have to be able to manage short-term liquidity outflows from clients while also generating profits from assets that are long-term on average. When banks don’t do this well they often find themselves in a position like SVB last year, where they held too much of their assets in long-term bonds that were underwater, and in order to fund their outflows they were forced to liquidate the bonds at a loss. Pension funds have a similar problem. In fact, all investors have this same problem.One thing I’ve realized in recent years is that someone’s “risk profile” is really just a temporal liquidity profile. In other words, when someone sells in a bear market, they aren’t doing it because they’re scared. They’re doing it because they’ve recognized that they have an inherent asset/liability mismatch. They typically hold too much stock relative to their short-term spending needs, and so they sell because they want to obtain more cash to create more financial certainty.This is why I am now convinced that most risk profiling processes are ‘BS.’ Trying to assess someone’s “risk tolerance” is a pointless process if you don’t first assess their asset/liability mismatch. Said differently, I don’t care how behaviorally robust you are – if you have 100% invested in stocks and the stock market falls 50% and you lose your job, then you need to sell stocks to fund your ability to live.You become a forced seller because you created an asset/liability mismatch by being overly invested in stocks. It doesn’t matter if you know it’s a knucklehead move to sell low because you have to sell low.Pension funds have to be even more cautious than individual investors because they’re responsible for a much larger pool of participants with wide-ranging risk tolerances and liability needs. They cannot be 100% stocks because a three to five year bear market would turn them into a forced seller of equities to fund their liabilities.A five to 10 year bear market would likely force the fund to make devastating rebalancing changes at the most inopportune time. Anyhow, the point is that it’s reckless to benchmark pension funds to the S&P 500 because a 100% equity allocation would create an enormous asset/liability mismatch at times, which would put the fund in a position of forced liquidations.I can’t speak to the specifics of their allocation and the appropriateness of it because I haven’t reviewed it, but we shouldn’t pressure pension funds to take an excessive amount of equity risk because they have an inherent balance sheet mismatch, which would make that inappropriate.

2) How About That Labor Report?
Friday’s labor report was hot at 254,000 jobs. The unemployment rate fell to 4.1%, and the prior two months were revised up by 72,000. It was a good report. But we also know better than to read too much into any single report. And when we look under the hood, all the same underlying trends are still in place:

That said, this report is going to cause some concern about the rate cuts and whether the Fed is too eager to cut. I don’t think this changes the year-end trajectory of cuts, but I do think it could materially impact the pace at which we move in 2025. For now, I still expect 25 bps cuts at the November and December meetings, and if the labor market remains this robust, then we’re going to get a pause heading into the new year.There’s no reason for the Fed to overreact and move too quickly here. So this report modestly changes the likely pace at which we’ll get to 3%, but I don’t think it changes the fact that we’re still headed to 3% at some point in the coming years.

3) Give Me an Idea For My New Book
I’ve been plugging away on my new book, which should be out some time in early or mid-2025. I had to pivot earlier this year when some guy named Tony Robbins released a book under the exact same working title as mine, “The Holy Grail of Investing.” Anyhow, part of the book is a critical review and deep dive into many famous investment strategies, but I am still looking for more ideas here. If you have a specific strategy idea that you’d like me to include in the book, then please send it my way. If it’s a good one, I’ll include it in the book. Feel free to email me at cullenroche at disciplinefunds.com.More By This Author:The Most Insulting Economic NarrativeThree Things – Weekend Reading: Friday, Sept 27Three Things – Weekend Reading: Saturday, Sept. 21