SSTF June Trading Report

The SSTF has (finally) released its June trading results. June is a big month for the Fund. Every June they aggregate all of their cash positions and reinvest the proceeds in newly issued securities with maturities from one to fifteen-years. There a few observations I would like to make regarding these results. First a look at the trading blotter. I will reuse sections of this report later on so don’t get hung up now on these big numbers.

There were a total of 36 separate transactions during the month. Not a big deal for your average day trader. But consider the size of these deals. The total turnover for the month was $612 Billion. That ain’t hay. The total assets held by the Fund were about $2.6 T so SS turned over the equivalent of 25% of its book in just one month. Two observations:

-I constantly see reports in the media on SS that argue that there is no money in the TF. That the assets are not real. That there is no liquidity in the securities held by the Fund. That it is a Ponzi accounting scam. A look at the June results prove that those claims are all false. The extreme naysayers of SS should look at this and wake up. These are very real assets. They are liquid.

-From the CBO to other government officials to Wall Street and most other economists we are getting a measure of the nations debt that is a function of the Debt Held by the Public. The CBO thinks our debt is 53% of GDP because they conveniently forget about the intergovernmental accounts (where SS fits in). The total IG account is $4.5T and has trust funds that are comprised substantially of special issue treasury securities.

Both sides of this need to wake up and smell the coffee. These debts are very real. They are legally as binding as those securities held by the Chinese Central Bank. When we talk about our debt these should be included. Our debt is not 53% of GDP. It is 92%. Debate over.

The Fund acquired a strip of newly issues securities with its excess cash. The maturities range from 1-15 years. As you can see from the following the entire $270 billion of new investments was set at one common rate of 2-7/8%. This is the arithmetic average of all Treasury maturities beyond four years. What this means is that the TF is immune from the investment death trap of ZIRP. Consider the first investment of $14.996 billion with a maturity of one year. The fund gets a return of 2-7/8 on that. The fair market rate was just 25bb. The difference on this one transaction? It comes to a tidy $395mm. Who would not like a risk free investment and earn 2-5/8 over market? I would love to buy into that. But this “special deal” is only available to the TFs. Why is it that they get such a good return?

-I conclude that the TF is costing us much more than just the payroll taxes that are collected. To get a real sense of the cost you have to add in the interest. Our economy has to pay that as well. The total interest tab in 2010 will be ~$118 billion. The average yield on the portfolio is 4.7%. The recent fair market rate on an eight-year average life Treasury investment would be about 2.2%. The Fund is enjoying an above market yield of 2.5% currently. That comes to $63 billion a year. The formula that sets the interest rates is now 50 years old. It should be reviewed. It is no longer a viable methodology. Our short term financial position is being impaired so that SS can “look better” long term. We are kidding ourselves.

The flip side of this is that the Fund's % income is declining even with the formula that beefs up its results. Look at all the high coupon stuff that has rolled off. The folks at the TF must be sad to see these bonds mature. They have been living off of this fat income for years. Consider the $29.7b of 5.5% bonds the Fund has been holding for fifteen-years. That money was re-invested at 2-7/8%. The difference over the next 15 years comes to a whopping $800mm per year or a total loss of revenue of $11 billion. And that is just one small portion. The bonds that came due and a graph of the interest rates the fund has realized in the past:

The Fund has projected that this rate will return to 6% on average. I don’t think they consulted with Ben Bernanke on this. Ben is going to keep rates at artificially low levels for years. Even though the Fund benefits from a dumb 50-year old formula their revenues are going down. In a few years the numbers will be off “plan” and people will be scratching their heads wondering why.

The TF receives interest from Treasury in December and June. For June it was $59B. They will get a similar number in December. So for the full year % will be $118b. The assets of the Fund will rise in the year by about $80b. This is the fundamental problem with the Fund. They are losing money in their operations, but still show a growing surplus due to interest income. But we know that the interest is (A) declining and (B) it is artificially supported by a half century old methodology.

In June the Fund took in $56.8 billion in payroll taxes. They paid out $63.1 billion in benefits (includes $4.4 B of RR benefits). This is the only number you need to know. On a cash basis the Fund is losing billions every month. For June it was $6.3b. The interest income that hides this problem is just noise.

For the record; my numbers for July, August and September. It comes to a shortfall of $21 for the Q. By way of comparison Q3 2007 was in surplus by $10.6B. And some say the Fund has not “turned the corner”. Another thing we are kidding ourselves about.

July: +50.9 (PR), -58.7 (benefits). Net: -7.8B
August: +50.9 (PR), -58.6 (benefits). Net: -7.7B
September: +53 (PR), 58.8 (benefits). Net: -5.8B