by Michael Myers on December 6, 2009
Daniel Amerman describes the how deflation and inflation combine to reduce the purchasing power of the dollar. Devaluing the dollar bails out governments and companies who have underfunded pension plans. Unfortunately, it transfers money from savers to debtors in the process. Excerpts below.
Link: “Surviving The Cure For Asset Deflation” by Daniel R. Amerman, FSU Editorial 12/03/2009
Many people would say that the true lesson of the early 2000s in the United States is the demonstration what an extraordinarily loose credit policy can do in terms of asset prices. Low cost and easily obtainable mortgages led to a real estate bubble, even as easy and loose corporate bond markets led to a booming private equity market, with leveraged buyouts being an important factor in maintaining an overvalued stock market.
The problem is that Wall Street, the government, and much of America has effectively bet everything they have on these asset bubbles not only staying inflated, but continuing to expand. Pensions long ago became “the tail that wags the dog”, for state governments, local governments and most major corporations. Almost every state and local government in the US that has full time employees has entered into promises for future benefits, which it anticipates being unable to cover from ongoing tax revenues. Some of these promises are unfunded, others are fully “funded” (meaning they have adequate current portfolios given the investment return assumptions), but the mechanism all comes down to the same thing. Via the mechanism of the markets, vast sums of money and resources will flow from the outside economy into the local economies for all the states and cities, and will pay for the legally binding promises that would otherwise be unaffordable from current revenues. In other words – the asset bubbles have to not only be maintained, but must continue to inflate, or else the pension obligations bankrupt every level of state and local government.
Governments aren’t the only ones relying on asset bubbles, so are most of the major corporations. Oh, the defined benefit plans are disappearing fast in terms of the ability of workers today to participate, but there are still tens of millions of workers covered, and many trillions of dollars of pension and health care benefits that will have to be paid. Future benefits that would destroy corporate profitability, and drive many corporations into bankruptcy. [click to continue…]
by Michael Myers on December 6, 2009
Governments and non-governmental organizations around the world apparently have promised more than they can deliver to the citizens and voters.
For the United States, John Mauldin says that we must open the borders to allow more people to immigrate. Unfortunately, the policy conflict between opening the borders and maintaining a war against terrorism is glaringly obvious.
More immigration can create more revenue for Social Security and Medicare. Obviously, the U.S. Government is allowing immigrants to enter the U.S. However, it seems a deceptive way to make amends for the unsustainable promises made by our leaders.
Link: A Conversation with John – Thoughts from the Frontline Weekly Newsletter – John Mauldin
Demographic changes are predictable: we know how many people are going to be here in forty years because they’re already born. We know how many forty-year-olds we’ll have in forty years because they’re already born. So, we can see these changes coming at us.
If you’re Japan, you’re walking into a demographic nightmare. Russia is a demographic train wreck. And it’s not going to be but a few decades, in the grand scheme of things, until Iran will have more people than Russia. That’s got to be fit into your equations. You’ve got to look at these large, broad changes that are happening.
In the US, we’re going to be running into the freight train of Medicare and Social Security. There’s just not any way to get around it. We’re going to have to make tough generational decisions about how to handle that. And how we handle it is going to have enormous implications for our economy. If we handle it the way it’s likely to be handled – which is by raising taxes – then we have said we’re making a decision, conscious or not, that we’re going to become Europe. That means high residual unemployment and difficult, slower growth of individual opportunities.
There are other large changes when you talk about the demographic issues. Europe would have to take massive numbers of immigrants in order to support their system. They’re just not prepared for that. Neither is Japan. The US is blessed with a world population that wants to come here and are not very culturally different from us – especially the Hispanic populations. We’re going to need those immigrants. I think that one of the most economically suicidal things we’re doing today is trying to figure out how to close the borders. We need to be doing the opposite. We need to figure out how to open the borders. It needs to be a more rational policy than we have now. Again, you have to put those things into the financial equations.
by Michael Myers on December 3, 2009
Humberto Cruz at Boston.com reports that 51 percent of US households are now considered at risk of not having enough money to sustain their standard of living in retirement.
Link: Half of Americans at risk for not having enough in retirement, survey says – Boston.com
That’s the case even if they work until 65 – two years beyond the current average retirement age – and take a reverse mortgage on their home and use all their assets, including the mortgage proceeds, to buy an inflation-adjusted lifetime annuity to maximize their income.
In 2004, about 43 percent of households were considered at risk, based on the center’s analysis of a triennial Federal Reserve survey of consumer finances. In 2007, the number rose to 44 percent, the center now estimates, based on that year’s Fed survey. Without waiting for 2010 survey, the center’s researchers decided to update the index in response to the recent recession and economic crisis.
The index needed updating because the 2007 survey “reflects a world that no longer exists,’’ the center’s report says, with the Dow Jones Industrial Average near 14,000 and housing prices only slightly off their peak. [click to continue…]
by Michael Myers on November 10, 2009
Donald Luskin, chief investment officer of Trend Macrolytics, describes why gold is gaining favor with people concerned about the future of the dollar. Two caveats: governments sometimes seize gold when it becomes a very compelling safe haven; and, gold hit an all-time high at $1,100 in monetary terms, but $1,000 in 1980 (the previous high for gold) translates into about $3,000 into today’s dollars (adjusted for inflation).
On that note, anyone concerned about retirement income should think about the future in terms of purchasing power. If inflation jumps up to 10% (it reached 19% in 1981), money in savings accounts will be devastated. Inflation transfers wealth from retirees to workers.
Link: $300,000 of Gold, in the Palm of My Hand
The longer the Fed keeps interest rates at zero, the more worthless paper money becomes. That creates the impression that gold is more valuable — in fact, this week it hit all-time highs at almost $1,100 per ounce as the Fed announced the indefinite continuation of its zero-rate policy. But that’s not gold becoming more valuable. That’s the paper money in which the price of gold is denominated becoming less valuable.
In other words, gold is the constant. Its value doesn’t change. Its dollar price changes, but not its value. So when investors come to me and ask me how they can hedge against the falling value of the dollar, I always tell them to buy gold. [click to continue…]
by Michael Myers on November 4, 2009
Below are some reasons that people I know are holding gold’s little brother, silver.
Link: Invest in Silver Over Gold – Seeking Alpha
As we get closer to the day inflation kicks into full force, it is worth noting some common gold:silver ratios. History has more or less showed us that the historical ratio has averaged between 20:1 – 25:1 (depending on the measured time horizon). I personally like to break it down using different ratios for periods of low to moderate inflation and high and double digit rates of inflation. As a rule of thumb for times of low to moderate rates of inflation (below 5 or 6%), I use a ratio between 45:1- 55:1. During times of high to double digit inflation (late 70’s style) I revert back to the historical ratios between 15:1-30:1. Given the current low level of “headline inflation” (which is nonsense anyway), which has to inevitably rise over the coming decade, silver is very attractive on the gold:silver ratio, currently at 64.36. Though inflation is said to be “very low” (according to the governments convoluted measure), my expectation for it rise sharply over the coming years, makes silver an absolute bargain.
Take a conservative estimate of the future gold price when inflation is in full force, say $1300/oz, silver using a ratio between 25:1 to 40:1, would give you a price somewhere between $32.5 and $52.5. It need not even be take that far to see the price appreciation potential. Assume the price of gold remains at $1060/oz throughout the time when inflation plagues consumer prices, silver should still be between $26.5-$42, which is a substantial rise on a percentage basis. [click to continue…]
by Michael Myers on October 13, 2009
Retirees dependent on pension systems for income to maintain their standard of living may be disappointed, according to an analysis by Pricewaterhouse Coopers reported in the Washington Post. The trade-offs of high investment returns with high risk are discussed. Excerpts below.
Individuals whose employer pension is based on a defined benefit plan may want to plan to supplement their retirement income from other sources. The choice of how to save and invest is more complex than ever. These are challenging times for investors and future retirees.
Link: Steep Losses Pose Crisis for Pensions – Washington Post
The financial crisis has blown a hole in the rosy forecasts of pension funds that cover teachers, police officers and other government employees, casting into doubt as never before whether these public systems will be able to keep their promises to future generations of retirees.
The upheaval on Wall Street has deluged public pension systems with losses that government officials and consultants increasingly say are insurmountable unless pension managers fundamentally rethink how they pay out benefits or make money or both.
Within 15 years, public systems on average will have less half the money they need to pay pension benefits, according to an analysis by Pricewaterhouse Coopers. Other analysts say funding levels could hit that low within a decade. [click to continue…]
by Michael Myers on October 11, 2009
Many employers with defined benefit plans will be unable to make the required contributions to their pension plans, according to a consulting firm analysis. The employers are asking for funding relief from government regulators to help them lower funding requirements. Excerpts below.
If your employer contributes to a defined benefit plan for your retirement, you may not get what you expect. You might need to consider an alternate plan for saving for retirement.
Link: U.S. Employers Face Huge Pension Funding Tabs Without Relief, Watson Wyatt Analysis Finds
Despite recent increases in asset values and regulatory relief from the Internal Revenue Service (IRS), U.S. employers will be required to contribute $89 billion into their defined benefit (DB) plans in 2010 and more than $146 billion in 2011 unless they receive funding relief from the federal government, according to an analysis by Watson Wyatt, a leading global consulting firm.
“The combination of a deep recession and new pension law has landed employers in extraordinary circumstances, and they need temporary funding relief to lessen the enormous pension contributions required in the next few years,” said Mark Warshawsky, director of retirement research at Watson Wyatt, who testified on these points at an October 1 House Ways and Means Committee hearing. [click to continue…]
by Michael Myers on October 9, 2009
In this blog post by John Michael Greer, the importance of long-term investing in real assets becomes evident . Excerpts below.
Link: The Archdruid Report: The Metastasis of Money.
If economists took a wider view of the history of their discipline than they generally do, they might have noticed that what most of them consider a fundamental feature of all economies worth studying – the centrality of money – is actually a unique feature of an economic era defined by cheap abundant energy. Since the fossil fuels that made that era possible are being extracted at a pace many times the rate at which new supplies are being discovered, current assumptions about the role of money in society may be in for a series of unexpected revisions.
In an ironic way, this process of revision may be fostered by the antics of the world’s industrial nations as they try to forestall the Great Recession by spending money they don’t have. The economic crisis that gripped the world in 2008 was primarily driven by a drastic mismatch between money and wealth. When the price of a rundown suburban house zoomed from $75,000 to $575,000, for example, the change marked a distortion in the yardstick rather than any actual increase in the wealth being measured. That distortion caused every economic decision based on it – for example, a buyer’s willingness to go over his head into debt to buy the house, or a bank’s willingness to lend money on the basis of imaginary equity – to suffer similar distortions. Now that the yardsticks have snapped back to something like their proper length, the results of the distortion have to be cleared out of the economy if the amount of money in the system is once again to reflect the actual amount of wealth.
Yet this is exactly what governments and businesses are doing their level best to forestall. Governments are scrambling to prop up economic activity at a pace the real wealth of their societies can no longer support; banks and businesses are doing everything in their power to divert attention from the fact that a great many of the financial assets propping up their balance sheets were never worth anything in the first place and now, if possible, are worth even less. Both are doing so by the simple expedient of spending money they don’t have. As government deficits worldwide spin out of control and the total notional value of the world’s derivatives market climbs steadily above one quadrillion dollars, the decoupling of money from wealth is even more extreme than it was at the height of the real estate bubble.