A Long Day's Journey into Retirement Night

"I’ve lost faith in the whole darn market."

– Investor hoping to pull herself out of the labor pool, someday, quoted in MONEY

Three little numbers at the end of the world:

Average age of Americans: 48

Average amount in retirement plan: $40,000

Number of years at 6% growth to reach comfortable retirement income: 49.

But wait, there’s one more number that may be important:

Amount of money in U.S. Social Security Trust Fund: $0

We do not believe in crunching numbers here at the Daily Reckoning. Nor do we flatten them, twist them, inflate them or torture them into more appealing shapes. We just take them as they are, however disagreeable.

Painting by the numbers above produces no great work of art…but a monstrous futuristic tableau. Something Goya might have done on a bad day…or Andre Serano on a good one. For the scene is much the same all over the Western world, whether you look at France or Canada or Italy – with regional differences, more and more people are getting older and older.

In this sense, Japan is part of the picture too…with one important difference – its people are about 10 years older than those of most Western nations.

So, we wonder, what happens when whole populations get old? We look to Japan for an answer…and don’t like what we see. And then we remember something worse: the average Japanese householder never invested heavily in stocks…and never stopped saving. The picture in the U.S. over the next 12 years may be even fuglier.

"How capitalism ruins small shareholders," reads the headline of a popular magazine in France. The leftist press, like jackals spying a crippled deer, is enjoying the market’s decline. We didn’t read the article, but we can give you an answer.

The investment industry – analysts, brokers, underwriters, Fed chairmen – encourage investors to believe that they can get rich without working for the money. They don’t even have to do serious stock research – it’s enough to be "in the market, in stocks all the time." Stocks always go up over the long run, they are told. You can’t beat a diversified portfolio of growth stocks, they hear. Alan Greenspan and the best business managers money can buy will make sure the economy keeps growing, they believe.

The smart money knows better. As the boom peaks out, they are selling stocks, not buying them. A few months ago, for example, insiders were selling 4 times as many stocks as they were buying.

The whole process is designed by nature to separate the patsies from their money. Capitalism is a jungle, after all. The weak perish and life goes on. At the peak, the smart insiders sold off their holdings of techs and telecoms. Like Buffett, they left their money in only the strongest companies…and in bonds, real estate, gold and other holdings. Then, when the lie is finally discovered…the little guys drown in the swamp…while the smart money, high and dry, prepares for the next deception.

We have no quarrel with that and see nothing to investigate – for it is the way of the world…

Back in the ’90s, when all good things seemed not just possible, but inevitable, a man could imagine himself retiring young. He didn’t need to crunch numbers, he just had to tote them up. At 18% per year compounded growth in common shares – a 47-year-old with $100,000 in a 401K could see himself retiring at age 59 with a $1 million retirement account.

With so much imaginary wealth coming his way, he saw no reason to hold back on the little real spending power he actually had. Rather than save, he spent. This spending – multiplied over millions of consumers – had a remarkable effect; the whole economy was soon flooded with credit, SUVs and retail outlets. In fact, the nature of the economy changed too. Like a decent woman from the East who came to Paris and became a hooker… the money was too good to turn down. The easy money corrupts her…and then, if you believe the press reports, for we have no independent information on the subject, life turns hard.

As consumption increased, Americans imported more and more goods from the rest of the world – resulting in the biggest trade imbalance ever recorded. (This past May the deficit reached $37 billion.) Savings that might have been used to build factories and equipment disappeared. Net national savings headed into negative territory in the late ’90s, according to Dr. Kurt Richebacher, for the first time since the Great Depression of the 1930s.

"National savings in total have been squandered to pay for spending that the consumer cannot afford from his current income," Dr. Richebacher explains.

Now, the poor, hapless patsy is, say, 5 years older… and his $100,000 is still just $100,000 – if he’s lucky. He has more debt, little in savings…and, it seems everyone agrees, he can only expect around 6% growth from his stocks for the next 5-10 years. Buffett says it might be 7%. Bill Gross says it should be about 6%. Jeremy Grantham told Barron’s that investors should expect only 5%.

"At this point," explains an article in MONEY, "7% is a more reasonable expected annual rate of return to plug into retirement calculations."

But what if he turned a little Japanese in the coming years? What if he figured he could not wait 49 more years to build his nest egg? What if he decided to cut back on his spending…pay down his debts…and add to his savings?

Imagine the disappointment of the poor Chinaman… laboring on some geegaw in an unheated factory…for the benefit of an American consumer, who quite suddenly, seems not to want to buy it. Imagine the desperation of the poor sweatshop seamstress in Bengladesh. Or the assembly-line worker at the Nissan plant in Nagasaki. What happens to the world economy when the buyers-of- last-resort – the Americans – stop buying? What happens to corporate profits when their products stop selling? What happens to consumer prices when consumers stop consuming? And what happens if stocks do not bottom out in the next few months…and then do not begin a slow recovery – 5%-7% per year – as everyone expects? What if the N.Y. Dow tracks its Tokyo cousin and closes at 2,700 in the year 2012?

In short, what happens to the world economy when aging baby boomers start to act as if they were growing old?

More to come…

Your correspondent,

Bill Bonner
July 24, 2002

Day by day…one by one…the heroes of the Information Revolution are taken to the guillotine.

Mr. Bear wants blood. Mrs. Mom and Mr. Pop investor want blood too. Never before have so many moms and pops been invested in stocks; nearly 2 out of 3 American families have them. Never has there been so much disappointment with equities…and never has so much money been lost – about $7 trillion, according to a MONEY magazine estimate.

An MSNBC poll tells us that Americans are going "sour" on the economy…and 2/3rds of people asked said they wanted more investigations…more prosecutions…more blood.

Yesterday, it was the big financial houses to mount the scaffold – as Eric details below. Citicorp…Morgan… the Wall Street financiers were the toast of the town 3 years ago…gaily helping companies cook their books for multi-millions in fees. They were a key part of the miracle New Economy – allocating precious capital, as it turns out, where it was not needed, and could not be paid back. Now it is their own books and records that are feeling the heat…and their own necks that are on the block. Hardly a single illusion, hallucination or reputation of the revolutionary era remains intact. Telecoms, dot.coms, technology, shareholder value, pro forma earnings, inventory reduction, George Gilder, peace dividend, federal budget surpluses, 401k contributions (where else are they going to go but into stocks? Oh, but now, says MONEY, "all stock all the time is sooo out of fashion), enlightened American management – all have lost their heads.

Who’s next…who’s left?. Only Alan Greenspan and miraculous productivity increases. The Fed chief appeared before Congress last week, where he was mistaken for an honorable man and competent economist. Once again, he credited productivity gains and his own monetary policy with putting the economy back on the path to prosperity. But there is nothing miraculous or even unusual about the productivity numbers.

Productivity increases are merely at a cyclical high – at near 4%, where they have been on at least 16 different times over the past 50 years.

And old humbug Greenspan himself? How long before the tumbrels carry him to the scaffold?

More to come…right, Eric?


Eric Fry, reporting from Wall Street:

– Well, it’s pretty clear by now; nobody wants to own nuthin’!…Everything is for sale. "This is what I call ‘fugly’," a happily retired professional investor told me yesterday.

– I’m not sure exactly what fugly means, but I think I know what it looks like: Nasdaq down another 4%; JP Morgan and Citibank shares down more than 16% each; gold down almost $10 per ounce and gold stocks down more than 12%. (On the bright side, the dollar scored its biggest one-day gain in more than five months by jumping 2% against the euro to 98.6 cents per euro).

– But the Dow slipped another 82 points yesterday to 7,702. The (black and) blue chip index has now fallen 11 of the last 12 trading days, in the process losing a staggering 1,677 points – or 17.9%.

– And woe is the beleaguered NASDAQ Composite. After its 4% loss yesterday, the formerly highflying index has cascaded 75% from its record high in March of 2000… That’s a bear market in anybody’s book.

– "Now everything is feeding on itself and people are just getting out," Todd Leone, head of listed trading at brokerage firm SG Cowen, tells the Wall Street Journal. "It is like a herd mentality. You [see] people just dumping stocks – both professionals and individuals."

– "It’s a complete horror show," griped another Wall Street analyst.

– Taking center stage of the horror show was the blowup of Citibank and JP Morgan. Both stocks tumbled more than 16%. Morgan fell to its lowest price since 1987, and that wasn’t a great year for stocks, as I recall. For those keeping score at home, Citibank and JPM have each dropped more than 26% since last Thursday. Taken together, their losses amount to more than $65 billion of vaporized market capitalization.

– Triggering the steep sell off were press reports that congressional investigators accused the two banking giants of helping Enron conceal its true financial picture from investors and also of marketing similar schemes to other companies. It seems that the two money- center banks had offered various US energy companies the same sorts of clever "turn-key fraud" products that made Enron so successful. Says Kerr-McGee CFO Bob Wohleber, "Did we receive a pitch? Yes. Did we do a financing? Absolutely not."

– Sen. Carl Levin, the Democratic chairman of the Senate’s Permanent Subcommittee on Investigations, released an excerpt of an e-mail written by an unidentified J.P. Morgan officer that read, "Enron loves these deals as they are able to hide funded debt from the equity analysts…"

– The news of the congressional findings slammed the shares of both JPM and Citibank. (Happily for the subscribers of Apogee Research, JPM has been a short- sale recommendation for several months.)

– Paradoxically, gold and gold stocks failed to rally in response to this troubling development at "the Citi" and "the Morgan." To the contrary, gold fell and gold stocks collapsed. Gold prices suffered their biggest decline in almost five years. The yellow metal tumbled $10.90 to $312.60 an ounce. Meanwhile, the AMEX Gold Bugs Index fell a whopping 12.6%. "I never knew that index existed," a friend of mine said to me yesterday, "I’ll add it to my list of indexes to watch go down."

– It is strange enough that gold stocks would collapse when fear reigns on Wall Street. But it is stranger still that gold and gold stocks are collapsing amidst the simultaneous meltdown of America’s two largest financial institutions – Citicorp and J.P. Morgan.

– What kind of bear market is this? Why did the gold stocks fall so hard? Maybe because they are "stocks"… and that’s reason enough. Clearly, there are a lot of "forced sellers" in the stock market – from mutual fund managers facing redemptions to individual investors facing margin calls. The common theme is that these forced sellers tend to sell whatever they can in order to raise cash. Gold stocks work as well as anything else for that purpose.

– Some day soon, the forced selling will likely come to a halt for a while, and then a great big trading rally will get underway…or not.


Back in Paris…

*** What’s this? The price of gold took a big hit yesterday…and gold stocks got hit again, too. Meanwhile, the dollar rose. What could be going on?

Worldwide deflation is our guess. The Chinese are making more of everything, cheaper than anyone. So are the Indians. And in the West, people are getting older and poorer every year. The Financial Times estimates the global cost of the bear market and economic slump at $35 trillion. Stock markets all over the world have been hit hard…with the French bourse down about 30%…and other European markets down like amounts.

Ten thousand Americans turn 50 every day. Facing retirement, with little hope of another stock market boom to make them rich, people prepare in the old fashioned way: they save. The more people save, the less they spend. Prices fall…and the whole world sinks into a long, dark, deflationary night. More below…

*** When will this bear market finally end? After the crash of ’29, stocks hit a bottom in ’32. But, according to Bob Prechter, the long, dark night of the ’30s left investors so demoralized that P/E ratios continued to fall and were lower in ’42 and ’49 than they were in ’32. Again, in ’80 P/Es fell below the bottom they hit 6 years earlier.

In Japan, the trendsetter, the Nikkei Dow, closed at 10,215 yesterday – still a long way down from its high, near 40,000, set in 1989!

*** Oh la la…from one hallucination to the next… Obesity and criminality are what threaten to put most Americans in an early grave. But it is the War Against Terror that seems to make politicians go mad.

"The Bush administration’s plan to recruit one out of every 24 Americans for its proposed domestic spy program – TIPS, the Terrorism Information and Prevention System – has met surprisingly little political opposition, notwithstanding House Majority Leader Dick Armey’s attempt to block it last week," reports the Independence Institute.

In the name of protecting freedom, of course, "A new bureaucracy will be formed to record suspicious activity reports from the 12 million citizen informants," writes Paul Craig Roberts. "Once the police state bureaucracy is in place, it will never be dismantled."

"The results in the United States will be the same as in East Germany. Jealousies, rivalries, misperceptions and many inflamed imaginations will result in the reporting of many innocent people, who will be investigated, questioned, detained and, on occasion, framed…Will our government do us more harm than the terrorists?"

*** Henry turns 12 today. He likes his Playstation II.