A Long Day's Journey into Retirement Night

A DR Classique, originally published on 24 July 2002. This essay inspired themes in "The Hard Math of Demography," Chapter 7 of Financial Reckoning Day – now officially an International Bestseller.

"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:

1. Average age of American baby boomers on January 1, 2001: 46.

2. Average amount in retirement plan: $50,000.

3. Number of years at 6% growth to reach comfortable retirement income: 63.

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

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

Aging Baby Boomers: A Monstrous Tableau

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 uglier.

"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.

Aging Baby Boomers: All Stocks, All the Time

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 of the bubble, 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 this. We 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.

Aging Baby Boomers: Too Good to turn Down

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 corrupted her…and then – if you believe the press reports, for we have no independent information on the subject – life turned hard.

As consumption increased, Americans imported more and more goods from the rest of the world – resulting in the biggest trade imbalance ever recorded. 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 Richebächer, 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. Richebächer 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%.

Aging Baby Boomers: Turning Japanese

"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 63 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 gee-gaw 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 Bangladesh. 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 NY 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?

Your correspondent,

Bill Bonner

November 19, 2003 — London, England

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the NY Times and International Bestseller: "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century" (John Wiley & Sons).

We live in a nation of clairvoyants, dear reader.

"Yesterday, the Commerce Department reported that retail sales were disappointing. The big chain stores are also reporting lower-than-expected sales. People seem so negative now…" said the Bloomberg interviewer, "with all these corporate scandals and this lingering unemployment… and now sluggish consumer spending…don’t you think that stocks will move up when people turn more optimistic and become more confident?"

Just as people put on a bright face when they feel worried…we would have said, if we’d thought of it…they often put on a gloomy one when they feel most confident.

Not only have Americans rarely been more positive on the future…they have never been so sure about it. Everyone seems to think he knows what will happen…and most people take action to make sure things turn out even better than expected.

How else to explain buying stocks at today’s high prices? The danger is on the downside, a veteran investor might say, simply because there is so much more of it. But today’s callow punters are not worried. They’ve looked into the future; they know prices will go up, and they’ve bought shares to take advantage of it.

How else to explain mortgaging your house…or running up credit card bills? In a normal world, people are reluctant to borrow and reticent to spend; they save money ‘for a rainy day’ or ‘just in case…’

But today’s super-confident residents of Squanderville need no savings; they’ve looked into the future. They know it never rains. And they have no need of a cash reserve for ‘just in case’; the cash comes along ‘just in time’ to make the monthly payments, and that is all that matters.

The Wall Street Journal surveyed 53 economists. Squinting to see tomorrow’s Commerce Department reports, these fellows could make out not only the headlines…but the small print, too. GDP will grow by 4% this last quarter, they said. Next year, in the first quarter, it will grow by 4.2%.

Meanwhile, the Soothsayer in Chief tells us that he may not read today’s newspapers; but he must read those of the future! How else could he know what kind of world we would have had if he had not taken action against Iraq when he did? He would do it again, said he yesterday, because the "safety of the world" depended on it.

And so does the safety of the world economic system depend on a special trait of the U.S. Federal Reserve: its mystical ability to pass through some sort of magic mirror and stroll around in the future.

Of course, Fed governors could sit back and let lenders and borrowers work out for themselves what rates to pay. But that would betray a humble ignorance and remarkable restraint. Fed governors love the world created by the ‘free market,’ but with their special talent for foretelling the future, they believe they can create a better one.

It is almost too marvelous to believe, isn’t it? We mean, that so many people have been given such a gift – a gift not usually granted to humans – the gift of prophecy. What a comfort it is to know that so many Americans are capable of it.

Over to Addison with more news:


Addison Wiggin in Paris…

– What’s this…the day of reckoning so soon? We were just getting used to toiling alone in despair over the bear market rally.

– And then, last night, gold goes and does a head fake over $400 in Asian trade…and traders feinted a run on the dollar. The greenback skidded to an all-time low against the euro at $1.20, if only briefly. Both moves were beaten back…but for the first time, the critical resistance points at $400 and $1.18 were crossed.

– Upon hearing the news this morning, your Parisian editors suffered a wave of mortal fear for our benchmark Red Wine indicator. And but for the Bank of Japan, we might have seen our elixir spike to unimaginable highs of 10 dollars a bottle!

– "Overnight, in the Tokyo session," writes Chuck Butler over at the Everbank World Currency trading desk, "the Bank of Japan stepped in and wrapped a tourniquet around the dollar and stopped the bleeding, by buying [our] currency and selling theirs. Yes, they intervened once more…The BoJ buying of the dollar brought the dollar back to $1.19."

– Of course, we’d like to raise a glass to our friends at the BoJ. But if this is a strategy they’ve developed to help keep their trade balance in the black vis à vis the U.S….we suspect they’ve got their work cut out for them.

– First of all, here’s some big news we here at the Daily Reckoning have been suspecting would arrive soon enough: Foreign investors and central banks currently propping up America’s credit-bubble – and with it, the international Dollar Standard itself – have begun to lose faith. Figures released by the U.S. Treasury show net capital inflows to the U.S. fell more than 91% in September, from $50bn in August to $4.2bn.

– The government took a hit, too, as foreigners bought just $5.6bn in Treasuries, down from $25.1bn the previous month. Drew Matus, an economist with Lehman, states the obvious in the FT: "It appears foreigners may have tired of U.S. treasuries."

– The current account deficit that the U.S. sports with the rest of the world requires foreigners to sink $1.5 billion into the homeland every day. What happens when foreigners decide not to sign the checks? Well…the dollar falls. Fast. Hard.

– As if that weren’t enough, we got word this morning that the BED spread has converged below the 5% level. You’ll recall the BED spread is our colleague Dan Denning’s proprietary "doomsday clock"…measuring the riskiness of U.S. government debt versus that of the emerging market variety. Denning: "The yield on GVT (our basket of Uncle Sam’s debt) rose to 4.57% by Monday’s close. At the same time, the yield on EMD, our basket of emerging market debt, fell to 9.21% for a spread of 4.64%. That’s the narrowest the spread has been since I began tracking it, and down 12% in just two weeks.

– "It’s bad enough," writes Denning, explaining the implications of a converging BED spread, "that the Federal government runs monstrous deficits. That’s bad fiscal policy. But as Richard Russell said in his remarks in New Orleans, it’s also immoral. To rack up enormous debts you know you will never pay and to burden your children with them isn’t just lacking in foresight. It’s selfish. It’s greedy. And it’s the kind of thing to make foreigners look at your currency like they would at spoiled meat."

– Adding even more fuel to the fire, the knuckleheads in Washington appear to have declared trade wars on the rest of the planet, in addition to the hot ones they’re already trying to finance. The ink isn’t even dry on the WTO ruling that declared George W. Bush’s steel tariffs illegal – and the U.S. has just shot off a few warning rounds to the Chinese textile industry. The EU is threatening retaliation against the U.S. by December 15th if the administration doesn’t revoke its steel tariffs.

– Lobbyists for the American Textile industry, which has lost about 316,000 jobs since the "recovery" began, wants to "put a lid on virtually all Chinese textiles," according Reuters. One brain-dead senator has officially proposed a 27.3% tariff on all imports from China.

– Makes us wonder if they have history books inside the beltway. A shapely White House intern wouldn’t have to lick her fingers and leaf too far back into the 20th century to discover a similar instance…when another group of numbskulls tried using tariffs to stave off the inevitable after the last credit-goosed spending-binge went bad. It’s a certain little episode in history, which time sleuths like to call: THE GREAT DEPRESSION! Oy.

– Despite it all, a Merrill Lynch survey of fund managers reckons 78% expect the current U.S. ‘recovery’ to continue into 2004, 58% reckon shares are at fair value, and 50% think bonds over-priced. State Street’s new index of investor confidence is also bullish; it’s up nearly 1% on the month, at its highest level for a year. And a recent poll of economists working for major U.S. brokerage houses found that 100% of them expected rising share prices over the next 12 months.

– "The real problem with fund managers isn’t their dishonesty," wrote Michael Lewis in Barron’s yesterday, "it’s their incompetence." But the U.S. authorities disagree. On Monday, Morgan Stanley had to agree to pay $50m to settle an SEC investigation into its mutual fund business.

– Yesterday, Securities and Exchange Commission chief William Donaldson told Congress he may ban so-called ‘market-timing,’ whereby big institutions trade mutual fund shares after-hours, costing the lumpeninvestoriat dear.

– The SEC also arrested 48 foreign exchange traders on suspicion of fraud yesterday. It had the FBI drag them out of their Wall Street offices in handcuffs. Today, it seems to us, the problem neither institutional dishonesty nor professional incompetence…it’s that the lumps keep buying at the top, and selling at the bottom.


Bill Bonner, back in London….

*** "Is it overkill?" wondered the Daily Mail, with a bad choice of words.

Half of London’s police, 14,000 men, plus 250 armed secret service agents, have the job of trying to make sure that U.S. President George W. Bush survives his trip to Britain’s capital. A better headline, on our opinion, would have been "Is it worth it?" There are no shortage of candidates for America’s top office. In short supply, on the other hand, are police in London…and parking places, most of which seem to have been eliminated in London’s drive to keep George W. Bush among the quick.

"Even mobile phones will be cut off," continues the Daily Mail. Security agents are worried that mobile phone signals could be used to set off a bomb.

Bush, say the protesters’ signs, is Britain’s most unwelcome visitor in a long time. But at least he is not likely to be arrested, as was Chile’s former president General Augusto Pinochet, for ‘crimes against humanity.’

*** A note from friend Byron King: "This quotation is from Benjamin Franklin, a Founding Father:

‘Rather go to bed without dinner than to rise in debt.’ – Benjamin Franklin

"His roots were in an English-cultured Colonial America, and he was truly an Anglophile. But later in his life, he showed a fierce and abiding love for his native land. As he was leaving Independence Hall at the conclusion of the Constitutional Convention, he was asked by a passerby what form of government the nation would have. He replied, ‘A republic, if you can keep it.’

"One of the finest modern historians, H.W. Brands, in a biography published in 2000, considered his life and called Benjamin Franklin ‘The First American’. Today, the nation reveres the memory of Benjamin Franklin by placing his face on the $100.00 Federal Reserve Note, one of the most commonly used debt instruments in the world. Go figure…"

*** "It’s so odd," we remarked to a friend, "the way the English upper classes all seem to have some speech impediment. Either they stammer, make some goofy expression with their mouths, or some silly laugh."

"You see," our friend explained, "accents are so important in Britain that making some gesture with your mouth is extremely significant. The upper classes, having perfect Oxbridge accents, feel the need to compensate. They are so confident of their superiority that they give themselves a handicap to prove it…like a guy who spots you a few points when you go up against him in sports. No matter who wins…he’s the winner."

In nature, some of the fittest males give themselves a handicap. Bright plumage on a bird, for example, signals to the females that this guy can survive – even though he stands out like a traffic accident. A more discreet animal may have a survival edge…but lack a way to communicate his genetic fitness to potential mates. We have even heard of some animals that display their handicaps when pursued by predators. Rather than dart to safety, some males deliberately make a show of bravado in order to impress the females.

In America, the rich have always handicapped themselves in other ways. They play golf….buy expensive houses, fancy cars…learn about French wines and cigars…and often even get divorced so they can marry a ‘trophy’ wife. All of these things cost time and money…effectively giving their competitors a few points advantage.

But now, the whole nation seems to want to give itself a huge handicap…buying things it doesn’t need and cannot afford with money it cannot earn and doesn’t intend to pay back.

Often, we note, the handicaps are a little too much. The tycoon collapses under the weight of his acquisitions. The colorful male bird ends up as some other male’s meal. And the upper-class Englishman sounds as if he is brain- damaged.