The Big Schlep

"Can they ever retire?"

TIME, July 21, 2002

Poor Martha Parry. The N.Y. woman sold her insurance company and thought she had it made. According to the TIME magazine cover story, she had $1 million in the stock market 2 years ago and was looking forward to a retirement of golf, travel and good times.

Now, at 65, she has $600,000 in her retirement account and must still earn her living by the sweat of her brow. She is one of the lucky ones. Most 65-year-olds have much less money and many are near bankruptcy. Recently, the expression ‘senior debt’ – which used to refer to secured credit – has taken on an entirely different meaning. For old people are going bankrupt at the fastest rate in history. More often than ever before they walk right into their retirement years without a dollar in their pockets…and credit card bills that would embarrass a pickpocket.

Just 3 years ago, the typical home calculator overheated, as the average investor toted up how rich he would be at 18% annual growth…and how soon he could retire. Again, the calculators are warming up – we believe – but this time to different purpose; figuring out how much people will have to save in order to have any hope of ever retiring.

Expect "a move back toward the historical norm," warns TIME, " – working until you drop."

"More and more older Americans were choosing to work" anyway, TIME continues…"often in part time and in dream jobs like business consulting or running a small art gallery, just to stay active and engaged. But that’s very different from the prospect that faces many older workers today; being forced to work more hours each week for more years than they want at jobs they don’t like."

Here at the Daily Reckoning, of course, we love our work. It is hardly work at all…for every day we can barely wait to get to our desks…wondering what comedy…what farce…what new absurdity or old folderol will entertain us next. Like serving drinks or presiding over High Mass – it’s work that we can see ourselves happily doing until the customers disappear.

But imagine that you worked as an airport security guard – pretending that every grandmother and girl scout is a menace to the empire…or that you labored for the Federal Reserve Bank, pretending to protect its money. You might be worn out at 55 or 60…Nothing wears a man out faster than pretending to do real work.

One of the shocking things about Americans is how much they work. Paris, Berlin…even London…have slowed down for the summer. Many of the best restaurants in Paris are already closed; their customers have left town for the vacation season. The subway is nearly deserted at rush hour. Even by mid-morning, the town is as quiet as a dead Republican.

Manhattan, meanwhile, is as loud as ever. People schlep and hump…toting and pulling…as though they needed the money. And maybe they do.

Everybody knows that Americans got a lot richer in the Great Boom of 1982-200?. But a man toting bales full time in 1979 would have earned $677 at it (adjusted for inflation to the year 2000). He could have kept on toting bales for the next two decades, but he would have little to show for it. Median weekly earnings for men in 2000 were less than they had been 20 years earlier. In 2000, he would have earned only $646 per week.

Seeing these figures in Gary North’s "Remnant Review," we could barely believe them. But there they were, taken from Bureau of Labor Statistics data.

During the same period, family income rose, but only because the family spent more hours schlepping and toting. According to census data, the average married- couple worked nearly 400 hours more each year in 1999 than they did in 1979. Even so, the data shows that at least 20% of families actually lost income in the ’73 to ’93 period.

"No explanation for this reduction of per capital income has been widely accepted by economists," writes Gary North.

"There is no serious economic thinking going on in America," added Dr. Kurt Richebacher at this weekend’s get-together. "They think the whole economy depends on consumer confidence. As long as consumers keep buying, they believe, everything will be all right. But where does the consumer get the money to spend? Nobody even seems to care…"

Here we offer an old explanation for why corporate earnings have collapsed…and why personal earnings have stagnated…and why Americans have to work longer and longer just to maintain their standard of living:

"You can’t get something for nothing," is our theory. Stagnant wages is our evidence. Collapsing profits is our smoking gun.

Americans do not save enough. Without savings there is no real capital investment – because there is nothing to invest. Instead, there is only make-believe investment in unprofitable new-technology – paid for with credit. Without real capital investment in profit-making new machinery, new plants and equipment, people do not have high-value-added new jobs. Wages cannot increase – for they are not really producing more and better goods and services. So, they are forced to work longer hours and go into debt in order to give themselves the illusion of financial progress.

Then, once they think they are getting rich, they are encouraged to borrow and spend even more – which further distorts the entire economy towards a level of consumerism that can’t be maintained.

Eventually, the consumers arrive at retirement age and realize that they don’t have enough money. What can they do? Go back to work!

"Everyone, Back in the Labor Pool," says TIME. "Eroding pension benefits, longer life-spans and a major meltdown in stocks add up to this: most of us will have to work well into our 70s."

At least Americans are used to it. They’ve been schlepping longer and longer hours since 1982. Now they are prepared to work not just more hours, but more years too.

Your editor, hard at work…

Bill Bonner
July 29, 2002

P.S. Day by day, investors adjust their expectations downward. But they are still hallucinating. "The median savings for boomers aged 55 is just $25,000 – without accounting for their debt," reports TIME. "Yet many polls show that people in their 40s still expect to retire in their early 60s. And some 70% of Americans believe they will live well in retirement even thought just a third have attempted to calculate how much they should be saving. Clearly something has to give…"

People will have to keep working, the editors of TIME conclude.

Doing what, we ask? Once the marginal baby boomer gets his calculator out, he is likely to be surprised. What will happen when he begins to save at anywhere near the levels the numbers suggest? After sales collapse, what business will be able to afford an additional geriatric employee? Or even a young one?

We will find out…as our work goes on and the Daily Reckoning continues, tomorrow.

"Is this the bottom?" asks USA TODAY, as if it were born YESTERDAY.

With the S&P still trading at 34 times earnings, the bottom is a long way off. This could be a bottom, of course. In the short run, the stock market is a voting machine, says Buffett. One day to the next, investors – like voters – can get any fool outcome they want…But in the long run, as we keep saying, they get what they deserve.

While the Dow shot up on Wednesday, there was not much follow though the rest of the week…which makes us doubt that this will be a long, tradable rally. Nor has there yet been any real panic out of stocks – just selling, day after day…week after week…month after month.

The selling could stop – temporarily – any time. But we see few signs that it is stopping now.

Meanwhile, we think the dollar seems doomed too. It has rallied along with the Dow…and who knows what the next few weeks will produce. But, in the longer term, the dollar has nowhere to go but down. Foreigners hold $9 trillion of U.S. dollar assets, while the U.S. runs a trade deficit of $37 billion per month. Those foreign investors are facing even bigger losses than their American counterparts. For on top of the stock market losses, they have currency losses of another 10%-15%.

"These poor foreigners are stuck," Dr. Richebacher explained this weekend. When they begin to sell in big numbers, the buyers will disappear and the dollar will fall far more than most people expect.

America exports dollars the way Nissan exports automobiles. Once sold overseas, they will never take them back. Buyers just have to sell the old hulks back and forth to each other – each time at a lower price.

"You can buy an option on a million euros for only about $14,000," Dr. Richebacher advised. "Every time the dollar rallies, I buy more of them."

Eric, what’s the word in Manhattan?


Eric Fry, our man on Wall Street:

– Mr. Market tied a bow on his spiffy gift to investors last week with a nice little Friday rally. The Dow gained 78 points to 8,264, while the Nasdaq rebounded 22 points to 1,262. The S&P 500 jumped 14 to 852.

– The dollar added to the good cheer by gaining about 2% against the euro on Friday to 98.6 cents per euro. Unfortunately, the rebounding dollar combined with a resurgent stock market proved to be a lethal cocktail for the gold market. The yellow metal collapsed $19.30 to $303.30 per ounce.

– For one week at least, the stock market bulls – except for the tech stock variety – enjoyed a respite from their months-long misery, as the Dow gained 3% over the five-day span. But this modest gain hardly tells the story of a stomach-churning week in the stock market.

– By the close of trading last Tuesday, an oppressive gloom blanketed Wall Street. The Dow had lost more than 23% on the year, the S&P 500 had fallen 34% and Nasdaq had tumbled 43%. And both Maria Bartiromo and the Wall Street Journal were certain that the market would keep on falling. Happily, for investors, it didn’t.

– Around lunchtime on Tuesday I stopped in briefly at a brokerage office in Manhattan to say hello to a friend of mine. While we were standing there chatting, one of the brokers nearby started shouting into the phone, "Don’t you dare tell me that I’m bugging you! You have a margin call! I expect you to act responsibly and meet it!" – I imagined thousands of similar phone calls taking place in brokerage houses across the country. As these unfortunate investors met their margin calls by selling stock Tuesday afternoon and Wednesday morning, the market continued to slide lower. But then, without warning, as if the market gods were appeased by these sacrifices, stocks started heading higher. The urgent selling dried up, the buyers showed up and voila, a rally ensued.

– From its Wednesday morning nadir below 7,600, the Dow Jones Industrials rocketed all the way back to 8,264 by the end of the week. The S&P 500 eked out a slim 5-point gain for the week. But alas, the star-crossed Nasdaq fell once again – down 4.3% on the week.

– However, last week’s blue chip rally did little to alleviate the pain of the fully invested bulls. Most folks I talk to are thinking much more about the mountain of money they’ve lost than about the molehill of pocket change they recovered last week. Capital bereavement remains the preoccupation.

– "Half the respondents in [a recent Gallup] poll dubbed the decline of equities a ‘major problem,’" Alan Abelson observes in this week’s Barron’s. "Interestingly, the Gallup pulse-takers note, opinions didn’t change among those queried before, and those queried after, Wednesday’s big market.

"Most significantly, a mere 32% of the participants reckoned that their financial situation is better today than a year ago; 45% declared it worse. This is the highest negative reading registered in the poll in 10 years."

– I was chatting with a friend of mine over the weekend about various minor news items in the town of 5,000 where he lives. After a while, I said, "You know, you’re amazingly well informed about all this minutia."

– "I like to read the local paper," he replied. "I’ll read any paper without a business section."

– That comment fairly well sums up the national sentiment toward the stock market.

– "Many people in their 50’s and 60’s said they no longer open their 401 (k) statements," the NY Times reports, "others have decided to keep working for a year or two longer than they had expected. ‘I know things could change, but if they keep going this way, we’ll be eating cat food in our golden years,’ said Jane Perkinson, 61, a production manager at Business Week…"

– The struggling stock market is starting to make a very visible dent in consumer sentiment. The University of Michigan’s report on consumer sentiment for July fell to 88.1 from 92.4 at the end of June. The future expectations component suffered an even steeper drop – from 87.9 in June to 81 in July.

– As we know by now, a glum consumer can be a big drag on the US economy. But as consumers are fickle folks, a stock market rally might brighten their spirits next month.

– "What’s obviously of greater importance than what touched off the smashing midweek rally is whether it marked a turn of the ugly trend that has been wreaking devastation on stock prices for months," Abelson writes. "Is this the bottom that so many have been fervently seeking for so long?"

– "We doubt it," he says matter-of-factly. "The market fetches a lofty 20 times earnings (and who knows what multiple of thoroughly scrubbed earnings?); typically, at the end of a bear market, it sells at eight-nine times. By other measures, too, stocks are very pricey: five times book and yielding a paltry 1.5%.

– "Perhaps multiples won’t get quite as low as they have in the past, although we wouldn’t bet on it. But they’re likely to be considerably lower – and yields a good bit higher – than they are right now. We’re still in a bear market, and the most you should expect is that last week was the start of a bear-market rally."

– We agree. But this bear market rally might last awhile…Happy trading!


Back in France…

*** "The U.S. economy will not have a double-dip recession," Dr. Richebacher explained to our small gathering on Saturday. "It will have a double-deep recession. It won’t be like Japan…it will be worse. Because Japan was an isolated economy, with savings…and a creditor nation. America is far worse off."

*** "Everybody talks about consumer confidence…as if consumers could somehow produce profits just by spending money they don’t have," Dr. Richebacher continued. "But America’s problem is not too little confidence – it’s too much. Nobody believes that a serious recession is a possibility. Here we’ve seen the biggest collapse in corporate profits ever – even after consumers have spent like crazy – and nobody even asks why. It’s unbelievable…"

*** Dr. Richebacher asks himself why nearly every day. And he thinks he knows the answer. "Because America has no savings," he says. "Without savings, you can’t have much real business investment. And without business investment – and I’m talking about real investment of real resources in real manufacturing, not over- investment in technology that doesn’t produce profits – you can’t make any money. Not only that, but you also can’t create jobs that puts money in consumers’ pockets. So they don’t have any real money to spend either. America operates on credit…because nobody has any money."

*** The Ouzilly Band performed up to expectations. One of our guests was practically in tears after one of our sad numbers. "Can’t you afford real entertainment?" he wondered.

The Daily Reckoning