Agora, Pensions and Mortgages

State pension funds across the U.S. have lost $1 trillion over the last year… and that’s just the beginning. Welcome to the great deleveraging issue of your 5 Min. Forecast.

In 2002, we forecast that the tech bubble would mutate into a housing and consumption bubble… and when that burst it would do far greater harm than techs, because so many more “innocents” would be adversely affected. This morning, we’ve got an entire issue of data points that show what the deleveraging of America looks and feels like.

According to a study published this week by the Center for Retirement Research at Boston College, public pensions will need $270 billion in new contributions over the next four years just to stay afloat, and another $100 billion annually for the 20 years afterward. All during the greatest wave of public retirement in U.S. history -- the last chapter of the baby boom.

As a consequence, states all over the country are coming clean: Kentucky has unfunded pension liabilities exceeding $27 billion. In Illinois, Chicago alone is $17 billion in the hole. New Mexico is unfunded by $4.6 billion. Teachers in West Virginia are short $4 billion… this list is long.

Over 14 million Americans are counting on a public pension to help fund their retirement. We’ll visit this topic again soon. And then again. And again… In the meantime, we strongly advise you take matters into your own hands.

This crisis in pension funding comes at a really bad time. “Check out the unemployment rate among baby boomers,” for example, says Rob Parenteau, whose been mining Friday’s job report for worthy nuggets.

“The unemployment rate for the 45-55 age cohort is about to break the spring of 1983 highs that followed the double-dip recession of 1980-2.

“This segment represents the tail end of the baby boom that should be both in its peak earnings years, as well as in a position to save out of retirement. The 55-and-over unemployment rate is also at an all-time post-World War II high, while the percent of the total unemployed who have been out of work for 15 weeks or longer is also at a post-World War II high of 43%.

“This shedding of workers in the prime saving age range of 45-55 poses a challenge to those trying rebuild their savings. Given the damage done to portfolios, crude estimates indicate the gross personal saving rate should be migrating toward 8%, while it’s currently half that. Although the 91.5% of the labor force still employed may continue to cut back spending to achieve savings goals, clearly, there is a rising cohort of older unemployed workers who will need to draw down their saving rates, as unemployment benefits are unlikely to pay their existing bills.

“The upcoming personal tax cuts may help cushion this blow, but we believe the heavy hit to older workers -- probably the same workers hardest hit by falling home and equity prices -- could make further gains in the household saving rate more difficult to achieve.”

And so it goes.

Americans across the board are already falling behind on loans at a record rate. In the last quarter of 2008, a record 4.2% of all consumer loans were delinquent at least 30 days, says data from the Fed this week. Another 4% were in default.

“The wheels have fallen off the economy," James Chessen, chief economist for the American Bankers Association, told USA Today. "There have been significant job losses, and that translates into people having a hard time paying their bills."

And as we’ve been expecting for nearly a year, prime and Alt-A mortgage delinquencies are soaring: From the Office of Thrift Supervision (sic):

Subprime mortgages are suffering the highest rate of delinquency.

But the delinquency growth rate among prime and Alt-As, from the beginning of 2008 to the end, more than doubled. Plus, delinquent prime and Alt-A loans far outnumber subprime.

That makes our forecast last May all the more daunting… we have likely yet to see the worst of the housing bust.

Is It Time ToGet Back In The Market?

S&P 500 video

Dark Clouds In Commercial Real Estate

Stock prices have rallied for much of last month. The housing market has shown some early signs of life. And some of the latest economic reports haven’t been the disasters that many experts feared.

While this is hardly a portrait of an economy on a roll, there are enough bright spots to nurture a feeling that the U.S. economy is finally on a path to recovery - especially given the upbeat response the latest elements of the Obama administration’s fix-it plans have received.

But there’s a dark cloud in this picture. And it’s big - big enough, in fact, to potentially finish off the U.S. banking sector, blotting out the U.S. economy’s new dawn.

That dark cloud is the commercial real estate sector. With rent prices falling and vacancies rising due to the recession-weakened economy, delinquencies on commercial mortgages are already escalating steeply. And the credit crunch bred from the recession is often making it impossible for property owners to avoid deeper trouble by refinancing. (more)

Great Depression Optimists

We’ve discussed the sport of bottom-calling the last few weeks and what an unreliable pastime it often proves to be. But, on the other hand, it’s nothing new. Even back at the beginning of the Great Depression, experts and authorities were failing to assess the actual state of the economy.

In retrospect, their words are pretty enlightening. Consider the following quotes…

“We will not have any more crashes in our time.”--Economist John Maynard Keynes, 1927

“There will be no interruption of our permanent prosperity.”--Myron E. Forbes, President, Pierce Arrow Motor Car Co., 1/12/28

“Stock prices are not too high and Wall Street will not experience anything in the nature of a crash...increasing prosperity...is due in large measure to inventions such as the world never before has witnessed...This is a new and tremendously powerful factor in the business world.”--Professor Irving Fisher of Yale wrote in the New York Times on September 5, 1929, a month before the Crash.

“American industry has reached a point where a break in New York stock prices does not necessarily mean a national depression.”--Associated Press dispatch, 12/28/29

“No Stimulants Needed!”--New York Herald Tribune, 1/23/30

“President Hoover predicted today that the worst effect of the Crash upon unemployment will have been passed during the next sixty days.”--Washington Dispatch, 3/8/30

“While the crash only took place six months ago, I am convinced we have now passed the worst and, with continued unity of effort, we shall rapidly recover.”--President Herbert Hoover, 6/29/30

“The worst is over without a doubt.”--James J. Davis, Secretary of Labor, 8/29/30

“We have hit bottom and are on the upswing.”--James J. Davis, Secretary of Labor, 9/12/30

“The depression has ended.”
--Dr. Julius Klein, Assistant Secretary of Commerce, 6/9/31

A wonderful thing about human beings, especially American human beings, is our abiding sense of optimism. In our haste to display it, though, we often find ourselves jumping the gun. So the next time you hear someone declaring an official end to the current round of bad economic times—right in the face of scary local and anecdotal news you know to be true—just shake your head and think of the overly-optimistic pronouncements the experts and authorities made at the beginning of the Great Depression.

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WHAT TO DO ABOUT IT

Certainly, do not abandon your hope and optimism! That’s not the point of this e-letter. These two essential beliefs can keep you afloat and motivated to find the answers you need right now. You have only to read Viktor Frankl’s Man’s Search for Meaning to understand the true value of hope and faith in the midst of trying times. Viktor not only was a survivor of a Nazi death camp, he helped many others survive those horrendous conditions, too…and, it’s almost foolish to even mention, we don’t have it anywhere near that bad.

So nourish and cling to your hope and optimism…just don’t be unrealistic about the actual condition of our economy. In other words, hope for the best but be prepared for the worst. Who knows, things may straighten out sooner than expected…but there’s still an awful lot of unraveling of government and institutional shenanigans left to go.

SECOND, it may be really helpful for you to read Man’s Search for Meaning right now. It will inspire you and give you your much-needed second wind. And stay tuned to The Ruff Times. I’ll always do my best to alert you about what’s up ahead.

Trading in Crude and Equities

Is the move in crude oil over?
http://broadcast.ino.com/education/is_move_in_crude_over/

Is it all over for the S&P500?
http://broadcast.ino.com/education/all_over_sp500/

Any Gold In Fort Knox?

NYSE Runs Out of Gold Bars: What Happens Next?

In the first Great Depression, the government tried, for several years, between 1929 and 1933, to maintain a fiction that the U.S. dollar was still convertible and as “good as gold”, in spite of having irresponsibly printed more dollars than they had gold to back them. Back in the 1920s, just like during the last 22 years, the Federal Reserve had run its printing press overtime, and, as a result, it couldn’t deliver. The U.S. Treasury eventually ran out of the gold, in the face of overwhelming public demand, resulting in the infamous gold confiscation order, by President Franklin Roosevelt, in 1933. History may be repeating itself, except that the government no longer makes any pretension to maintaining a gold standard, or any standards at all. Instead, nowadays, the futures exchanges offer to trade gold for a floating number of dollars, and, it appears, they have printed more paper contracts than they can redeem, at least when it comes to 1 kilogram bars.

The NYSE-Liffe futures exchange has, it seems, run out of 1 kg bars of gold. Futures markets, like NYSE-Liffe and COMEX, try hard to maintain the fiction that they will deliver physical gold, in completion of executed contracts. Indeed, to prevent fraud, U.S. law requires clearing members to keep a stockpile, of one kind or another, consisting of a minimum of 90% of metal. Up until October, 2008, it didn’t matter. Only about 1% of long buyers of paper gold futures contracts typically took delivery. Now, the situation is very different. Demand has surged and, it appears, one major futures exchange, NYSE-Liffe, and by extension, the COMEX gold warehouses it shares with its larger cousin, are unable to meet the requirements of their contracts, vis-a-vis, delivery of 1 kg. bars. (more)