A LONG DAY'S JOURNEY INTO RETIREMENT NIGHT
By Bill Bonner
"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
 |
Previous Notes |
| Read Here | |
 |
 |
|
