Boomers Say, “What, Me Worry?,” Goldman Issues Gloomy Forecast, Here Comes Another $250 Billion Problem, and More!

by Addison Wiggin & Ian Mathias

  • Boomers say, “What, me worry?” while Gen X wonders if it can ever retire
  • As Wall Street waits for Citi and Merrill shoes to drop, Goldman issues gloomy forecast
  • As if write-downs weren’t enough, here comes another $250 billion problem
  • A 17% first-quarter loss… When hedge funds don’t hedge
  • Coal prices shoot skyward… The sector ideally positioned to benefit
  • Plus, readers write: Is there a commodities bubble?

Here’s a cheery way to start your week: More than two-thirds of American Gen Xers — those aged 27-42 — don’t think they will ever be able to stop working. And don’t think they’ll ever see a dime from Social Security or Medicare.

“The Gen X group is the most anxious about their finances,” Chris Moloney of Scottrade told Reuters last week.

Worth the paper it’s printed on…

Of the 1,000 people they talked to who were 18 and older, nearly 40% percent said they had saved less than $25,000 for retirement. Conventional wisdom suggests if you want to live for 20 years on about $50,000 per year — whatever that will be worth at that the time — you’ll need to have $1 million stashed away.

“Gen X is in the middle of a ‘retirement perfect storm’ of very high expectations, low retirement savings and massive concern about the future of Social Security,” Moloney says.

Thirty seven percent said they would like to have between $1-5 million saved for retirement — even if their ability to save this money leaves such sums in the realm of wishful thinking.

Not that we want to reignite the debate among readers about which generation is “to blame” for the state of things, but we also note that 64% of baby boomers say they’re ready to retire — and aren’t worried.

Take that.

Retail sales were up in March…but mostly because gasoline keeps costing more.

The Commerce Department says retail sales rose 0.2% in March, a tad more than the flat reading analysts were expecting. But throw gasoline out of the equation, and they were ruler flat, indeed.

If the figures took inflation into account, which they don’t, the outlook for retailers would be even more discouraging. Still, a 0.2% increase in March looks better than, say, the revised 0.4% decline in February…

U.S. stock markets began the week moving sideways, taking a breather after GE’s earnings disappointment Friday and before Citi and Merrill reveal whatever they’re going to reveal later this week.

But Goldman Sachs isn’t waiting to make its call: Earnings season has had an “awful” start and stocks will head downward this spring.

“Early signs are awful,” says a Goldman report out today. “We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor’s 500 Index lower in coming weeks,” perhaps as low as 1,160, before a rebound by year’s end to around 1,380 — which would put the S&P down 6% for the year.

That’s a remarkably gloomy call for David Kostin, Goldman’s new chief forecaster — at least compared to his predecessor, the ever-optimistic Abby Joseph Cohen.

Wachovia needs cash, and quickly. Ho-hum. The bank plans to float $7 billion in new shares and slash its dividend by 41%. It’s the second time Wachovia’s had to scramble for capital just this year.

Wachovia jumped into the adjustable-rate mortgage pool with both feet at the most frothy stage of the bubble in 2006 by purchasing Golden West — whose business was focused on one of the most airheaded states, California.

But that’s just the beginning of the financials’ pain this week, as many of the top firms reveal first-quarter earnings…and probably more write-downs, too. Citigroup will likely write down $10 billion in debt this week…which would add up to a first-quarter loss of $3 billion. Merrill Lynch will likely write down another $5 billion, for a loss of $2.7 billion.

That’s still a drop in the bucket given that write-downs industrywide total $250 billion to date…and that everyone from George Soros to the International Monetary Fund is forecasting $1 trillion, give or take, by the time all is said and done.

Citi’s announcement last week that it will unload about $12 billion in debt onto private equity at 90 cents on the dollar highlights another problem — one that’s “entirely separate from subprime mortgage lending,” writes Strategic Short Report’s Dan Amoss. “It’s another symptom of the credit bubble disease.”

The $12 billion is money Citi hoped to raise in the credit markets to finance leveraged buyouts. But when the credit markets seized up last summer, Citi had to take the deals onto its own books.

“Investment banks are stuck with an estimated $250 billion worth of this buyout debt on their balance sheets,” says Dan, “or in off-balance sheet entities for which they’ve made guarantees. Until they get rid of it, credit will remain fairly tight.

“Financial stock bulls point to this $12 billion sale as evidence that the leveraged loan sector of the credit markets is thawing. But I remain a financial stock bear, because this sale is only a tiny part of the market and only one of the many other credit-related problems plaguing investment banks.” For ways to play Dan’s skepticism, see the Strategic Short Report.

Asian stock markets tanked overnight, fearing the worst from U.S. financials this week. Shanghai was down 5.6%, Hong Kong 3.5%, the Nikkei 3%.

Gold is up slightly, the dollar down slightly. Gold is trading up a little over $5 this morning, to $930. The dollar index remains in solid 71 territory. And today it takes $1.58 to buy one euro.

The ever-widening dollar-euro gap…

Finance ministers of the G-7 countries are tut-tutting currency traders for beating up on the dollar…

“Since our last meeting,” they collectively warned on Friday in Washington, D.C., “there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability.” Europeans in particular are unhappy that a rising dollar is making their exports more expensive.

And yet…the G-7 gave no indication that central banks are willing to continue buying dollars in the open market.

“They are hoping that the economy will turn around,” Ronald Simpson of Action Economics says of G-7 ministers “that credit markets will stabilize to a degree and perhaps we will start to see a bottom in the U.S. housing market.”

Hoping? Oy. We humbly submit it’s going to take a little more than hope to put some stable footing under the dollar.

“Have you seen the price of coal?” asks our energy expert Byron King by e-mail this morning. “In 2008, thermal coal prices are set to double, from about $55 to $125 per ton. That’s based on a recent agreement between Japan’s Chubu Electric Power and the giant mining firm Xstrata, and it should become the benchmark for 2000-09 contract prices worldwide.”

Coal generates 40% of the world’s electricity. It’s getting more expensive. And in the United States, it’ll be still
more expensive, because every remaining presidential candidate is committed to “clean coal” technology that cuts down the pollution, but at considerable cost.

Spot prices for thermal coal have tripled in the past 12 months. And spot prices for coking coal (used to make steel) have quadrupled over the last 12 months.

“So,” says Byron, “where can we in North America get significant amounts of ‘clean’ electricity with minimal CO2 emissions? Not from coal. How about windmills? Yes, when the wind blows. How about solar? Yes, when the sun shines. And how about geothermal? Yes, all the time. 24/7/365.”

Byron’s five geothermal picks from his Energy & Scarcity Investor portfolio can still be had below his buy-up-to price. And until midnight tomorrow night, we’re making Energy & Scarcity Investor membership available for the lowest price ever.

Even as hedge fund losses go, this is big.

David Tepper, founder of Appaloosa Management LP, managed a 17% loss in the first quarter on two funds with a combined $6 billion in assets. He bet big on positions in the debt of struggling companies, and lost as the credit markets seized up. Quite the reversal from annual average gains of 28-30% since the mid-1990s.

Aren’t hedge funds supposed to “hedge” against financial turmoil and bear markets?

Not every hedge fund manager gambled their clients’ money away. John Paulson saw his Credit Opportunities fund rise 10% in the first quarter…after he personally pocketed $3 billion last year from smart bets on the housing bubble.

Paulson spoke last week at Grant’s Spring Investment Conference in New York…he’s singing from the same hymnal as George Soros and the IMF, seeing $1 trillion in write-downs once the smoke clears.

The crisis over rising food prices has claimed its first political casualty. Protests brought Haiti to a standstill last week, so the country’s senate voted over the weekend to remove Prime Minister Jacques-Édouard Alexis. The move comes as President Rene Preval announced subsidies that he promised would cut the price of rice by 15%.

The World Bank also stepped in with an immediate $10 million in food aid. And our old friend Hugo Chavez is promising to send 200 tons of food to Haiti to counter “the attacks of the empire’s global capitalism.”

It’s easy to be generous with other people’s money.

What ordinary Venezuelans suffering from 20%-plus inflation think of Chavez’s generosity he didn’t say.

Bit by bit, more details emerge about China’s plans to basically shut down Beijing’s economy in advance of the Olympics. All building construction in Beijing will halt three weeks before the opening ceremony. No digging, no pouring of concrete, no outdoor spray painting, either…all in the hopes of clearing the choking pollution that envelops the capital and poses a threat to athletes’ health.

Even before this announcement, factories in six provinces surrounding Beijing began shutting down. Still in the works: a decree that would clear the streets of most traffic. Can’t wait to see how that goes over.

“What is the first thing people do when a blizzard is predicted?” writes a reader, regarding a bubble in commodities. “They make a run on the supermarkets. With the current thinking on ethanol in this country, especially by the present administration, we are in a blizzard situation.

“We are plowing every inch of arable land, and some marginal acres, to satisfy the apparent ‘demand’ for ethanol. Never mind the cotton, sugar cane, rice acreage being lost to corn and, to a lesser degree, to soybeans. The demand worldwide is eclipsing the supply of essential foods.

“A commodity bubble? Possibly, right now, but a sustained increase ultimately. Population continues to grow and essentials are becoming more scarce. Costs for food commodities will continue to rise. Cheap food as we have known it is, I’m afraid, a thing of history. Hard assets, especially metals, will continue to appreciate. However, nothing moves in a straight line. Expect corrections, but appreciation will continue.”

“We are wasting massive amounts of ag land planting corn for ethanol,” responds another on the same subject. “China and India are booming, so silver (and all other metals) consumption is going to continue upward. Unless we get interference from the government, like what is happening to the price of silver and gold, I think all commodities still have a long way to go.

“That does not mean there will not be some hiccups along the way, nor will it prevent overshooting the natural supply/demand price; thus, it will go too high and then retreat some, and we are probably less than halfway to the top.”

The 5 responds: We seem to be reaching a consensus building among the readers who’ve written in and the balance of our analysts…why does that make us nervous?

“The Frontier Airlines Chapter 11 is an interesting canary,” writes another, on a slightly different tack: “Nice people in a lousy business. Think low-fare competitors, government regulations, unions, business cycles and, of course, fuel costs. Now one more thing they can’t control — vendor credit. Unusual credit markets sure screw with business as usual. Who’s next?

“Keep peering through the fog. I always enjoy the read.”

“This ‘recession’ will be different,” writes another reader, who divines something a tad more ominous through the fog than most. “It will not end. The USSA economy will fall in fits and starts until everyone in the USSA, as well as the rest of the world, fully acknowledges — the USSA is a third-world banana republic with nukes.

“And I predict that last part will become very problematic when the going gets really tough, for Americans have fewer ethics and scruples as the days pass (and it hasn’t gotten even slightly difficult yet). Already, most Americans have no qualms threatening (or even pressing the button) given even the lamest militant sound-bites from any so-called leader in either party.

“So I’m off to establish the best exercise in self-sufficient living I can muster in the deep boonies of the Andes — while I still can. It won’t be easy, but at least it will be real. Adios, gringos.”

The 5 responds: We’re assuming the ‘USSA’ is a thinly veiled snipe implying life in the USA is coming to resemble life in Soviet Russia. Good luck in the Andes.


Addison Wiggin,
The 5 Min. Forecast

The latest edition of The Demise of the Dollar seems to be attracting some attention in the Far East. Today and tomorrow, we’re fielding unsolicited interviews with South Korean public TV and the 21st Century Business Review, “China’s largest circulation business magazine, with 70 million readers.”

The South Korean film crew is flying directly from Seoul to our offices in Baltimore for the interview. Crazytown. We’ll let you know how it goes.


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