The Great Deleveraging, Pension Problems, A Short Play, Interesting Housing Data and More!

by Addison Wiggin & Ian Mathias

  • The next shoe to drop? The 5 examines one crisis yet to unfold
  • Baby boomers beware… pensions unfunded, unemployment soaring
  • Government report shows surprising housing crisis stats… are prime loans the real problem?
  • A sector worth shorting in the new era of deleveraging
  • Chris Mayer on the slow and steady demise of the dollar
  • Plus, another new image of the credit crunch: The airline “boneyard”


  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.

  What’s more, the government’s huge refinancing push has been largely ineffective. According to that same OTS report, fewer than half of those government sponsored refis late last year actually reduced monthly payments by more than 10%.

In fact, one in four of those loan modifications actually resulted in HIGHER monthly payments, thanks to fees and past-due interest payments.

  The end result: personal bankruptcies in the U.S. were up 38% in March compared with the same time last year. 130,793 people filed for some form of bankruptcy last month. 1.5 million are expected to go under by the end of the year, a 36% hike from 2008.

  Another industry built on credit-fueled consumption, and thus, likely to get leveled during the great deleveraging, is looking a little gluttonous right about now:

Since 1990, the number of bars and restaurants in the U.S. has grown 49%, to over 537,000. The American population has grown only 23% in that period.

Growth in the restaurant industry has outpaced even the U.S.’ appetite for squandering money. According to the National Restaurant Association, in 1985, Americans spent around 40 cents of every “food dollar” in restaurants. Today, we’re closer to 48 cents on the dollar, a 20% bump.

Back in the 1950s, the average Joe spent just 25 cents of his “food dollar” in restaurants. If we’re to return to anything even resembling a post-Depression, postwar, way of life… tens of thousands of restaurants will go under.

  Stocks are down this morning thanks almost entirely to one guy — Mike Mayo. The former Deutsche Bank analyst garnered a reputation for getting it right during the fall of American financials. He recently left DB. Some say because the bank was trying to mute his financial bearishness. He found a new gig at Caylon Securities. This morning, he initiated coverage on 11 different financials, and recommended his team sell all of ’em. Heh.


And believe it or not, that’s about all it takes to scare the masses out of the market these days. The Dow quickly fell over 100 points this morning.


  Aside from Mr. Mayo, there’s every reason to be taking some profits today. Stocks are currently on their best run in 75 years. Including last week’s 5% jump, the Dow is up 21.5% over the last four weeks… its best streak since 1933.

At dinner on Friday night in San Diego, Rick Rule — a name you may recognize from our Vancouver event — suggested to us that this is an epic sucker’s rally. He said he’s using it to liquidate some large positions he’s already held on to for too long.

“Once this rally’s over, we’re going to return to despair like you’ve never seen,” Mr. Rule warned. “That’s when it will really be time to buy.”

  Gold is in the doghouse… sheepishly licking its wounds. When we wrote you last, it was testing support at $900. Today, that support… well, failed. The spot price rings in at $865 as we write.

  But other commodities are doing quite well lately, thanks to the return of optimism in American markets. That so-called “reflation” trade has given a nice boost to industrial commodities like copper and crude oil. Copper is back up to around $2 a pound, its highest spot price over five months. And crude is still well above $50 a barrel this morning. 

The dollar is back en vogue, if briefly, this morning too. The dollar index is up about half a point from its weekend low, to 84 and change.

  Even so, the demise of the dollar has begun a new chapter. Time magazine just published an article, “Is the Dollar Doomed?” No offense to the rag, but we take it as the official sign that the dollar crisis is now a household phenomenon. The magazine’s answer was a solid “maybe,” but still… another brick in the wall.

  “These things can take a long time to play out,” says Chris Mayer, who’s always good for some sound historic perspective.

“Consider that even in 1870, America’s economy was bigger than anybody else’s — except Britain’s. By 1914, the American economy was as big as Britain’s, Germany’s and France’s combined. It didn’t mean the dollar reigned supreme in international finance, though. It would be another 30 years before that happened.

“China is today still small compared with the U.S. economy. It is, depending on how you figure it, the second- or third-largest economy in the world. But the growth rate is the thing. Sometime over the next generation or two, China will become the world’s largest economy. Then there is China’s extraordinary pull on natural resource markets, which gives its economy greater weight in the scheme of things than might otherwise seem, given its size.

“I don’t think that the baton will pass to the Chinese currency — known as the renminbi — anytime soon. But it seems obvious that the dollar won’t be the reserve currency forever. In fact, I would say that the role of the dollar — and, hence, the value of the dollar — looks to diminish meaningfully before the Obama administration is over.”

  Another sign of the times this morning: the airline “boneyard”


As the airline industry busts, businesses that store borrowed, broken or bankrupt airplanes are booming.

Nearly 40 airlines around the world have gone under since the recession began, and the airlines still running have promised to ground over 1,700 planes to match dwindling demand. Turns out you can’t just keep your 747 in the garage, and thus desert salvage yards are reaping exceptional rewards… the number of commercial planes in long-term storage has jumped 29% over the last two months, to over 2,300. U.S. airlines account for 903.

Above is the ironically named Evergreen Air Center in Arizona, where 204 jumbo jets now sit, idled, hoping to be redeployed one day. Sigh. Evergreen charges $60,000 a year to park your plane in their dirt patch. Good work if you can get it… or invest in it.

Given our treatment at the hands of the two dimwits who were running check in for US Airways Friday morning at 5:30 at BWI, we’re surprised there aren’t a couple hundred more planes choking up the desert right now.

  “It’s time we, as parents,” writes another reader in response to the impact the credit crunch is having on American society and the difficulty of funding education, “take our children out of schools and start teaching them at home — with all the information so readily available nowadays and the fact, I think, parents (or at least most) can do a much better job teaching what is really important to their children. Since gov’t has had its grubby hands in the school basket, teachers have shifted from actual teaching to learning how to score on tests with no relevance to what life will hold for these kids once they ‘graduate.’

“The country has dumbed down since my high school days (very long time ago) and is actually producing third-world people. They can’t think for themselves, and forget reasoning. There are a handful who stand on their own, but the numbers are dwindling fast. After a basic first year’s learning, as the child develops an interest in something (auto mechanic or doctor), an apprenticeship should follow as young as 14.”

The 5: We suspect the time will come around when pursuing an apprenticeship to a skilled trade will be honorable again.

Addison Wiggin

The 5 Min. Forecast

P.S. The most surprising feature of Richard Russell’s tribute dinner on Saturday night? Ivan Boesky, he of onerous junk bond fame, was the first keynote speaker. Not something we expected at all.

Over 450 people showed up at the posh San Diego Grand Hyatt to honor the man who most consider to be the grandfather of the financial newsletter industry. Russell’s been publishing his Dow Theory prognostications since 1958. Our own Bill Bonner emceed part of the event, opening with a letter written to Richard from legend-in-his-own-right Harry Schultz, another giant who began his daily musings nearly half a century ago. We who happened upon the industry in our early careers owe a giant debt of gratitude to these independent thinkers.

Still, the greatest relationships yielded by this self-serving medium are with readers. We had the good fortune of sitting next to a gentleman from Holland who flew in expressly for the tribute. He’s employed successfully as a corporate headhunter, but was trained as a mechanical engineer. He turned us on to a company perfecting “nano-solar” sheets, which we promptly turned over to Byron King for further inspection.

The gentleman who sat to our right was a “jeweler” by trade. But for our money, he was a transport genius — specialty: moving diamonds back and forth from South Africa to the United States and Europe. On his arm, a charming South African woman, we suspect half his age. No telling what these types of stories these contacts may yield yet.

We invited them both to Vancouver. And suspect we’ll see them there. Hope you’re making plans to attend too.



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