The $2 Trillion Hole, New Trade of the Decade, A Tech to Watch and More!

by Addison Wiggin & Ian Mathias

  • The $2 trillion hole: Pension funds go from bad to worse
  • Bill Bonner introduces his new “Trade of the Decade”
  • The second wave cometh? Pending home sales plummet 8 times more than expected
  • Plus, Patrick Cox on a technology ready to “power a revolution” in electronics… and your portfolio


  Sometimes, The 5 just writes itself. Follow us through the next couple minutes…

  First, U.S. public pension plans face unfunded liabilities of over $2 trillion, says Orin Kramer, chairman of New Jersey’s pension fund. Kramer is stealing the show in this morning’s FT with a new take on an old story. Sneaky accounting and laughably unrealistic expectations of future returns have led many econ-nerds, your editors included, to suggest pension funds are in a deep, dark hole… maybe as bad as a trillion bucks.

Well, Mr. Kramer, citing his own experience running Jersey’s fund, said today that it’s probably two times as bad. For every dollar the average public fund has promised, he says, it has only 60 cents on hand. In other words, 40% of people with public pensions technically have no money saved on their behalf.

We’ve rang this bell again and again, but hopefully, Mr. Kramer’s admission in this morning’s FT will elicit change — while there is still time. Of course, it probably won’t. Kramer is also a huge player for the Democratic Party. Thus, we suspect certain members of the Senate will reject any notion with his name at the top. Not to mention we’d love to see a campaign built around pension reform… in this land of ballot busting baby boomers, you’d get more votes on a Neo-Nazi ticket.  

  So what’s going to happen to us? Well, here’s what went down last night:

A 66-year-old man shot up a courthouse in Las Vegas yesterday because his Social Security benefits had been reduced. Police killed him, but not before he murdered a security guard and wounded a U.S. marshal.

We aren’t making light of this tragedy one bit, just looking at it from a different angle. Relatively speaking, Social Security beneficiaries have it pretty good right now. What happens when the masses of loyal pensioners find out the emperor has no clothes?

  If reform isn’t in the near future, perhaps state governments could help foot the bill. Heh, nope… 36 states have already fallen into a budget deficit since the 2010 fiscal year began back in July.

  Then what about the federal government? You already know this story: They’ve got around $60 trillion worth of their own unfunded liabilities, plus over $12 trillion in national debt. The U.S. Treasury sold a record $2.1 trillion in notes and bonds last year, a debt accumulation greater than 2007 and 2008 offerings COMBINED. Never one to rest on its laurels, the Treasury is expected to issue a record $2.4 trillion in debt this year.

  Thus, enter the NEW trade of the decade. Bill Bonner and Addison Wiggin hit the nail on the head for 2000-2010 — sell American stocks and buy gold. For the next 10 years, here’s the trade from Mr. Bonner himself:

“There are, of course, two sides to this trade… the long side and the short side. We had no trouble finding things to put on the short side. In a deleveraging period, almost everything goes down. We could have stuck with U.S. stocks, for example. They’ll probably continue to come down… just as they did during Japan’s deleveraging process.

“But who knows? U.S. stocks just had their worst decade since the ’30s. What are the odds that they’ll have another bad decade? We don’t know. But what we look for in our Trade of the Decade, for the sell side, is something that has just had its best decade ever… something that has been going up for so long people think it will go up forever… something that everyone wants.

“What does that describe? Well, the thing that comes closest is U.S. Treasury debt. Yields have been going down (meaning, the price of debt is going up) since 1983. And now, despite a supply that seems to be going off the charts, demand for Treasury bonds, notes and bills has never been stronger. What’s more, if our analysis of the U.S. economy is correct, the supply of Treasury debt is going to continue to rocket upward for many years. Deficits of $1-2 trillion per year are going to become commonplace.

“How long will it be before the market in Treasury debt crashes? How long will it be before hyperinflation… or a debt default… sends investors running for cover? We don’t know… but it seems a likely bet that it will happen sometime in the next 10 years.

“So on our sell side…we’ll put U.S. Treasury debt.

“How about the buy side? Ah… that is something we’ve struggled with. While there are many things that seem likely to go down, there aren’t many that seem destined to go up. Let’s see, what has been beaten down, dissed, battered and abused for the last 20 years or more? What is it that people don’t want? What is it that they expect to go down… possibly forever?

“Of course…Japanese stocks!

“So there is our Trade of the Decade: Sell U.S. Treasury debt/Buy Japanese stocks.”

Bill and Addison updated the Trade of the Decade a bit more thoroughly in their updated edition of Financial Reckoning Day… which you can get for free by clicking here.

  Pimco, arguably the most prolific bond house in the world, agreed with Bill and announced Monday it is cutting holdings of U.S. and U.K. Treasuries. Co-CEO Paul McCulley said, “supply and demand dynamics are likely to be negatively affected as borrowing rises and central bank buying declines."

  Stocks soared in the U.S. yesterday, with major indexes pulling in 1.5% gains. Back from vacation, traders had plenty of New Year’s orders, and good manufacturing reports from the U.S. and China gave some extra incentive to buy. All told, it was the best day for U.S. stocks since early November 2009.

  Commodities were just as popular yesterday. Gold shot up 2.2%, its best day since Nov. 3, 2009, to about $1,125 an ounce. Oil, thanks to a cold snap in the U.S. and growing hopes of a global economic recovery, rose to $81 a barrel. That’s a 14-month high.

  So if stocks and commodities are up, it’s safe to assume the dollar is down. The dollar index is down almost a full point from yesterday’s opening, to 77.2.

  All markets seem to be ignoring this morning’s lone data point: Pending home sales plummeted 16% in November, reports the National Association of Realtors. That’s just a bit off the 2% fall Wall Street was expecting.

Now at 96, the pending home sales index is actually 15% higher than the same time last year, a score that “shows the market has gained sufficient momentum on its own," said Lawrence Yun, NAR chief economist and poster boy for housing hubris. In the same press release, the NAR cited the imminent withdrawal of the first-time homebuyer tax credit as the reason behind the larger-than-expected November fall… so how does that show the housing market can stand up on its own?

  Last, a new addition to your tech lexicon: Nanotech lithography. In the latest issue of Breakthrough Technology Alert, editor Patrick Cox told his readers about the coming boom in a technology that allows us to “print” electronics on virtually anything.

“Xerox has developed a silver-based conductive ink that can be printed on everything from plastics to textiles,” Patrick notes. “The ink’s melting temperature of 140 degrees Celsius is low enough to allow printing on plastics. Instead of expensive fabrication facilities, specialized inkjet printers will be able to print circuits that could be used as part of flexible signage, radio frequency identifier tags and even novelty clothing.

“Beyond logic circuits, energy storage devices will be printable as well. Two years ago, chemists at the Rensselaer Polytechnic Institute in Troy, N.Y., were able to place a thin film of cellulose over a surface of carbon nanotubes. This breakthrough will enable paper and CNT-based batteries. Stanford researchers have been able to take a paper substrate and coat it with ink made of silver and carbon nanotubes to create working ‘paper batteries.’

“Paper-based batteries charge and discharge quickly, making them suitable for a wide variety of technologies. Together, these breakthroughs herald an era of ultra-cheap, easily manufactured energy storage…

“New nanotech-scale manufacturing and materials technologies in the semiconductor industry are going to power a revolution in how we make electronic devices, power our homes and collect and analyze information. Right now, the vast majority of people have no idea how profound these changes are going to be.”

This is just one of several technologies Patrick says are on the verge of changing the world as we know it. For the full list, look here.

  “I agree that the dramatic increase in natural gas supply over the last few years is a result of the frack drilling process,” a reader writes, responding to Byron King’s forecast last week. “It was exempted from the Clean Water Act in 2005 by Congress (fondly known as the Cheney Bill, but approved by most in Congress — donations, please…). That doesn’t make it a good thing, and a national review of this process is necessary.

“This type of drilling has been shown to very polluting for both air and water; the most extreme examples are of people who can now light their taps on fire with their well water due to the methane released by frack drilling… The cost of this "CLEAN ENERGY" needs to be reevaluated and the ‘externality’ costs of all the billions of fresh water (can I have a little benzene with my water?) that will be polluted and all the methane (a much worse gas than CO2 in terms of greenhouse effect) that will be released into the air and water needs to be accounted for. If I were starving, I guess I would eat stale or poisoned food, but it wouldn’t be my first choice. Neither should frack drilling!

“Keep up the great work and best wishes for 2010.”

The 5: Cheers.

  “Hey, give Chicago some credit,” a Chicagoan pleads after reading our coverage on the newly crowned world’s tallest building. “The Burj Dubai is a Chicago product — Skidmore, Owings & Merrill. We know how to build them here, and the local designers and engineers came up with something that is interesting and classic, standing in the midst of many rather weird-looking smaller siblings.”

  “The Burj Dubai brings to mind a similar structure and it may end up having the same outcome,” another reader writes. “That structure being the Burj Babil.”

The 5: We should note that the Burj Dubai now has a new name: Burj Khalifa. Sheikh Mohammad ordered it renamed to honor Sheikh Khalifa bin Zayed, the UAE president and emir of Abu Dhabi that recently saved Dubai’s bacon.

Best regards,

Ian Mathias

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