The Social Security Crisis, Fed to Withdrawal Mortgage Aid, The Vibe at Grant’s and More!

by Addison Wiggin & Ian Mathias

  • Faraway crisis suddenly a reality of today… Social Security is running out of cash
  • Personal incomes fall while inflation rises… why the stock market is rising despite the consumer’s plight
  • Euphoric extreme: Dan Amoss on the vibe at the latest Grant’s Investment Conference
  • April 1 is no joke to the Fed… massive market intervention scheduled to end this week
  • Plus, why the $1 mark is very important for your investments


  Wanted: Accountants to oversee government fund. Employer seeks relative accuracy, margin of error +/-30%. GED preferred. Optimism required. Candidates to be compensated at market value plus $50,000. No calls please.

  The Congressional Budget Office now predicts the Social Security fund will pay out more than it earns starting this year — as in it’s happening right now.

That’s just a shade off of last year’s forecast, which expected the fund to run a deficit starting in late 2016. And a far cry from the CBO data we used while making I.O.U.S.A. in 2007 and 2008.

And as you can see, the fund is not just dipping its toes in deficit waters. The current forecast reveals a torrential drop from $20 billion surplus to $29 billion shortfall since we premiered the film in Aug., 22, 2008 — before we knew who the current president would be… and, more importantly, before Lehman Bros. crumbled.

Surely, some sort of unpredictable catastrophe precedes such a revision… something that wasn’t even on the national radar in 2009:

“The problem,” The New York Times helpfully suggests, “is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.”

Really. Who could have seen that coming?

  The CBO also bumped forward its forecast for Social Security insolvency late last week. The fund is now expected to be bone-dry… completely of money… in 2037, four years earlier than the 2009 projection.

Why should anyone under 40 put one more penny into this fund?

  Personal incomes fell in 42 U.S. states in 2009, the Commerce Department reported last week. Nevada’s 4.8% fall was the worst. But on average, including the eight states that didn’t suffer declines, personal incomes in the U.S. fell 1.7% from the year before. 

If you’re curious, West Virginia saw the best growth — up 2.1%.

  Meanwhile, prices for consumer goods increased 1.3% over the last year, the Commerce Department reports today.

As you can see, there has been a load of data looking back and confirming many of the projections and forecasts we’ve been making here in The 5. We don’t say that to toot our own horn — at least not overtly — but to once again cast doubt on the ability of mainstream pundits and government spokespersons to get the story right.

Just because you believe the U.S. economy is the most dynamic and productive in the world… does not make it so. A low-saving, high-consumption economy is not a healthy one over the long run. It’s not so much gloom and doom as it is common sense. Again, we refer you to the mainstream approach we took in I.O.U.S.A. for the quick-and-ugly explanation made easy.

We learned last week at Rancho Santana that many Reserve members have yet to see the film… or to read the interviews we conducted with Warren Buffett, David Walker, Ron Paul, Alan Greenspan, Arthur Laffer, Steve Forbes, Robert Rubin, Alice Rivlin and others. Across the political spectrum, the “experts” all agreed — before the crisis hit — that without high savings and investment in production… the economy is facing strong head winds and is susceptible to corrupt politics.

  Roughly 20% of House of Representatives staffers — not congressmen — make over $100,000 a year.

  The stock market continues to defy reality. The Dow and S&P were up 0.5% in the first few minutes of trading.

“We had a bit of reversal last Thursday, but again, the market has been resilient and bounced back,” our resource trader Alan Knuckman told CNBC this morning. “I look for the market to continue to move higher, up to S&P 1,250. The momentum is still strong, and I’m not looking to take profits yet. We are due for a pullback, but when it looked like it was going to happen last week, it didn’t. So I have to respect the trend.”

  “You know that market sentiment has reached a euphoric extreme when nearly every presenter at Grant’s Conference is bullish,” Dan Amoss reports from Jim Grant’s spring soiree.

“The mood in the ballroom at New York’s Plaza Hotel was much happier than the last time I was there, in October 2008. At that point, equity investors were convinced that there was no way the Federal Reserve’s inflation could offset a seemingly unstoppable debt deflation spiral. Liquidation of every asset — regardless of its investment merit — was the order of the day.

“Eighteen months later, we’re closer to the opposite end of the spectrum of fear and greed. Bond investors are reaching for yield, regardless of credit quality. This reach for yield will be a mistake if we see the following in the coming years: private sector deleveraging, a broadening loss of faith in the direction of government policy and slow-to-nonexistent growth in the ‘nongovernment’ economy.

“Big companies have taken advantage of the bond market’s offer to raise money on easy terms and pushed out their debt maturities. Much of the proceeds were used to pay down bank credit lines, rather than for expansion of capital programs. So much of the fall in bank credit has been offset by growth in the corporate debt market.

“Now a consensus is forming that Federal Reserve policy will support stock and bond prices in perpetuity. Several speakers at the Grant’s Conference held this view.”

  However, this week market support from the Federal Reserve is supposed to end. If it keeps to its schedule, the Fed’s program to purchase mortgage-backed securities and Fannie/Freddie debt concludes on Wednesday, the last day of March.

“This is likely to be a big thing,” warns The Richebacher Society’s Rob Parenteau. “The Fed has bought over $1 trillion on government-sponsored entity (GSE) debt from the private sector. Private sector investors have taken the money the Fed has created. “Given the yield on near cash instruments, we believe investors have turned around and invested the proceeds from their GSE sales to the Fed in risky assets. We also believe some of these investors have replaced their GSE positions with Treasury bonds.

“So directly, the Fed has bid GSE prices up and suppressed GSE-related interest rates (think mortgage rates). Indirectly, the Fed’s money creation in the QE ops has suppressed Treasury yields and boosted prices of risky assets. At month end, then, a major prop beneath asset markets will go poof.

“Do you see that line in the powering through $1 trillion on April Fools’ Day? That represents the Fed’s QE purchases of GSE debt… and that is going to do a 180 — it is bound for zero. What happens, then, when broker dealers, households and money market funds go to sell their GSE debt after March 31 and there is no Fed on the other side of the trade, with a bunch of blank checks, prepared to buy the GSE debt?

“Can you say train wreck?”

  Not to be outdone, Treasury officials announced their plan to unload 7.7 billion shares of Citigroup this morning. The transaction, which will take place in scheduled increments over the rest of the year, is being heralded as a big win for Treasury. If Citi shares stay where they are today, the government could bank about $8 billion — more if C goes higher.

We’ll believe it when we see it.

Of course, someone on Wall Street stands to get very rich. This time, it’s Morgan Stanley. The firm won the contract to “underwrite and advise” the sale, as Reuters described it delicately this morning.

  As stocks rise, the U.S. dollar has been on a steady decline. The dollar index is down almost a point from Thursday’s high, at 81.3 as we write. The vibe in Europe is increasingly optimistic that Greece will not implode and ruin the euro. The market grew more confident (?) this morning when the Greeks announced a new $6.7 billion bond sale, scheduled for April 20.

  So if the dollar is down, gold must be up: Indeed, the spot price has climbed about $15 from Friday, to $1,110. Any day that gold is up and the dollar down is a “gudd day,” our friend and mentor Bill Bonner would say. 

  “The dollar mark matters to your penny stock plays,” writes our microcap man, Greg Guenthner. “The more you know about the $1 threshold, the more likely you are to improve your trading success.

“The dollar mark has a certain mystic quality about it. I don’t write this to be cheesy or melodramatic; it is an important milestone in a penny stock trade’s cycle. Market psychology has a lot to do with this phenomenon, and I’m far from the first to recognize this fact and use it to my advantage. Many successful traders have written extensively on the subject. Simply put, the market likes round numbers — and $1 is perhaps the roundest of them all.

“Investors and traders will rally around common points that signal a stock is outperforming. Breaking past an area of key resistance is one of them, and these usually occur in the neighborhood of nice, round numbers. Why? Because traders and investors alike remember prices. If a large number of traders buy into a stock around the same levels over multiple trading sessions, that number becomes an important level for the stock to overcome. It’s that simple.

“It’s also important for me to note that whether a stock breaks $1 based on fundamentals or hype is inconsequential. What matters is that the stock crosses this level — nothing more, nothing less. In the short term, a break of the $1 mark — or another round number near resistance — can lead you to speedy profits.”

Don’t forget about Greg’s upcoming online Q&A. He’ll be answering your most pressing small-cap investing questions, which you can submit, here.

  There’s nothing ironic about Big Pharma and health care companies rallying last week, a reader thinks. “This health care bill was written and supported (behind the scenes) by Big Pharma. You aren’t really so naive to think they’d hand over control of their profits to their minions, are you?”

The 5: Not so much. In fact, we suspect we’re in for a bit of detritus-clearing post-health care reform bill euphoria in the markets… and a continuation of the sucker’s rally that’s demise we’ve been expecting for weeks now.


  “Big government and big business are synergistic and exchange parts and people readily,” adds another. “Corporations give money to both parties to grease the skids and retain homage by politicians who will later be their lobbyists.

“Most of all, small and midsized business is put to a disadvantage by those same new regulations that serve the Fortune 500 bunch. The more regulations, the more they can’t compete with those large companies that have their own legal staffs and legions of MBA types to work the regs.


“Buying Wall Street stocks is simply going along with the system.”

  “So you describe Chris Dodd as ‘lone gunman’?!  Get real!” a reader writes, referring to our coverage of his financial reform bill last week. “Dodd may be leading the charge for effective financial reform, but he’s got the rest of America — the 99% that doesn’t work for the Wall Street Casino — armed and covering his back!


 “I don’t promote big government per se — quite the contrary — but I do support whatever extent of government involvement is required in order to protect the lives and well-being of the vast majority of the American people.”


The 5: By any means, eh? Oy. Early last week, we were unwillingly engaged in small talk at a kids’ soccer game when an otherwise normal mother of three. She let slip she supported a right-wing military takeover of the government. We expected to laugh facetiously afterward. She did not. Revolt of the soccer moms!


Addison Wiggin

The 5 Min. Forecast

P.S. A hearty thank you to the Reserve members who joined us at Rancho Santana on the Pacific frontier last week. We were trepidatious… but the property is so spectacular and we had so much fun we’re already planning “Chill 2.0.” If you’re interested in details… or would even like to request a date… send an e-mail to:


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