Retirement Is Whose Responsibility?

• May 12th, 2015
• 5 Min Forecast
• Daily Issue, Issue

  It’s the “generation gap” of the 21st century.

Sort of an old-fashioned phrase, but appropriate today.
“A generation gap,” Wikipedia reminds us, “is the difference of opinions on music, values, politics, etcetera, that occurs between one generation and another, usually between younger people and their parents and/or grandparents.”
It was the rebellious baby boomers in the ’60s who brought the term into vogue. And in their advancing dotage, they’re giving it a new meaning.
  The gap is revealed in a recent poll commissioned by PNC Financial Services. In February, 1,017 adults with investable assets of at least $50,000 were asked whether they agreed or disagreed with the following statement:
“I believe I am solely responsible for my retirement (no Social Security, employer pension, inheritance, etc.)”

• 65% of Generation Xers (defined as those age 35-49) say they agree
• Only 45% of boomers (defined as those age 50-68) agree.

Fascinating.
“Gen-Xers don’t have pensions, and no one I know is counting on Social Security, so we are in it for ourselves,” says Brandon Moss, vice president at United Capital. “It’s been more of a forced preparation, but at this point, many Gen-Xers are more prepared,” he tells the MainStreet site.

Readers of The 5 generally don’t run with the herd… so we suspect even if you’re a boomer, you’re not counting on Social Security to be there — at least not to the degree it was for previous generations.
  The Social Security trust fund “can’t be trusted and isn’t funded,” once quipped David Walker, the former U.S. comptroller general and protagonist of I.O.U.S.A. — the documentary Agora Financial produced in 2008.
The actuaries who oversee Social Security say the fund will be exhausted by 2033 — a mere 18 years from now. At that point, only incoming Social Security taxes would be available to pay benefits, and benefits would have to be cut by 23%.
Last week, however, researchers at Harvard and Dartmouth suggested those figures are, shall we say, optimistic. They say the actuaries have been relying on suspect numbers for the last 15 years. Alas, the researchers wouldn’t be drawn on how much sooner the fund would be depleted or how much more benefits would have to be cut.
  “We have a situation [with Social Security] that is like Enron accounting,” says Boston University’s Laurence Kotlikoff.
Kotlikoff was not a party to the study and feels no obligation to mince words. He says Social Security is sitting on $24.9 trillion in unfunded liabilities through 2088.
That’s maddening when you consider the Canada Pension Plan — our northern neighbor’s version of Social Security — has doubled its reserves since 2004. And projections are it will quadruple by 2040.
But we write today not to suggest you get mad. Indeed, you can even the score and piggyback the Canada Pension Plan — collecting checks running anywhere from $400-4,700 a month.
Our researchers have found real Americans just like you pulling down this income month after month. Sara Yaeger, a secretary from Texas, collects $2,900 per month in “benefits.” Ditto for Carol Alderman, a widow with two children, averaging more than $1,200 in “benefits.”
And no, taking advantage of this additional retirement income won’t affect whatever Social Security benefits you’re entitled to.
We know extraordinary claims require extraordinary proof. Judge for yourself when you follow this link.
  Stocks are generally in the red today, though not dramatically. As we write, the S&P 500 is down about a half percent, at 2,095.
The buzz on the street is all about Verizon’s $4.4 billion buyout of AOL. The deal “will position the mobile carrier as a key player in the realm of digital video,” says ABC News. Verizon also inherits 2.1 million people who still pay an average $20.83 a month for dial-up Internet from AOL.

Treasury yields are backing off, the 10-year a shade below 2.25%. Gold is making another half-fast run toward $1,200; at last check, the bid was $1,193. Crude has pushed back above $60, now $60.88.
  Panic of 2008 fallout, Part 1: A federal judge has meted out some semblance of justice to two banks that palmed off securities packed with junky mortgages onto Fannie Mae and Freddie Mac.
Nomura Holdings and Royal Bank of Scotland will have to fork over roughly $450 million to the Federal Housing Finance Agency — the conservator for Fannie and Freddie.
“The offering documents did not correctly describe the mortgage loans,” wrote New York-based Judge Denise Cote, a Clinton appointee. “The magnitude of falsity, conservatively measured, is enormous.” As many as 59% of the mortgages in the securities were “materially defective.”
The lawsuit is one of 18 the FHFA filed in 2011. Most of the others, including those against Goldman Sachs and JPMorgan Chase, have been settled out of court — preventing any dirty laundry from being aired.
Expect an appeal. “The banks’ lawyers could argue on appeal that even though Fannie Mae and Freddie Mac took steep paper losses on the bonds, their actual losses have been small,” says The New York Times. “All payments on the roughly $2 billion in bonds have been made, except for about $25 million, according a member of Nomura’s legal team, who spoke on the condition of anonymity.”
Indeed, the U.S. Treasury has already recouped $36 billion more than it put in to bail out Fannie and Freddie.
  Panic of 2008 fallout, Part 2: “If it hits, you’ll win big,” says our Chris Mayer — revisiting the case for Fannie and Freddie he first made in our virtual pages around Thanksgiving last year.
“Year to date, both have done well,” Chris says now. Fannie Mae (FNMA) is up 27%, and Freddie Mac (FMCC) is up 21%.
The feds still own 80% of the mortgage giants. “But here’s the kicker,” Chris reminds us: “Uncle Sam is taking 100% of the profits — which it sweeps into the U.S. Treasury. And those profits are substantial.

“The speculation on FNMA and FMCC is a simple bet that at some point the U.S. will stop taking 100% of the profits,” Chris goes on. “If private shareholders, who own 20% of the companies, get their 20% of the profits, the stocks will soar.”
That’s precisely the bet hedge fund guru Bill Ackman (Pershing Square) and mutual fund guru Bruce Berkowitz (Fairholme) are making. Both own meaningful stakes. In his annual letter, Berkowitz wrote, “Under a range of scenarios, the companies are collectively expected to earn at least $21 billion per year.”
Assume a multiple of 15 times earnings and each company would be worth about $17 or $18 a share. This morning, they both trade for about $2.70. Big upside — assuming the feds stop hoarding the profits. Shareholders are suing to make that happen. And at some point, the feds will have to relent just so Fannie and Freddie can build a cushion against future losses.
“It’s interesting, isn’t it?” muses Chris. “It is also highly uncertain as to the outcome and timing. Years could roll by with nothing happening.”
Chris can’t bring himself to make a formal recommendation in either of his newsletters… but he passes it along as a point of interest.
  “The MoneyShow is just kicking off this morning,” writes our income specialist Zach Scheidt from Las Vegas.
“Several keynote speakers are offering quick sound bites of what they’ll talk about this week. Here are some quick bullets from my notes that have stood out to me:

• There is significant concern about whether we are nearing the end of the 6-year bull market
• Margin debt (the amount of money that investors borrow to buy stock) is at a peak level
• The last two times margin debt hit these levels were just before the 2001 dot-com crash and the 2007 financial crisis
• Europe and Japan’s central banks are committed to juicing their economy with stimulus
• But the U.S. Fed is preparing the way to stop juicing the economy
• Today, it is important to focus on protecting your investments instead of being too aggressive in looking for big gains.

“While many of the speakers appear concerned about the market, there is still a lot of bullishness in the group. ‘Bears make headlines, but bulls make money,’ shouted Mark Skousen, one of the few unbridled bullish speakers — which was followed by the loudest round of applause I’ve heard all day from the crowd. Apparently, the crowd here is very bullish — and that makes me very concerned…
“This afternoon, I’ll be attending a breakout session dedicated to simple income strategies that allow investors to pull cash out of markets on a regular basis. I’m excited about this event because it dovetails so closely to what I’m focusing on with my Income on Demand trading service.”
Look for more from that session from Zach tomorrow.
  Small-business owners feel less glum than they did a month ago.

The Optimism Index from the National Federation of Independent Business jumped in April from 95.2 to 96.9. Alas, the number is still well below the post-2008 high of 100 reached in January.
Nine of the 10 indicators that make up the index rose. Unfortunately, the 10th was expectations for future sales.
  Just when we thought we’d seen the last of feral hogs in The 5… they’re back!
Their first appearance was nearly two years ago, when Dallas Fed president Richard Fisher opined in the Financial Times “that big money does organize itself somewhat like feral hogs. If they detect a weakness or a bad scent, they’ll go after it.” Along with the tapir, feral hogs provided our readers with months’ worth of running jokes.
We bid farewell to the feral hog upon Mr. Fisher’s retirement a few weeks ago… but it’s just crashed through a drop-ceiling back into the headlines.
This is at a children’s clothing store… in Hong Kong.

We’re not sure who was more alarmed — the 55-pound 3-foot juvenile female hog, or the window-shoppers looking on. Animal control showed up, tranquilized her and took her to an animal rehab center, according to the South China Morning Post.
“Wild boars are common in Hong Kong,” The Associated Press tells us, “where they are often found roaming the forested hills of the southern Chinese city.” Now you know…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. A special message from Jim Rickards follows. He’s issued a major update to his currency wars thesis. Jim, take it away…

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.