Death Throes for the Traditional Pension

  • The final death throes of the “defined benefit” pension plan…
  • … and a much better choice for reliable retirement income
  • Latest North Korea missile test, and Rickards’ timetable for war
  • The stock market’s “Big 5”… and their overrated cash pile
  • Crude volatile (again)… China’s high-tech bus turns out to be a fraud… readers deliver tough love to their fellow readers… and more!

Pity the paper-pushers at UPS.

Last week the company announced it will freeze its pension plan for non-union U.S. employees — 70,000 people in all. (The drivers are covered by a union contract that expires in a year.)

“UPS is changing retirement benefits for employees after reporting a $9.85 billion shortfall in its pension plan,” says our income and retirement specialist Zach Scheidt. “In other words, UPS hasn’t set aside enough money to cover the payments it has promised to retirees. And it would take a $9.85 billion contribution to the pension plan to make up the difference.

“Unfortunately, UPS isn’t the only company in such a predicament. DuPont and Lockheed Martin are just two of the many companies who have recently made similar decisions, cutting pension benefits in an effort to reduce their debt to retirees.”

The “defined benefit” pension plan has been dying for decades… but now it’s in the final convulsions. Certainly in the private sector.

In 1998, 59% of Fortune 500 companies offered a traditional pension to new hires. By 2015, it was only 20%, according to a report from Willis Towers Watson.

Shortly after the Panic of 2008, 21% of employers had frozen their pension plans. By 2015, it was 39%.

“Companies are struggling to afford pension plans as people live longer, which increases the amount of benefits they receive,” says The Washington Post, fumbling for an explanation.

“The Fed’s experiment with low interest rates has made it very tough for pension plans to generate any sort of meaningful return,” says Zach, offering a more substantive account.

“And with lower returns on their investments, companies like UPS have to contribute more cash to cover pension payments. That’s why the UPS pension plan is short billions of dollars. Because the company simply can’t earn enough interest to cover future pension payments.”

[Ed. note: It’s not just Jeff Bezos’ sorry-ass newspaper resorting to “people living longer” as the excuse for the poor state of pensions — and American retirement in general. We heard the same dodge last week from Minneapolis Fed chief Neel Kashkari during the “town hall” he held. It didn’t ring true for the retirees in attendance, scared to death at how much of their savings they’ve had to plow into the stock market because fixed-income investments generate squat for yield anymore.]

So UPS will push its new nonunion employees into 401(k)s. “This way,” says Zach, “it’s the retirees’ responsibility to manage and grow their retirement funds. And the pension does not have to worry about what happens once employees retire.”

“The widespread demise of traditional pension plans may sound like a bad deal for retirees,” Zach goes on. “After all, without traditional pension plans, retirees can’t count on regular payments from their employers after they stop working.

“But for investors who know how to generate reliable cash payments, this new trend should actually increase the amount of money you can enjoy during your retirement.

“You see, if your employer contributes money to a 401(k) or other savings account for you, you can then use our perpetual income strategy to generate extra cash in these accounts.

“By collecting instant income payments week in and week out, you’ll be earning much more on your own retirement plan than a pension plan would be generating from its fixed-income investments. And that means when you retire, you’ll have a much bigger nest egg to work with!”

Sound intriguing? Does it sound too good to be true? We recently wired up Zach to a polygraph to put his claims to the test. You can see the results right here. Please note: Response to this experiment has been so overwhelming that we’re taking the video offline at midnight tonight. Watch now while you still can.

To the markets, which are mostly treading water as traders recover from their holiday revelry.

After Monday’s big run-up, the Dow is slightly in the red while the S&P 500 is slightly in the green. Gold is quiet after it got a severe whacking on Monday; at last check the bid is $1,222. Gold’s pattern of “higher highs and higher lows” going back to late last year just barely survived Monday’s sell-off.

The big mover is crude, down 3.5% amid signs that OPEC’s exports rose last month. As we write a barrel of West Texas Intermediate is back to $45.38.

The big economic number of the day is factory orders, down more than expected — a 0.8% decline for May. Once again, the chasm between “hard data” like this and “soft data” from surveys is enormous; on Monday the ISM manufacturing survey clocked in at its strongest since August 2014.

Also of note — Volvo’s decision to make only electric and hybrid cars by 2019. Shades of what publisher Aaron Gentzler of our science-and-wealth unit said in this space last summer: “The future of cars is electric and driverless. This isn’t theory anymore. This is happening.”

“By late this year or early next, you can expect a shooting war between the U.S. and North Korea,” says Jim Rickards.

As you might have heard, the North Korean regime did its own July Fourth celebration of sorts, performing its first successful test of an ICBM, an intercontinental ballistic missile, theoretically capable of reaching Alaska.

Now, lobbing a missile isn’t the same thing as “miniaturizing” a nuclear warhead to fit atop that missile. And the alarmist media usually omits the fact that the Norks are still a ways away from that capability.

But the facts almost don’t matter anymore. They’re being overwhelmed by the irresistible forces of geopolitics.

“In April at Mar-a-Lago,” Jim reminds us, “President Trump asked President Xi of China to intervene with the North Koreans. He wanted Xi to persuade them to stop their nuclear bomb and missile testing programs. Trump told Xi that he was willing to hold off on labeling China as a currency manipulator and imposing trade sanctions in exchange for China’s help. Trump gave Xi 100 days to get the job done. Those 100 days are up July 15.”

Obviously judging by Kim Jong Un’s ongoing missile tests, China’s not been able to bring enough pressure to bear.

“China does not want to confront North Korea,” Jim goes on, “and North Korea will not be deterred. By the end of this summer, you can expect an escalation in the currency wars and trade wars between China and the U.S.”

Then comes the shooting war. “The timeline is accelerating and the war may be here even sooner than my original estimate.”

The “Big 5” stocks of the S&P 500 are sitting on more than half a trillion dollars in cash… but that doesn’t make them good buys in the eyes of our Louis Basenese.

“Cash,” he says, backing up a bit, “is the most tangible, liquid asset — and the easiest to value. After all, $1 is worth $1. So it’s easy to tell when you’re overpaying or getting a discount.”

Louis likes to apply what he calls a “density ratio” to evaluate a good cash opportunity: “We simply divide the price per share by the cash per share (total cash divided by shares outstanding).”

Density ratios under 1 are highly attractive… and none of the five biggest stocks in the S&P 500 qualifies, even though they’re sitting on piles and piles of cash. “The density ratios suggest that they’re actually overvalued.

“If you’re building a retirement portfolio,” Louis concludes, “I’d argue against anchoring it with the fabulous five ‘kings of cash.’

“Instead, I recommend buying the microcap stocks on the receiving end of all of the spending. Whether it’s via direct business relationships with these mega-caps with billions in cash — or via an outright takeover.”

With that in mind, Louis has recently completed six years of testing to identify what he calls “marked stocks” — stocks destined to zoom five, six, even 10 times higher in a single day. And as he explains at this link, the next opportunity is less than three weeks away.

As “China bubble” stories go, this one might be the most bubbliscious ever.

Nearly a year ago, to much fanfare, a Chinese company conducted the first trial run of a “Transit Elevated Bus” — a bus with an elevated passenger compartment that straddles several lanes of car and truck traffic…


The Transit Elevated Bus, aka a pregnant roller skate

The company touted the TEB as a panacea for congestion-choked Chinese cities. In reality, Chinese investigators now say it’s an enormous scam.

Over the weekend, police arrested more than 30 people who raised $19 million for the project by the end of 2016, promising a 12% annual return(!).

Chinese media report more than 70 investors are suing. It’ll be fascinating to see what if anything they can recover…

To the mailbag, where several people wanted to sound off after the reader complaints aired here last week…

“Those who whine about the performance of specific investment recommendations need to realize this,” writes the first: “Subscription to an advisory service is no excuse to outsource one’s brain nor one’s responsibility.

“When I receive a recommendation, it’s exactly that: a recommendation that I can choose to act on or not. It’s on me to do further due diligence and it’s on me if the investment goes south. One needs to put on one’s big boy/girl gender-appropriate undergarments and say, ‘I, and no one else, am investing here.’ No one can blame others for what happens in the privacy of one’s own tawdry, dimly lit brokerage account.

“As to Rickards’ recommendations, I find his reasoning coherent and his writing compelling. A rule of thumb I’ve found useful, however, is that when what should happen in markets conflicts with what is happening, go with what is happening.

“Regarding those who expect (feel entitled to?) instant gratification from Rickards’ Gold Speculator, or I guess any of your publications, maybe that’s evidence that investment has indeed gravitated down to the millennials who cannot grasp that gain comes with pain under even the best of circumstances. Suck it up, little snowflakes, and observe that life continues even after your meltdown!

“An analogy I find helpful comes out of The Big Short. I’m admittedly overweighted in gold-related investments, but not by accident. It’s because I’m a big believer that this country is run by idiots, and eventually all Ponzi schemes fail, albeit with unknown timing. At least in the case of gold stocks, things are going up in fits and starts, rather than going down as in The Big Short, but the principle is essentially the same.

“While others salivate at their huge gains in the FANGs and feel invincible, I’m sticking to my guns like the lead guy in the Big Short while others wonder if I’m sane or blind or something. I still have no doubt that in the end this will pay off, but it’s not a short-term game, folks.”

The 5: Thanks for rising to our collective defense.

That said, not everyone’s in the same boat as you are… and we as publishers must be cognizant of that.

Some of our most long-term readers are in your camp. They’re willing to ride gold’s ups and downs. They have both the capital and the patience to do so. Chances are they made a respectable amount of money both from their careers and from their gold investments during the 2000–2011 run-up.

But we also have scads of newer readers who have less capital and less patience. If they’d bought gold, say, at the end of 2013, they’d have basically nothing to show for it after 3½ years — a period during which the S&P 500 has risen from roughly 1,800 to 2,400. They don’t want to hear about gold’s long-term prospects if they’re missing out on juicy stock-market opportunities. So we’re looking for quality recommendations on their behalf as well.

That said…

“You can’t please everybody,” writes our final correspondent.

“Focus on the plus comments, Dave. My philosophy is if you have a complaint, fine; however (not a but :)), come with at least one solution as well.

“Love The 5 — or 2 or 10 or however long it takes. Keep it up.”

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. Last chance: Our over-the-top lie detector experiment — putting our most popular high-end income strategy to the ultimate test — comes offline tonight at midnight.

If you have $20,000 to invest and want to learn how to snag cash payouts averaging $966 per week, it’s now or never: The video comes offline tonight at midnight.

Dave Gonigam

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.

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