Money and Markets
With the housing bubble now unraveling before your eyes ...
With deepening concern for the millions Americans of my generation nearing retirement ...
And in the spirit of Thanksgiving, Veterans Day, plus every national holiday that honors America ...
I present ...
My Challenge to the
Democratic Congress
Democrats in Congress, I challenge you to do something that neither you nor your Republican counterparts have ever done before:
- To reveal the truth about the housing bubble -- how it was created by the reckless interest-rate policy of the U.S. Federal Reserve and why more of the same won't fix it.
- To reveal the truth about corporate pensions and post-retirement benefits -- now in the red to the tune of $1.5 trillion, ten times more than it cost to bail out the S&Ls in the 1980s.
- To reveal the truth about Medicare -- with a looming deficit of $32.1 trillion, over two hundred times larger than the S&L fiasco.
- To recognize the real cause of the trade deficit disaster, the worst of any country at any time in history. And ...
- To cope realistically with each of these dangers, without digging us deeper into debt and without debasing the dollar.
Beware! These are not theoretical threats that you can hand off to this or that fact-finding committee.
They are the consequence -- and cause -- of a single, overarching dilemma: 78 million baby boomers approaching retirement age ... with the lowest savings rate in history ... suffering deteriorating health ... living in the world's most indebted nation.
These are not newly-discovered dangers that you have not been warned about before.
U.S. Comptroller General David Walker has told you it's "a demographic tsunami" that "will never recede."
Former Fed Chairman Greenspan testified before your committees that, "as a nation, we may have already made promises to coming generations of retirees that we will be unable to fulfill."
And your own experts have estimated that the total promised benefits -- including Medicare, Social Security, government pensions and the interest on the debt to fund them -- add up to a staggering $53 trillion in liabilities. That's $473,456 per household, more than 5.6 times the $84,454 each household owes in personal and mortgage debt.
Most important, these are no longer just future threats that can be swept under the rug with your standard dose of stop-gap prescriptions.
These are threats bursting onto the scene today, impacting the daily lives of millions of Americans right now, demanding prudent action immediately.
The evidence is everywhere:
Exhibit #1
Housing Bust
In Full Swing
Just this week, the U.S. Commerce Department reported that the number of new homes started by builders plunged 14.6 percent in October, the lowest level in six years and far worse than Wall Street or Main Street believed possible.
The main reasons:
* Home buyers are being scared away by falling prices.
* Home builders are finding that the only way they can sell new homes is by virtually giving them away.
* So the entire industry is finally responding. After months of letting inventories pile up, they are finally starting to slam the brakes on new construction.
This is not just a one-month phenomenon: The number of permits issued for future construction projects has also fallen -- to its lowest level since 1997, pointing toward still greater construction declines to come.
Stop for a moment to consider the stark contrast with the still-booming housing market of just one year ago.
- Back then, housing starts were running at a break-neck clip of 2 million per year. Now they're only 1.5 million, 27.4 percent lower.
- Back then, building permits were nearly 2.1 million annually. Now they're also down to 1.5 million, a 28 percent plunge.
- Overall, it's widely recognized that the U.S. housing market is already in its worst slump in 15 years.
But it has barely begun.
The total inventory of new and used homes waiting for buyers is still the largest of all time. The number of investors and speculators dumping their properties on the market is just beginning to swell.
But if you think the housing bust is severe nationally, look at what's happening in California: Housing permits were down by a whopping 47 percent in September, many times worse than the national average, according to the California Building Industry Association and the Construction Industry Research Board.
For single-family homes statewide, it was even more severe: Down 57 percent from the same time last year.
And in certain formerly hot areas -- like San Francisco, San Mateo and Marin counties -- new housing starts have dropped by an unbelievable 71 percent!
Exhibit #2
Corporate Pension
Plans Disappearing
Or Going Broke
Back in 1985, nearly 90 percent of Fortune 100 companies offered defined benefit pensions to their workers; in 2005, only 37 percent did -- and that number is shrinking by the week.
The human resources consulting firm Watson Wyatt reports that 113 of the Fortune 1000 companies have frozen or terminated a defined benefit plan this year alone, triple the number in 2002.
That's one of the reasons Congress supported the pension reform law that President Bush signed in August, widely considered the most extensive revision of the nation's pension law in three decades.
This is the law which will supposedly force most private employers that provide traditional pensions to their workers to pump in tens of billions of dollars more.
Problem: Most employers don't provide traditional pensions. Period.
Overall, according to the U.S. Bureau of Labor Statistics, only 21 percent of U.S. workers participate in traditional defined-benefit retirement plans -- mostly government workers.
And now, even government workers are in danger of losing their retirement benefits.
For example ...
- The California State Teachers Retirement System, known as CalSTRS, now faces a shortfall of more than $24 billion.
- In Illinois, the five state-run pension funds are only 62 percent funded, leaving a $35 billion deficit -- the worst in the nation.
- The state of West Virginia faces a $5.5 billion pension deficit and an additional $3.3 billion in unfunded workers' compensation liabilities.
- The City of San Diego is facing a pension deficit of some $2 billion. In fact, the mismanagement there is so egregious, the Securities and Exchange Commission just alleged this week that city officials committed fraud by "intentionally underfunding its pension system so that it could increase pension benefits but defer the costs."
According to Business Week, 14 million public servants and 6 million retirees are owed a total of $2.37 trillion by more than 2,000 different states, cities, and agencies.
And as of January 25, 2006, the National Association of State Retirement Administrators and National Council on Teacher Retirement reported an aggregate unfunded liability of nearly $296 billion for the 103 pension systems and 127 total plans in their Public Fund Survey.
(This, by the way, is in addition to the $1.5 trillion shortfall in private-sector pensions and benefits I've been telling you about in recent issues.)
Exhibit #3
MediScare!
Members of Congress, before you draft one single line of legislation, consider the facts:
The baby boom bulge in the population curve is hitting right now. The 78 million Americans born in 1946 begin turning 60 years old this year and will soon be demanding help with their health care costs.
If your only problem were the skyrocketing number of Medicare participants, that would be bad enough. But the cost of caring for each participant is also exploding -- up at the rate of nearly 8 percent per year.
And the trend is accelerating: According to the Medicare Trustees Board, the monthly Medicare premiums for doctor bills will rise 11 percent in the next twelve months alone.
Worst of all, six great American epidemics are crushing the Medicare system: Obesity, heart disease, stroke, cancer, diabetes and Alzheimer's.
The National Institutes of Health, the Centers for Disease Control and the World Health Organization have warned that diabetes alone will claim ten times more victims than it did just a few short years ago.
They also warn that the number of Alzheimer's cases is expected to explode to 16 million by 2050.
The main reason this is gutting Medicare: These diseases are not short-term ailments that can be cured with a single trip to the doctor or a quick prescription. They last for many years -- in most cases, for the rest of a patient's life -- and they are driving health care costs through the roof.
Exhibit #4
Underlying U.S.
Trade Deficit
Still Getting Worse!
Some folks in Washington and Wall Street breathed a sigh of relief when the Commerce Department reported a modestly smaller trade deficit for September -- "only" $64.3 billion instead of the record $69.0 billion of the month before.
Don't let this minor fluctuation lull you into complacency.
The one-month deficit is still larger than the entire deficit for a full year of not long ago. And the modest improvement in September was due to a temporary decline in the price of imported oil.
The primary source of our nation's chronic deficit -- the trade imbalance with China -- has actually gotten worse, while China posted its largest surplus ever in October.
But you can't solve this by erecting trade barriers. Quite to the contrary, those patches can only obscure and worsen the real cause of the deficit:
Americans have gotten so used to cheap money and lavish borrowing, most want more benefits for less effort. They're unable to compete with foreign workers willing to work harder for less money.
My Recommendations
To the New Congress
First, recognize the truth about the housing bust, the pension crisis, the Medicare disaster, and the record-smashing trade deficits. No more patches. No more palliatives.
Second, end the retirement deception. Stop telling us you're going to fix these problems when you know, based on an objective review of the facts, that they're unfixable -- by any government.
Third, give each citizen the opportunity to confront the reality ... and then to deal with it directly by working harder, living less lavishly, saving more.
Above all, give us the tools we need to take our retirement destiny into our own hands, build our own nest eggs, and keep those nest eggs out of harm's way.
My Recommendations
To Investors
First, don't count on Congress to rise to the challenge. More so than ever, you must build your own savings that you control, sheltered from the retirement dangers.
Second, unload vulnerable assets -- especially investment real estate -- and raise as much cash as possible.
Third, protect yourself from inflation. Despite temporary ups and downs, that should include investments tied to gold, energy and other natural resources.
Fourth, diversify your portfolio to include investments tied to the world's strongest economies.
Even before the latest impact from the housing bust, the U.S. economy was crawling along at the anemic pace of 1.6% per year. In contrast, countries like China and India are growing at least five times faster, even after an expected "slowdown" in China's economy from 10% this year to 9.5% next year.
Fifth, recognize that one single nest egg may not be the answer for all your needs. You may actually need two:
→ One nest egg that virtually guarantees a minimum income to cover your necessities. My favorite vehicles: Funds that invest exclusively in U.S. Treasury bills or equivalent.
→ Another nest egg, although not guaranteed, with the goal of throwing off substantial amounts of cash to cover your favorite extras -- so you can truly enjoy your retirement.
Right now, for example, we like China, and our favorite vehicle is a China ETF that has surged 18% since we recommended it in late August. (Click here for details.)
Sixth, above all, stay in touch. Whether Congress rises to the occasion or not ... whether the Dow is up, down or sideways ... the retirement crisis will continue to unfold, with unpredictable consequences.
Good luck and God bless!
