Twenty-eight
years ago, in 1977, the stock market opened the year with three consecutive
weeks of decline. And strangely, that never happened again …
… until just now!
This month, the S&P, the Nasdaq, and the Dow have again opened
the year with three down weeks in a row, giving up nearly all of their
post-election gains, pointing to further declines, and raising serious
concerns among investors.
Back in 1977, the market continued falling in January … rallied
a bit in February … declined steadily until the end of October …
and finished the year with a substantial loss. This year, don’t be
surprised if you see something similar.
Needless to say, the differences between then and now are large. Twenty-eight
years ago …
-
the Dow Jones Industrials traded between 1000 and 800 and the
S&P traded between 108 and 90 — less than one tenth of today’s
levels … -
the total federal debt, accumulated over many decades,
was only $706 billion — less than the new debt the U.S.
government now accumulates in just two years, and … -
the worst U.S. trade deficit for an entire year was smaller
than the typical trade deficit of just one month today.
But there are also some uncanny similarities. Back in 1977, much
like today …
-
major efforts were being made to restore some semblance of stability
in the Middle East, but … -
brewing political turmoil in major oil-producing regions threatened
the world’s energy supplies, driving its cost inexorably higher
… - the dollar was falling …
-
housing was booming, with most prices moving up at an accelerating
pace, while … - U.S. consumer price inflation was starting to heat up, and …
-
the Federal Reserve was coming under stiffer and stiffer pressure
to jack up interest rates.
The big picture: Despite the fact that values are higher and deficits
are bigger, the fundamental dilemma facing Washington and Wall Street
today is very similar to that of 1977: How can we keep the energy
flowing from abroad and still prevent a tidal wave of inflation?
Unfortunately, in the late 1970s, America didn’t come close to achieving
that goal. Iran exploded. Oil prices spiraled out of control. Gold
catapulted past $800 per ounce. U.S. price inflation galloped into
double digits. The 3-month Treasury-bill rate surged past 16%. The
U.S. bond market suffered its worst collapse in history.
And now, as we begin the second half of the decade, we face similar
dangers.
I don’t believe they will reach the same extreme as they did before.
But, already …
-
World energy supplies are so tight that the cold weather and
blizzard hitting the northeast of the United States have driven
up the price of crude oil by nearly 20% in a matter of days. - The dollar has plunged to its lowest level in over a decade.
-
Inflation last year ran at triple the pace of a year
earlier. -
Even the Federal Reserve is hinting that it will now have to
jack up interest rates at a faster clip.
These uncertainties cast a long shadow of doubt on your financial
plans, on the long-term strategies of corporations, and on virtually
every major policy initiative of the U.S. Government.
Case
in Point: Social Security Reform
In the months ahead, I will probably be meeting with Washington officials
regarding the president’s Social Security reforms. So this morning,
I began to visualize a meeting, wondering how the debate might evolve
…
“The facts are simple,” says a top Social Security official deeply
entrenched in the debate. “Back in 1940, when Social Security was
still in its infancy, average Americans at age 65 could expect to
live another 12.8 years. Now, they can expect to live another 18.1
years. Even assuming no other changes, this factor alone boosts the
demands on Social Security by over 40%.
“Look
at this table. In 1940, only 6.8% of the U.S. population was 65 and
over. Today that figure has nearly doubled to 12.4%.”
“And by the middle of the century?”
“It will have mushroomed to 20.5%, TRIPLE the 1940 levels.”
She pauses, points to the third column and then, raising her voice
by an octave, says: “The proportion of Americans 85 or older is growing
at an even faster pace. In 1940, they represented a meager
0.3%. In other words, only three out of every thousand Americans.”
“And today?”
“Today, the 85-and-older generation represents 1.5% of the population
or FIVE times more than in 1940. By 2050, they’re expected to make
up 5% of the population, a share that is SIXTEEN times greater than
1940′s!”
“What’s your personal view of this?”
“These numbers are huge, probably the largest population time bomb
with the largest potential shock impact since the Dark Ages.”
The picture she paints is clear: Millions more mouths to feed for
many more years … with fewer shoulders to bare the burden … yet
all still retiring at about the same age as they did years ago.
In response, I tell her about my experiences in Japan in 1980 …
how I met with officials like her … facing essentially the same
problem then as we face right now. “What are other advanced countries
doing?” I query.
“They’re cutting benefits,” she says.
“How?”
“Mostly by extending the retirement age. In the Netherlands, for example,
all retirement plans must have a target retirement age of 65, up from
60 previously, and the government is enacting measures to discourage
early retirement before age 65.
“Austria,” she continues, “has voted to scrap their early retirement
by 2017. France has enacted new rules requiring people to work longer
to qualify for benefits. Italy’s government is proposing to increase
their complete contribution period from 35 years to 40 years. Singapore
wants to up the retirement age from 62 to 67. Finland, South Korea,
Brazil, and Greece are all proposing similar measures.”
“Is that the only way?” I queried.
Back To Basics
Instead of responding, she turns the discussion to traditional, agricultural
society.
Their primary long-term care solution — family; and the primary
“investment” for future retirement — children.
“Once parents are physically unable to farm the land,” she recounts,
“it’s their children or other family members that step in. The elderly,
meanwhile, are still productive, caring for babies, helping prepare
meals, sharing their wisdom. It isn’t until the rise of city-states
that government begins to play a role:
“18th century before Christ: Code of Hammurabi defines the
rights that widows and orphans should have to the estates of their
relatives.
“Over a millennium later: Confucius describes how the Chinese
empire provides ‘regular allowances’ to orphans, widows and widowers,
and ‘old men without sons.’
“Two more millenniums go by: The Bubonic plague wipes out
nearly one third of Europe’s population, creating massive labor shortages
and forcing the state to intervene. All able-bodied men are compelled
to accept employment. All alms to able-bodied beggars are forbidden.
“1601 Elizabethan Poor Law: Local governments build almshouses,
workhouses, public housing, and work facilities for the unemployed.
“Plymouth Colony: Poor and unfortunate are divided into two
groups: ‘the deserving’ — sick, disabled, widows, orphans, and
thrifty old … and ‘the undeserving’ — offenders, unmarried
mothers, vagrants, unemployed, and the old without savings.
“1862: The U.S. government creates a generous pension program
for Union war veterans. But it covers only a minor portion of the
U.S. population.
“1927: Canada introduces social security — subsidized
old-age pension program for citizens 70 years or older.
“Great Depression: FDR follows suit with the present Social
Security system.
“And here we are today,” she concludes. “The entire system on a collision
course with disaster. We can’t go back. We must look forward. But
with modern, self-reliant households, we can also consider restoring
some of the elements that worked for traditional society. Most important,
we must recognize that people are living longer, healthier, potentially
more productive lives.”
The President’s Proposal
“But I notice the president’s proposal doesn’t go there. Why not?”
She leans forward and looks me straight in the eye. “Can I trust you
not to mention my name in any of your reports or any of your speeches?”
“Of course.”
“Then let me be perfectly frank with you: Almost every Social Security
expert in America — inside the Beltway or outside the Beltway,
Democrat or Republican — agrees that any appropriate solution
must include an extension of the retirement age. It’s either that
or outright cuts.”
She hesitates for a moment. But I beg she continue, and she does:
“We could encourage people to do EXACTLY WHAT MOST WANT TO DO —
be more productive in their later years and live a happier, fuller
life. We could phase in the adjustments so people who’ve contributed
to Social Security all their life wouldn’t feel they’re getting shafted.
For once, there would be no freaky mismatch between the proposed solution
and the actual, underlying, fundamental problem.”
As she speaks, I can sense her passion swelling to the surface, and
I think about my own parents.
Dad lived to 89 and never retired. Right up to his last year, even
after he was legally blind, he continued to analyze stocks, track
interest rates, watch the dollar, and advise me on how to run my business.
Mom stopped coming to the office at around 85 and lived to 96. But
after she “retired,” she still used to call me every Saturday when
she received my Safe Money Report in her mailbox. Her mission:
To make sure I knew that there was a typo on, say, page 3 … or a
comma missing on page 7.
Both Mom and Dad could have easily waited a few more years before
collecting their Social Security checks, and so could millions of
other Americans in similar circumstances.
The Social Security official breaks into my thoughts. “But no one
in Washington wants to even consider this option,” she says. “They
know it’s a political hot potato. They know they’d get smacked down
by powerful lobbies from nearly all shades of the political spectrum.
So they’re trying to change the subject by focusing on private investment
accounts.”
“Anything wrong with private investment accounts?”
“No. Not at all. But it has little or nothing to do with the longevity
trends or the demographic time bomb.”
The Premise
“What’s the basic premise behind the president’s proposal, then?”
“The premise is that you can make more money by investing more aggressively
in stocks and bonds than the Social Security Trust fund can make by
investing strictly in government securities. The idea is that everyone’s
extra returns will then help reduce the expected deficits.”
“What’s wrong with that?” I query.
“It assumes nearly all investors will make the right investment choices.
The reality is that some will … and some won’t.”
“But isn’t that the benefit — and the cost — of free choice?”
“Sure. But it still has nothing to do with the demographic time bomb.
The proposal also assumes consistently good, stable financial markets.
The reality is more likely to be a mix of good and not-so-good financial
markets.”
My mind jumps ahead to the future: What happens if inflation really
takes off? Bonds plunge in value. Stocks get chopped up. Americans
chasing bigger returns wind up with bigger losses. Private investment
accounts get decimated. How does THAT impact the retirement of millions
of Americans? I ask myself.
Three More Basic Gripes
With Social Security Reform
“Are you a Democrat?” I ask her.
“No, Republican. Democrats are also protesting but not as loudly as
Republicans.”
“Why not?”
“Not sure. Ask them. But I personally have three more basic gripes:
My first one is that the Social Security reform proposal is a big
budget-buster.”
“How big?”
“Two trillion! Social Security reform adds two trillion dollars to
the federal debt in the early years of the plan. The savings don’t
come until later years.”
“What’s your second gripe?”
“The proposal says they’re going to borrow the $2 trillion from the
public, but they’re not going to count it as part of the deficit.”
“Huh?”
“They want to hide it. They don’t want it showing up in the official
deficit or debt numbers. Everyone will know the money is being stripped
away, that the emperor has no clothes, but no one in an official capacity
is supposed to whisper a word about it.”
And your third gripe?
“Simply this: Social Security may be a time bomb. But the mega-ton
nuclear device is Medicare. The expected Medicare deficits make the
Social Security deficits look puny by comparison. They’re so big in
fact, they’re politically impossible to confront. That’s why most
of Washington is focusing on Social Security instead. Even their Pinocchio
noses aren’t long enough to touch Medicare.”
I leave the meeting pondering one thing:
YOUR Solution
The details are in my Safe Money Report. But here’s my unequivocal
opinion in a nutshell.
Avoid risk. Don’t chase returns except for a small portion of your
capital. Preserve your principal.
Hedge against rising inflation with gold-, energy- and natural resource-related
investments.
Be ready for major opportunities to lock in high yields AFTER interest
rates surge.
Above all, don’t rely on Washington to keep the economy stable, protect
the dollar, or even help provide for your retirement.
Be sure to pursue your own, independent retirement plan.
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
martinonmonday@weissinc.com
Martin Weiss
and “Martin on Monday” are non-partisan. Third-party ads do not necessarily
represent their opinion and should not be interpreted as an endorsement.
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