Losing Ground for 10 Years

March 7, 2012

• Pity the 20-somethings... and their elders: Rotten numbers on young people’s wages spell worse news for old people’s benefits
• Greece isn’t fixed, but the market rallies anyway: Dan Amoss on the real threat Europe still poses to your portfolio
• Faber on the “inevitable” event that makes gold — and stocks — a must
• “Financial emergency” in the home of the Hamptons
• Bracing for the zombie apocalypse... readers chime in on gold confiscation (and some possible defenses)... a mock trade update... and more!

The higher education bubble is this much closer to bursting this morning, according to no less illustrious an authority as the New York Federal Reserve.

It finds 27% of student loan borrowers are at least 30 days in arrears.

And that doesn’t count the borrowers who are still in school... or who’ve arranged to postpone payments because of financial hardship (allowing penalties and fees to pile up, but that’s another story).

We’re talking strictly people who are being billed monthly right now — 27% delinquent at least 30 days.

The explanation lies, in part, in another study just out: It finds hourly wages for college graduates dropping at a precipitous rate.

Among men with a degree age 23-29, the average inflation-adjusted wage fell 11% over the past decade. For young women with degrees in the same age range, the drop is slightly less dispiriting, 7.6%.

“New college graduates have been losing ground for 10 years,” says Lawrence Mishel, president of the Economic Policy Institute, which crunched the numbers.



In contrast, inflation-adjusted wages across the general population grew 3% during the decade... although that number is skewed by the fact many low-paid workers have dropped out of the labor force since the economy started going seriously south in 2007.

That has the effect of raising the overall average. Neat trick, huh?

The problem is that young people making sub-par wages are making sub-par contributions to Social Security.

Their contributions are even more puny in light of the payroll tax cut. Yes, that’s due to expire at year-end... but how likely is it that either Democrats or Republicans will be willing to let it go back up?

Social Security spending totaled $725 billion in fiscal year 2011. According to the Congressional Budget Office, that number is supposed to rise to $1.345 trillion in another 10 years. That’s an 85% increase.

Social Security revenue, meanwhile, will not rise at nearly as fast a clip.



What’s worse, the CBO’s projections are always based on rosy scenarios. So the Social Security revenue figures you see here assume, for instance, GDP growth averaging 4.1% from 2014-17.

Yeah, right.

What happens if the wage trend among those people age 23-29 in the last decade drags on as they move into their 30s? It means the distance between the blue and the red lines on that chart grows ever wider.

That’s when a “blue-ribbon panel” steps in and recommends means-testing Social Security benefits, and fiddling even more with the consumer price index to suppress cost-of-living increases.

So it’s more important than ever to pepper your portfolio with alternative sources of investment income. One of our favorite suggestions is here. (If you’re partial to precious metals, you might want to give this a look.)

Stocks are recovering slowly from yesterday’s whacking. As of this writing, the major indexes have recovered about a third of the previous day’s losses.

If, as the financial media told us, the market was jittery about Greece yesterday, it is no more... even though there’s still no deal on how much of a hit holders of Greek bonds are going to take, and the deadline is 3:00 p.m. EST tomorrow.

Thus is today’s mini-rally attributed to a decent employment report from ADP, the payroll firm. It says private employers added 216,000 jobs last month. Uh-huh...

“This constantly levitating market will correct,” says our short strategist Dan Amoss, “and it will do so as quickly as it did last summer.”

And Europe might well prove the catalyst, even if the latest Greek mini-drama reaches a quiet resolution tomorrow.

The problem, Dan says, lies with all the new easy money from the European Central Bank: 1.02 trillion euro handed out to the banks since December in what’s labeled a long-term refinancing operation, or LTRO.

“If investors follow the money,” says Dan, “they’ll discover that banks are depositing the three-year euro loans they borrowed from the ECB right back at the ECB! These banks are, obviously, not in a hurry to speculate with the cash proceeds from their three-year loans.”

“The banks that borrowed three-year money from the ECB at a cost of 1% per year are willing to redeposit the cash at the ECB for a 0.25% per year return. In other words, banks are willing to suffer a ‘negative carry’ of 75 basis points just to have cash available to satisfy depositors at a moment’s notice.”

“The most plausible explanation for this behavior?” Dan asks rhetorically: “Banks will use this cash to satisfy their own lenders and depositors, many of whom will decide not to roll over their loans to these banks.”

That means the ECB will have to roll over the LTRO loans. That wasn’t the idea, but that’s how it’ll work out. “A better name for the ‘long-term refinancing operation,’” Dan says, “would have been ‘infinite refinancing operation’ (for as long as the euro exists) — or, for the acronym fans, IRO until RIP EUR.”

“As European investors realize this LTRO cash will be used simply to satisfy maturing liabilities, we’ll probably go right back to the market environment we saw in July-September 2011.”

So what do you do about it? “All these central bank rescues do,” says Dan, “is impose the cost of bank bailouts onto holders of paper currencies.”

“It’s why the S&P 500 remains 50% below its 2008 peak in real (gold) terms, while on the surface, it appears to be breaking out in nominal terms”:



“By the end of this bear market,” Dan concludes, “the S&P will be an even tinier fraction of gold prices. If you save heavily in the form of gold, your buying power when the next great stock buying opportunity arrives will be that much greater.”

Gold is regaining its footing after yesterday’s drop, the bid currently $1,685. Silver has reclaimed $33, now back to $33.43.

Oil is likewise recovering after yesterday. A barrel of West Texas Intermediate goes for $105.69.

All remains well for our “mock trade” in the binary options market. On Monday, Abe Cofnas suggested a bet that oil would end the week in a range between $103.75-$108.75. If he’s right, it means a gain of up to 19.5% in a scant four days. Stay tuned...

“I think sooner or later, the U.S. or Israel will strike Iran — it’s almost inevitable,” says Marc Faber, eyeing a factor already keeping the floor on oil above $100.

“Say war breaks out in the Middle East or anywhere else: [U.S. Federal Reserve chairman) Bernanke will just print even more money — they have no option... they haven’t got the money to finance a war,” he said at a conference in Dubai.

“You have to be in precious metals and equities... most wars and most social unrest haven’t destroyed corporations — they usually survive.”

The estimable doctor suggested an ulterior motive for an attack on Iran: keeping China down, given its dependence on Middle Eastern oil. “The Americans and the Western powers know very well they cannot contain China economically... but one way to contain China is to switch on and switch off the oil tap from the Middle East.”

“I happen to think the Middle East will go up in flames.” Aside from precious metals and select stocks, here’s a protective strategy worth considering.

In a reminder that localized fiscal crises have not gone away, Suffolk County, N.Y., has declared a “financial emergency.”

Suffolk County is home to the Hamptons and the palatial estates of the Wall Street elite. Nonetheless, the county recorded a deficit last year, the first in two decades.

How exactly this will impact everyday life is up in the air: Under the emergency declaration, the county’s chief executive can “embargo” up to 10% of the funds in each county department.

But as we noted last fall when an “Occupy the Hamptons” movement was gearing up, beach goers drown because there are no lifeguards, the East Hampton dump is closed on Wednesdays and autumn leaf pickup hasn’t happened since 2009.

If it can happen there, it can happen anywhere: As we’ve long said, the mother of all financial bubbles will make itself felt first on the local level. Prepare accordingly.

Meanwhile, the gods are reminding us they have, if nothing else, a sense of humor: Standard & Poor’s is on the verge of rejiggering the way it rates municipal governments.

Result: As many as one-third of its ratings might be revised a notch upward.

We’d expect no less from the outfit that gleefully rated subprime mortgage-backed securities AAA back in the day.

If we didn’t have enough to concern ourselves with in 2012 — European crises, Middle Eastern wars — Michigan State University is offering a course called Surviving the Coming Zombie Apocalypse.

Really.

In fairness, the subtitle of the course is Catastrophes and Human Behavior. The zombie apocalypse part is just an attention-getter. “Students will learn about the nature, scope and impact of catastrophic events on individuals, families, societies, civilizations and the Earth itself,” says social work instructor Glenn Stutzky.

Key to the experience will be “a catastrophic event simulation,” says a university press release, “which will be in the form of a theoretical zombie pandemic.” The good professor has also posted a YouTube video to gin up interest. [Warning if you have a weak stomach: The zombie gore is pretty realistic.]



We’re not sure how the “coronal mass ejection” — that is, a giant solar flare — figures into the rise of zombies. But we do see that overnight EST the sun fired off two X-class flares, NASA’s strongest category. “It appears direct enough,” according to SpaceWeather.com -- News and information about meteor showers, solar flares, auroras, and near-Earth asteroids, “to deliver a glancing blow to our planet’s magnetic field on March 8-9.”

Don’t say we didn’t warn you...

“Yes, they could try to confiscate gold,” says a reader reviving a familiar theme, “by going through every record of every reputable gold dealer here in the states for as long as they have sales records.”

“Then they would know who bought gold and they would hunt them down like the unpatriotic dogs that they are.”

“But perhaps the gold that was purchased was subsequently lost, stolen or spent? (or in the case of the more prudent, hidden... and not in a safe-deposit box).”

“They can’t take what isn’t there.”

“Regarding the suggestion that storing gold offshore will help protect your gold if the government decides to confiscate it — that’s all fine and good, but what good does it do if you don’t have (and can’t get) physical possession of the gold?”

“Given that scenario, you can’t bring it into the country... other options? I suppose you could convert it to a currency first?”

The 5: Exactly. And while there are no guarantees... chances are in a crisis, there will be no limits on how much currency you can bring into the country; the government will be far more concerned about it leaving.

Addison describes his favorite “offshore gold storage programs” in a package of special reports available here.

“I really do enjoy you folk,” writes our last reader of the day — “interesting information with a chuckle.”

“Can’t help it — each time I see the ‘Heh,’ I just have to chuckle with you.”

“I’ve learned a lot and appreciate the approach. Tell the kids, learning can be fun. Just a quick appreciation note, no amazing insights from me. Have a great week, month, year — you deserve it.”

The 5: Thank you!

Regards,

Dave Gonigam
The 5 Min. Forecast

P.S. “Health care,” says our biotech specialist Patrick Cox, “has been the only sector to grow during the Great Deceleration, as some are now calling our current troubles. This trend will accelerate as already existing but revolutionary medical technologies emerge from the regulatory shadows.”

“The impact of these technologies will be felt not only by the investors who bet on transformational life sciences. They will rescue our economy from the pit that has been dug by profligate politicians and dependent constituencies.”

“I’m not exaggerating. As bad as things have become, forthcoming medical technologies are powerful enough to pay off the national debt, and then some.”

If you’re skeptical, we understand. But Patrick makes a powerful case. Decide for yourself here.
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