Pensions A Potential Trigger

Last Thursday we promised that we'd "write more tomorrow on disappearing pensions as the possible catalyst for a market crash and major U.S. Dollar rally."

We should have said "Tuesday", not "tomorrow", so today is the day.

We do not suggest that a market crash is imminent or will happen at all. Our current thinking remains as past stated.

In August we wrote that "we feel that the rally since early March, or at least the bulk of it, is over. General markets may certainly rally higher, but we feel that increasingly even if that is the case some sectors will diverge."

That's exactly what has happened. General markets have gone higher of course. As of today the DJIA is only a few hundred points higher, and the important thing to note is the bearish divergence found in an increasing number of stocks and sectors that have been lagging the broader market. For example, XLF, the financial sector ETF, is at the same level it was in August, and an increasing number of stocks have fallen below their 50-day moving averages.

At present we believe there'll be a slow back-and-forth decline in the markets over time to new lows. That decline may well have started in October.

Today we simply wish to suggest what could be the main catalyst for a crash or protracted market slide, and why it could last a decade or more.

Economic problems are many, and the "solutions" so far enacted by those in power only exacerbate and protract these problems. Most think that if a market crash happens it'll be due to the "credit crisis", something to do with banks failing. Perhaps, but it's seldom what most people think will happen that actually does happen in the markets.


First we establish the problem with a series of links. Fans of horror stories will especially enjoy the Pension Tsunami website. The gross mismangement evident in the loss of "invested" pension monies could also fit well into the True Crime genre.


Mish Shedlock has been doing an excellent job putting it into perspective :

Prichard Alabama Files Bankruptcy Over Pensions

City of Houston is Bankrupt (So are California, Oregon, and Pension Plans in General)

Massive Taxpayer Backlash Over Pension Crisis Is Coming

Pension Time Bomb Explodes In US and Canada

CalPERS Admits California "Pension Costs Unsustainable" - So What To Do About It?


It's a world-wide issue :

United Kingdom

U.S.

Canada

Japan

Hungary

Etc.


We ignore the hype about massive amounts of money "on the sidelines" waiting to propel this bear market rally further. First, it's a false claim. Most funds are at cash levels consistent with their historical lows, and most retail investors are currently all-in and probably on margin. Further, with the "baby boomer" generation now retiring there'll be increasing amounts of money being taken out of the markets to protect the diminished wealth left in retirement funds.

Future retirees will have much less government and corporate help thus will need to save and safeguard their own money which means that retirement money will not be put into the equities markets in the first place. As the harsh reality sets in, people will realize that stock markets, real estate, and other too-good-to-be-true Ponzis, bubbles, and retirement schemes won't float them in their old age.

There will not be a bailout for Social Security.




Demographic trends further the problem, especially in Japan and the European Union. There are not enough young workers and taxpayers to fund the retiring masses. People will attempt to work longer in old age, making for greater numbers of unemployed and more competition for jobs and downward pressure on wages with the attendant deflationary economic effects.

This will all cause increasing pressure on the housing market - in increasing numbers people will be selling homes and property to downsize and make ends meet.

Pension funds, wielding hundreds of billions of dollars in the markets, will also need to withdraw investments to save what little they have left. Perhaps this will be done per well-meaning laws in response to public outcry, making things worse as all reactionary government policies do. As the market declines, the "domino effect" will be evident.

This flight to cash is the basis for our thinking that the U.S. Dollar will rally to new highs. Further, factor that while the U.S. Dollar is indeed a fiat currency under constant devaluation, its value is measured against other currencies and most rival currencies are in worse shape.

Regardless of "why", the scenario of the U.S. Dollar rallying while markets crash is not a fringe idea. Roubini: Mother of all carry trades faces an inevitable bust.


What else might happen? Will the government succeed in devaluing the currency enough to hyper-inflate away debts to citizens and foreign nations alike? Will foreign nations stand for it? Will citizens?




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This blog is merely a diary of some of our thoughts and trades and is in no way whatsoever to be considered investment advice of any kind. Always without fail consult a competent, experienced, and honest broker or investment advisor before making any investment or speculative decisions.

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