Curried Wealth Building
Finding an Edge

If you want help with your finances, give me a call at 703-791-3243.
August 21, 2010
Issue 110  -  The Past is Prologue
 
Cycles are the nature of the world.  Tides.  Seasons.  Orbits of planets.  These things happen over and over.  "There is nothing new under the sun," is a famous bible quote and holds true because of this quality of things.  In that vein, let's look at a chart:
 
 
 
This shows the national savings rate over the last 60 years.  This chart stops in 2007 and the rate is up to around 6% today.  The massive leveraging of our system that was started in the early 1980s is slowly being reversed.  As day follows night, deleveraging must follow a leveraging.  There is no alternative.  We don't live in system that can be endlessly levered up to infinity.  Eventually, the piper must be paid.  As more and more people realize the error of their ways, they pull their horns in and spend less.  This is great for the fiscal condition of these families, but is very bad for the economy, at least in the short to intermediate term.  Therefore, savings will increase to a level of at least 8 or 9%.  This means the economy will get worse before it gets better.
 
Another cycle that is playing out involves the stock market.  Where are we at in this cycle: (from zerohedge.com)
 

Retail Investors Don't Care If Stocks Are Up Or Down, They Just Want Out - Record 15th Weekly Outflow From Domestic Stock Funds

Tyler Durden's picture
Submitted by Tyler Durden on 08/19/2010 10:56 -0500



Retail threw in the towel weeks ago, which is why at this point confirmation that nobody is trading is like watching reruns of Weekend at Bernies (or GETCO's). ICI reports that the week ended August 11 saw a record 15th weekly outflow from domestic stock mutual funds, this time of $2.1 billion. YTD outflows are now just under $48 billion. Hedge funds are not the only ones who missed the miraculous and completely senseless July stock ramp: retail pulled out $13.1 billion in the same time, and has followed up by redeeming another $4.1 billion in August so far: nothing matters anymore - stocks can go up, they can go down: it is all the same to the one segment of the stock market responsible for the biggest portion of market capitalization. There is no improvement in the trend - retail has no faith in stock valuations, in the SEC, in the possibility that another flash crash won't happen tomorrow. Furthermore, retail is getting older and the retiring baby boomers would rather drink cyanide than put their money in stocks. We wish all the best to the computers and the Primary Dealers - they are now all alone. We dread to even think what cash levels are like at mutual funds.

 
 
This (the stock market) is a very long cycle, usually in the 17-20 year range.  We are now about 10 years into the "down" phase.  As with all cycles, this one doesn't go straight up or down.  At the end of this phase, most people won't want to touch a stock with a ten foot pole.  This is just furthering of the cycle.  As more and more people pull out of the stock market, there is less "fuel" to drive it higher. 
 
How about the credit market.  Where are we at in that cycle?  (the next three charts are from contraryinvestor.com which is an outstanding site for an overall view of the market and economy and I highly recommend it.)
 
 
 
This chart shows a turning point.  In the green shaded area we are seeing something not seen for many, many years.  A down turn in the credit market.  There is now less credit than before.  This is not good for a system that relies on inflation.  Now look at this chart which shows the data in a rolling format:
 
 
 
Here you see the debt as % of GDP.  The lower part shows that the GDP growth, even though there has been an ever increasing debt level, has been going down.  In fact, in the last decade it has taken over $5 of debt to produce one additional dollar of GDP growth.  That is incredible and truly shows the definition of "pushing on a string."  The last chart probably shows our fate:
 
 
 
As you can see Japanese have had virtually no GDP growth in the last ten years.  Many claim we are on the same path as Japan, but delayed by ten years.  This would mean no recovery is in the offing.  Our economy will slowly grind to a halt.  I unfortunately agree.  Another side effect of this downturn is evident in this article:
 

Fidelity: retirement fund withdrawals rise in downturn

By Ross Kerber

BOSTON, Aug 20 (Reuters) - A record number of U.S. workers are tapping into their retirement accounts to make it through the economic downturn, Fidelity Investments found in a survey released on Friday.

Among the 11 million workers whose 401(k) plans are run by Fidelity, 11 percent took out a loan from their plan during the 12 months ended June 30, the company said, up from 9 percent at the same point a year earlier.

By the end of the second quarter, plan participants with loans outstanding against their 401(k) accounts had reached 22 percent versus 20 percent a year earlier.

Hardship withdrawals were also on the rise, although in absolute terms remain quite low.

During the quarter, 2.2 pct of Fidelity's active 401(k) participants took a hardship withdrawal, up from 2 percent a year earlier, and another peak, Fidelity said.

Often those withdrawals were used to prevent foreclosure on a home or pay college tuition.

"People have been looking to their 401(k) plans as a source of relief to help them meet financial hardships," said Beth McHugh, a Fidelity vice president who oversees the area. "For many individuals that is their primary savings vehicle."

Loans and withdrawals were highest among workers between 35 to 55 years old, Fidelity found, peak earnings years.

Fidelity, the Boston mutual fund giant, is also the country's largest administrator of retirement savings plans like 401(k)s, making its quarterly survey a closely watched barometer of saver behavior.

As more companies end traditional "defined benefit" plans like pensions, workers are relying more on "defined contribution" plans like 401(k)s to carry them through retirement.

To encourage savings, tax codes and other rules discourage early withdrawals. Distributions from 401(k) plans are taxed as ordinary income, and withdrawals by individuals younger than aged 59 1/2 may be subject to an early withdrawal penalty.

Balances in 401(k) plans, which tend to be held in mutual funds dominated by U.S. equities, slipped in the second quarter as major stock indexes tumbled more than 10 percent.

The average 401(k) balance as of June 30 was $61,800, up 15 percent from a year ago but down 7.6 percent from $66,900 as of March 31.

Fidelity found signs of continued thrift in the workforce. The average percentage of salary saved in a 401(k) held steady at 8 percent, similar to the rate in the first quarter, while 32 percent saved 10 percent or more of their pay.

But the rising rates of loans and withdrawals show more people have turned to their savings to cover basic expenses, McHugh said. She added that second-quarter rates tend to be higher as parents look for ways to cover college tuition.

Nevin Adams, editor at plan sponsor.com, a site for the retirement-planning industry, said the results were somewhat surprising since other plan providers had reported falling rates of loans and withdrawals recently.

But since Fidelity serves many smaller businesses and more varied geographies than do competitors, it may have come across a trend sooner than others, Adams said.

"Unemployment benefits have been running out for people, and it's possible they're seeing a double-dip of withdrawals from people trying to make ends meet," he said.

Plansponsor.com estimates that of the $2.7 trillion that corporate employees keep in 401(k) plans, Fidelity serves as "recordkeeper" for the largest amount of assets, $838 billion.

 
 
 So we have more and more people making the decision to take a LARGE penalty to remove their money from their tax deferred accounts to maintain their lifestyles and pay their bills.  This is usually a financial disaster.  Unless these people are taking out this money to invest in gold and silver, where it could possibly pay off, this is a stupid thing to do.  This shows desperation on the part of these people and will mean more and more will have to work longer and longer. 
 
If you didn't notice, the average 401k account is only $61k.  This is for an average age 45.  Even older Americans don't have much more than $100k.  This is totally insufficient to live on.  In fact, with today's near zero interest rates, these folks don't have a chance to have a comfortable retirement.  Think about it, could you live off 2 or 3 thousand plus social security?  Remember, that there are fewer and fewer people with defined retirement plans.  As of the end of 2008, there were only about 20% of all workers who had these plans.  That means that the large majority of people will only have their 401ks, savings and social security.  That is just not going to cut it.  People will have to work.  That is just the sad fact of reality.  Make sure you aren't one of these people and put a good portion of your assets in hard assets including gold and silver.  They are the only asset class which will survive the coming storm.
 
I'll finish up with two short movies which show something that very few humans ever get to see in person...a dolphin stampede!  Have a great week!