Friday, December 24, 2010

Who Is Buying Stocks?

First Pension Bomb Detonates

When a public employee of the state retires, such as a police officer or teacher, they receive a pension.  This means the government sends them a retirement check every month to pay for their living costs.

This past week a town in Alabama made major news when they announced they will no longer be sending the payments.  They were forced to decide whether to stop paying the current policemen, or to stop paying the retired policemen.  They chose the latter.

This has been a coming concern discussed for many years (relentlessly on this site), which has been dubbed "unfunded pension liabilities."  People disregard concerns until the day they arrive, and that day is here. 

There is currently an estimated $3,000,000,000,000 (trillion) in unfunded pension liability across the country  The following provides an interactive chart to show how bankrupt your area's pension fund is:

This is different than the muni-bond crisis, which is happening simultaneously.  The muni-bond crisis means that if states cannot raise new capital in the debt market, then the active police officers, teachers, fire fighters, and state workers will not get their pay checks.

Most state governments are currently bankrupt even without factoring in the pension time bomb.

Most assume that our Federal government will step in to fund the difference in muni-bond and pension shortfall.  This will add trillions to the deficit of the federal government, which also happens to be bankrupt.

Now that Americans can see retired workers in Alabama not receiving a pay check, it may be easier for them to understand the term "unfunded liabilities" for our federal deficit. This number includes social security and medicare and is currently at $75 trillion.  Once the debt catches up to reality, which like gravity it always does, it means there will be no social security and medicare checks coming in the mail.

We will most likely never get to that point, unfortunately.  Our Federal Reserve will most likely step in as early as this coming year to announce that QE3 will be focused on purchasing municipal bonds (state government debt) which will cover current debt and unfunded liabilities.

With this market back under control they can then continue to focus on our purchasing our $100 trillion in Federal government debt, including the unfunded liabilities.

It is not possible to put an upside target this decade for the price of gold with the blizzard of printed currency on the way.

h/t MISH

Thursday, December 23, 2010

Defense Spending 2011

Some highlights from the 2011 Defense Budget. (Without my personal commentary on the issue)

On December 22 both houses of the U.S. Congress unanimously passed a bill authorizing $725 billion for next year’s Defense Department budget.

The proposed figure for the Pentagon’s 2011 war chest includes, in addition to the base budget, $158.7 billion for what are now euphemistically referred to as overseas contingency operations: The military occupation of Iraq and the war in Afghanistan.

The $725 billion figure, although $17 billion more than the White House had requested, is not the final word on the subject, however, as supplements could be demanded as early as the beginning of next year, especially in regard to the Afghan war that will then be in its eleventh calendar year.

Last year’s Pentagon budget, by way of comparison, was $680 billion, a base budget of $533.8 billion and the remainder for operations in Afghanistan and Iraq. In July of this year Congress approved the 2010 Supplemental Appropriations Act which contained an additional $37 billion for the wars in Afghanistan and Iraq.

With 2.25 million full-time civilian and military personnel, excluding part-time National Guard and Reserve members, the Defense Department is the U.S.’s largest employer, outstripping Walmart with 1.4 million employees and the U.S Post Office with 599,000.

“Add in what Homeland Security, Veterans Affairs, and the Energy departments spend on defense and total US military spending will reach $861 billion in fiscal 2011, exceeding that of all other nations combined,” according to Todd Harrison, senior fellow for Defense Budget Studies at the Center for Strategic and Budgetary Assessments.

New Homes Sales Continue Cliff Dive

New home sales for the month of November came in at 290,000 annually.  The number was up 5.5% from the all time record low 275,000 from the previous month, which the media spun as extremely positive.  There is no precident in history for these monthly sales as can be seen with the cliff diving in the long term chart below.

Tuesday, December 21, 2010

Lehman Levels Return

The stock market has now breached the level seen 27 months ago during the week of the Lehman Brothers bankruptcy and AIG bail out.

I will have a detailed analysis coming by year end on whether I believe this is the launching ground for higher stock prices, or if this is a dangerous time to enter.  (Hint: don't buy until you read the analysis)

Monday, December 20, 2010

2015 Federal Deficit: $24 Trillion

Since the inception of this website I have routinely kept a link on the page to the now popular US Debt Clock counter. 

It is currently at the very bottom of the page titled: The Ticking Time Bomb

The site added a new feature this week which is what the debt will look like in 2015 based on current rates of growth.  The total national debt, which is currently at just over $14 trillion (see red box below), will have grown to $24 trillion at our current pace by 2015.  Click here for the 2015 outlook.

This is based on the assumption our interest rates on the debt will stay at all time historical lows. If rates were to rise (they will), then the deficit will be far higher.

This also does not include the explosion coming in unfunded liabilities such as social security and medicare.  The total deficit with these items included is estimated at $144 trillion.

It will not be possible for the United States to finance this deficit, and your investment strategy should be focused on how you believe they will default:

1. Informal Default:  The Federal Reserve prints money to purchase bonds (monetises the deficit)

2.  Formal Default: The US declares bankruptcy

Peter Schiff On CNBC

Peter Schiff takes some time to speak with the Bubbleheads on CNBC regarding housing and the artificial government support. Mark Haines refers to the now famous interview with Peter back in 2005 when gold was under $500 and Haines says "Who cares about the price of gold?" Quick refresher below:

And flash forward back to the interview today:

60 Minutes: The Day Of Reckoning