This 5,000 Year Low Is Ruining Your Retirement

By Justin Spittler

The global banking system, and your financial future, are at serious risk right now. To understand why, just look at what's going on with the government's latest radical policy. Regular Dispatch readers know we're talking about rock bottom interest rates. According to MarketWatch, global interest rates are at the lowest level in 5,000 years. Credit is cheaper right now than at any point since the First Dynasty of ancient Egypt, around the 32nd century BC. Today, we'll explain what this means and how to protect yourself going forward..…

Interest rates didn’t get this low “naturally.” They’re at record lows because central bankers put them there..…
In 2008, the Federal Reserve dropped its key rate to near zero to fight the financial crisis. It’s kept rates there for eight years to encourage borrowing and spending. Other major central banks did the same thing. According to MarketWatch, there have been more than 650 rate cuts since September 2008. Rates in Canada and England are also near zero. In Europe and Japan, rates are below zero.

As we’ve explained before, negative interest rates basically tax your bank account. Instead of earning interest on the money in your bank account, you pay the bank. Not long ago, negative rates were unheard of. Today, more than $12 trillion worth of government bonds pay negative rates, up from $6 trillion in February. 

They’ve even seeped into the corporate debt market. According to Bloomberg Business, more than $300 billion worth of corporate bonds now “tax” bondholders. Central bankers told us low and negative rates would “stimulate” the economy. But, as you’re about to see, they’ve done far more harm than good.

Central bankers made it much harder to retire..…
That’s because rock bottom rates don’t just make it cheap to borrow money. They make it tough to earn a decent return. From 1962 to 2007, a U.S. 10 year Treasury paid an average annual interest rate of 7.0%. Today, a U.S. 10 year Treasury yields just 1.5%, an all time low. It’s the same story around the world. Last week, 10 year bonds in Ireland, England, Germany, France, and Japan all fell to record lows. In Japan, you actually have to pay the government 0.23% every year you own one of its 10 year bonds.

This is a serious problem for hundreds of millions of people. For decades, retirees could earn a safe, decent return owning these bonds. Some folks even lived off the interest they earned from these bonds. These days, you have to own riskier assets like stocks to have any shot at a decent return. Central bankers have effectively forced retirees to gamble with their life savings. Rock bottom rates are a serious threat to major financial institutions too.

According to U.S. banking giant Citigroup (C), low and negative rates are “poison” to the global financial system..…
They could make pension funds, insurance companies, and banks “no longer viable in the long term.” Business Insider reported last week:

As Citi notes: "Viability in its strong sense means profitability (a rate of return on equity at least equal to the cost of capital). In its weak sense, viability means solvency." Basically, Citi is warning that the negative rates may stop institutions being able to make money, which in turn would hit their ability to pay out on things like pensions and insurance policies.

This is a major risk even if you don’t have a pension or life insurance policy. That’s because pension and insurance companies oversee trillions of dollars. They’re pillars of the global financial system…and negative rates are destroying them.

Rock bottom rates could also put some of the world’s biggest banks out of business..…
You see, banks earn most of their money making loans. When rates are high, they make more on each loan. When rates are at record lows, like they are today, banks often lose money. Business Insider explains how today’s record-low rates are starving banks of income:

Citi points out that: "Banks in large part live off the differentials between lending and borrowing rates or between investment returns and funding rates." Persistently low interest rates could hit these differentials, lowering profitability and seriously harming banks in the long run.

Profits at America’s four biggest banks fell by an average of 13% during the first quarter…
This group includes Citigroup, Wells Fargo (WFC), Bank of America (BAC), and JPMorgan Chase & Co. (JPM). European banks are doing even worse. Swiss bank UBS’s (UBS) profits plunged 64% during the first quarter. Profits at Deutsche Bank (DB), Germany’s biggest lender, fell 58%. Spanish banking giant BBVA’s (BBVA) earnings fell 54%. The CEO of Deutsche Bank warned last month:

In the banking world, we are currently struggling with negative interest rates.
We will struggle more as the effect of those negative interest rates plays out into our deposit books.

Dispatch readers know some of Europe’s most important financial institutions are looking for ways to get around negative rates..…
Commerzbank, one of Germany’s largest banks, said last month that it was thinking of pulling money out of Europe’s banking system to avoid paying negative rates. Other banks have started making riskier loans and buying riskier assets to offset rock-bottom rates. The Financial Times reported in March:

Gonzalo Gortázar, chief executive at Spain’s Caixabank, expressed concerns about a build up of risk in the banking system as a whole. “In a world of low or negative interest rates, that is a possible consequence; you could see banks taking more risk,” he said.

Longtime readers know excessive risk-taking by banks contributed to the 2008 financial crisis. As a result, the S&P 500 plunged 57% from 2007 to 2009. And the U.S. entered its worst economic downturn since the Great Depression.

Bank stocks are already trading like a financial crisis has begun..…
Swiss bank Credit Suisse (CS) has plummeted 63% over the past year. Deutsche Bank is down 60%. Royal Bank of Scotland (RBS) is down 59%. Mitsubishi UFJ Financial Group (MTU), Japan’s biggest bank, is down 39%. These are huge drops in short periods. Remember, these are some of the most important financial institutions on the planet.

We encourage you to take action now..…
Our first recommendation is to avoid bank stocks. Low and negative rates are eating these companies alive right now. And it could be years before governments abandon these failed policies. According to Fed Chair Janet Yellen, low interest rates are the “new normal.” We also encourage you to own physical gold. As we like to remind readers, gold is real money. It’s preserved wealth for centuries because it has a rare set of characteristics: It’s durable, easy to transport, and easily divisible. A gold coin is valuable anywhere in the world.

This year, gold has jumped 26%. It’s trading at its highest price in two years. But Casey Research founder Doug Casey says this rally is just getting started. According to Doug, gold could soar 500% or more in the coming years. If you’re nervous that central bankers will take this interest rate experiment too far, own gold. It’s the best way to protect yourself from desperate governments.

We also encourage you to watch this short presentation. It explains how these failed monetary policies could spark something much worse than a banking crisis. As you’ll see, this is a threat to you even if you don’t a have a single penny in the stock market. Click here to watch this free video.

Chart of the Day

Deutsche Bank is trading like a financial crisis has begun. Today’s chart shows the performance of the German banking giant. You can see its stock is down more than 50% over the past year. Last Thursday, it hit it a new record low. Like other European lenders, low rates are killing Deutsche Bank. Last year, the company lost $7.5 billion. It was its first annual loss since the 2008 financial crisis. And yet, its plunging stock suggests more bad results are on the way.

According to the International Monetary Fund (IMF), Deutsche Bank is the world’s riskiest financial institution. That’s a problem even if you don’t keep money with Deutsche Bank or own its shares. The Wall Street Journal reported last week:

The IMF also said the German banking system poses a higher degree of possible outward contagion compared with the risks it poses internally. “In particular, Germany, France, the U.K. and the U.S. have the highest degree of outward spillovers as measured by the average percentage of capital loss of other banking systems due to banking sector shock in the source country,” the IMF added.

In other words, problems at Deutsche Bank could spread to other banks around the world. It’s another reason why you should avoid bank stocks and own gold right now.

The article This 5,000-Year Low Is Ruining Your Retirement was originally published at caseyresearch.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

The Biggest Trade Ever....No Exaggeration

By Jared Dillian

I won’t keep you in suspense. The biggest trade ever is in demographics. In particular, our rapidly increasing life expectancy.

Quick story. My Coast Guard friends are retiring now. You get to retire after 20 years of service, but some of them have been taking advantage of early retirement and are leaving the service as young as age 40.
Oh my God, what a deal: At age 40, you can bring home about $50K a year and then start a whole new career on the side!

In the old days, you could offer that deal because military folks would die at 47. Now they will live to 100.
Paying out benefits for 60 years to retired military personnel doesn’t sound like a great deal for the taxpayer.
Of course, the military pensions are just the tip of the iceberg. To receive Social Security, you can retire at age 62 (or 67 for full benefits). Again, that’s fine when most people die before 62. The blended life expectancy (for both men and women) is almost 79 years and trending higher.

Or my favorite chart on life expectancy ever, also a rebuttal to those who don’t like capitalism.

If you pay attention to Silicon Valley stuff, you know that Google and Ray Kurzweil and some other folks are working on projects that will allow us to live to 150 or even beyond. That would involve doing a couple of things, first

1. Curing cancer
2. Curing heart disease
3. Curing Alzheimer’s disease

You do these three things, it increases life expectancy by another 10 years or more. And we are actually doing those things!

Once you have a cure for all known diseases (attainable in my lifetime), then you have a different problem. Cells get old and die. The Silicon Valley folks are working on that too. Funny, if you don’t smoke, eat right, and get a little exercise, you will pretty much live to 80, no matter what. What happens beyond that is up to genetics, which we will solve one day. So what will the world look like if people live to 100, 150, or more?

It Looks Like Greece

Greece’s retirement age (to receive benefits) used to be 55 years. Again: retiring at 55, what a deal! I would only have 14 more years to go. People are pretty healthy at 55 (though maybe not the Greeks—they have the highest rate of tobacco use in the developed world).

So if people live way longer than the retirement age, the Social Security system goes kablooey. It just does. And yet people resist all attempts to reform it. We know Social Security is in trouble. George W. Bush tried to tackle it. For all his faults, it was the right thing to do. But he got laughed at.

The first thing we will do is to means-test the benefits, which will just make it more progressive but won’t solve the actual problem. You need to push back the retirement age, like, to 80.

But wait a minute. There aren’t even enough jobs for people to work until age 80.

I know…..

The World Was a Lot Simpler When People Just Died When They Were Supposed To

We’re going to look back at the 1940s-2000s as an exceptional period in economic history—with high, virtually straight line, uninterrupted economic growth. We had debt problems before, but biology has made them intractable.

In fact, the whole profession of economics is based on the very idea that there is population growth and inflation. What happens if birth rates decline? They are. Population growth rates will peak very soon. (By the way, the old Malthusian idea of overpopulation is being discredited.) What does the profession of economics look like with declining populations, people living longer, a dearth of unskilled jobs?

Is it nonstop deflation?

Many economists predict years of global deflation based on this premise. They say that you should buy bonds at any price. It’s a compelling argument. I think we’re going to learn a lot of really interesting things about money velocity in the coming years.

The Trade

Like tech in the ‘90s and energy in the 2000s, health care has been and will be the trade of the 2010s. You have the happy accident of huge technological advances and a government that seems willing, for the time being, to pay for it all. You hear some squawking about the cost of some treatments, but seriously, if you can cure cancer for $250,000, who is going to say no? Especially when that person’s chemotherapy, radiation, and hospital bills could easily exceed $2,000,000.

Lots of folks thought that Obamacare would tomahawk the health care sector. In classic market fashion, it has done the exact opposite. The insurers in particular have been the biggest beneficiary. You probably saw the recent Aetna/Humana merger.

People have tried for years to short biotech. Hasn’t been fun for them.

People have funny attitudes about death, you know. You ask someone if they’d like to live to 100, 120. “Noooooo,” they say. “I wouldn’t want to just sit in a chair.” Me, personally, I’d be okay with sitting in a chair. But the point of these treatments is that you can be active into your 100s. What then?

“I don’t know…” they say.

Are you kidding me? Forever young, my man. I’m 41, and I look a lot younger than my parents at the same age (sorry, Mom and Dad). I’m still DJing parties, for crying out loud.
Still don’t get the point of Snapchat, though.

Jared Dillian

The article The 10th Man: The Biggest Trade Ever (No Exaggeration) was originally published at mauldineconomics.com.

Get our latest FREE eBook "Start Identifying Patterns in the Markets Today"....Just Click Here!

Thoughts from the Frontline: Rich City, Poor City

By John Mauldin

"The future is already here," intoned William Gibson, one of my favorite cyberpunk science fiction authors, "it's just not very evenly distributed." Paraphrasing Gibson, the pension crisis is already here; it's just not very evenly distributed. For the past two weeks we've been exploring the problems of state pension funds. This week we will conclude our look at pension plans for the nonce with a 30,000-foot overview of the states and then take a deeper dive into one city: mine. This will give you at least one version of how to do your own homework about your own hometown. But fair warning, depending on your locale, you may need medical help or significant quantities of an adult beverage after you finish your research. Then again you may be pleasantly surprised and congratulate yourself on choosing a particularly adept hometown. And be on notice that, no matter what your personal conclusion and how well-grounded your analysis is, there will be people who live in your neighborhood who think you are utterly full of, well, let's just say "nonsensical matter" and leave it at that. This is a family letter.

Into the Transformational Future

First, a quick announcement. I am constantly asked where the future jobs will be, and I think hard about the answer to that very personal question (it's crucial to those of us who have young kids). Will we see Gibson’s dystopian world or Ian Banks' world of abundance? The answer is, of course, that secular growth in employment will come from the new, transformational technologies that are already being created all around us, truly new industries that will change everything and create opportunities for work that we can't even imagine yet, in the same way the automobile or telecommunications or the McCormick reaper both took some jobs away and created even greater opportunities. The transition is the thing, though. It will be filled with opportunities for some and forced change for others, while we wait for the future to become more evenly distributed. In the next few weeks, you are going to get a letter from me that will tell you about the newest addition to Mauldin Economics, the Transformational Technologies Alert, written by my longtime friend Pat Cox, who is no stranger to readers of this letter. Pat and I have long wanted to work together, exploring the future and especially biotech. He is the best, and you will want to join us from the very beginning. We invite you to charge ahead into the future with us, exploring opportunities that will begin to change your own life right now. And now back to pensions…

Through the courtesy of one of your fellow readers I've been given a treasure trove of data on 702 city pension plans. I won't say that I got lost in the data, but the search and rescue teams sent to find me had to go back for extra supplies. There were some very dark alleys that it took a while to find my way back out of. Not to mention some twists and turns that were totally surprising.

So first I need to say a big thank you to Gregg L. Bienstock and Justin Coombs of Lumesis for giving me access to their data. Gregg is a cofounder of Lumesis, and their signature software is called (appropriately enough, given the oceans of data they plumb) DIVER. They've compiled data on 54,000 issuers of municipal and state bonds from over 100 sources. They sent me an Excel file on the major pension plans of every state and the pension plans of cities with populations over 100,000. And Justin was kind enough to create multiple spreadsheets and graphs upon request and patiently explain their data. The bulk of the data in this letter is from http://www.lumesis.com. The opinions are my own and should not be attributed to Lumesis. From time to time we will also look at another fascinating study from the Pew Charitable Trusts on pensions and retiree healthcare in 61 cities.

As we have seen the last two weeks (here and here), the assumptions that states make about their future investment returns are fairly unrealistic and generally nothing like what they've achieved for the last 10 years. This makes their balance sheets look far better than they really are, and for some states the discrepancy is pretty stark. Witness Illinois, where unfunded pension liabilities run north of $280 billion, give or take. That is more than $20,000 for every man, woman, and child in the state. And the bill keeps rising every month as the state plows ever deeper in debt to its own future.

Keeping in mind the caveat that the percentages may actually be worse than reported, let's look at a few graphs on a state-by-state basis. This first graph shows the funded ratio of state pension plans through 2012. (Note: on all the graphs the large "island" below Louisiana is a representation of Puerto Rico. To its left is Alaska, and both are obviously not to scale.)




The next graph shows actuarial required contributions (ARC). The ARC is simply the amount of money required to fund the pension plan given the return assumptions of the plan. The important thing to note here is the amount of blue in the graph. If you ask your local politicians how their pension plan is doing, they can probably tell you with a straight face (and because they don't know any better) that their state's pension is fully funded. I note with some alarm that "conservative" Texas doesn't fare very well. While Texas claims funding above 80%, a more reasonable assumption on returns suggests it is no better than 43%. Can Rick Perry run for president as a conservative on that number? Then again, can New Jersey Republican governor uber-star Chris Christie run on his state's funding level of 33%? Just asking.




To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – Please Click Here.

© 2013 Mauldin Economics. All Rights Reserved.

Visit  "Thoughts from the Frontline"  today!