Wall Street running out of suckers

(2 pm. – promoted by ek hornbeck)

  The world of international finance, as it is practiced today, is a giant Ponzi scheme. The largest and most powerful Ponzi scheme in history. One of the first Ponzi schemes in history to actually be supported by the political leaders of the world.

 However, all Ponzi schemes must end poorly. They are designed to have a built-in failure. A Ponzi scheme only works when increases in value. You can’t have suckers investors selling.

   The best way I know to tell when a Ponzi scheme is about to implode is when the very last possible suckers are being roped into it.

  That is what Congress is considering today.

 The proposal comes from an influential panel of military advisors called the Defense Business Board. Their plan, laid out in a 24-page presentation “Modernizing the Military Retirement System,” would eliminate the familiar system under which anyone who serves 20 years is eligible for retirement at half their salary. Instead, they’d get a 401k-style plan with government contributions.

  Brooklynbadboy was kind enough to describe how this would mean an 85% cut in retirement for career military soldiers.

  There isn’t any suckers left after our nation’s soldiers. They are the last ones.

You have to assume that when they betray the guys who they pay to keep the teaming masses under control, that the game is almost over.

Almost all the private pensions are gone. The public pensions are currently under (mostly successful) attack. The really bad debt got offloaded onto the taxpayer via our corrupt politicians, so the government balance sheet is “all in” too. Everyone is going to be forced into the stock market whether you like it or not, and you are going to be forced to use the 401k vehicle (or traditional IRA) to do it.

  Maybe some of you are asking, “What’s so bad about that?”

I could give you several reasons. In fact, I did just that several years ago.

  One of the things I stressed was this:

 Another risk is the systemic risk of all of those Baby-Boomers expecting to use those stocks and bonds to fund their retirement. To put it another way, starting this year and increasing every year after that for almost two decades, the number of people who were buying stocks and bonds are increasingly going to be selling those stocks and bonds (the WSJ estimate $300 Billion a year, every year).

 For those of us who are decades away from retirement, that means all our investments on Wall Street are going to be coming under increasing selling pressure. What kind of return on investment (ROI) can you really expect when the number of people only selling stocks and bonds increases by several million every single year?

  Some people listened to me, some were more dubious.

Well, earlier this week the San Francisco Federal Reserve released a study that basically says the exactly same thing I mentioned more than two years ago.

 “The baby boom generation born between 1946 and 1964 has had a large impact on the U.S. economy and will continue to do so as baby boomers gradually phase from work into retirement over the next two decades. To finance retirement, they are likely to sell off acquired assets, especially risky equities. A looming concern is that this massive sell-off might depress equity values.”

  The report goes on to say that real stock prices may not reach 2010 levels again until 2027.

 We find that the actual P/E ratio should decline from about 15 in 2010 to about 8.3 in 2025.

 Think about that for a few minutes. What they are talking about is basically what Japan has experienced since their stock market crashed in 1990 – decades and decades of non-performance and lower stock and bond prices while their population ages and retires.

  That’s both stocks and bonds I’m talking about. With interest rates currently so low, bond prices have nowhere to go but down.

 Of course the middle class retirement is mostly a thing of the past anyway.

 “Let’s consider the following facts in regards to the average American worker:

   56% of the average workers in America today have less than one years salary saved with less than $25,000.

   76% have less than $100,000; and

   90% have less than $250,000 saved.

If we assume that the average retired couple will need $40,000 (the average annual salary) in income to live through their “golden years,” they will need roughly $1 million dollars generating 4% a year.  Therefore, 90% of American workers today have a problem.

 So consider the question again: why give Wall Street money to further corrupt your politicians, while you are assured of not getting all your money back?

 If that wasn’t bad enough, there is another point I stressed a few years ago:

 Will taxes be significantly higher when you retire? Unless the federal government simply defaults on its Social Security and Medicare promises then taxes will have to be raised dramatically. You can bet the trillions of pre-tax money sloshing around in 401(k)s and traditional IRA’s will be at the top of the hit list.

  Sure enough, changing the tax laws that apply to 401k’s is also being considered in Washington as we speak.

 Now some might be thinking, “Wait a second. The Republicans are supposed to be opposed to tax hikes, so they wouldn’t do that.”

  That’s where you are wrong. The Republicans are opposed to taxing rich people only. They have no problem with taxing poor people. 401k’s are the investment vehicle of the working class, not rich people.

  To give you another example, on the front page of DKos was an article suggesting that Republicans are opposing extending Obama’s payroll tax cut simply because Obama supports it.

  That’s silly. They oppose it because it is the most regressive federal tax out there. It disproportionately applies to the working poor, not to the rich.

  Remember that it was the Republican Gawd Ronald Reagan that dramatically cut progressive income taxes while doubling regressive payroll taxes.

 If that wasn’t enough, we have a third problem major with putting your money into a 401k (I’m ignoring the massive fees and illiquidity problems for now. See my earlier diary for more on that).

 I’m speaking of the issue of who are the Baby Boomers going to sell to?

“People with different skills, different background, different education face very different opportunities. If you’re one of the very top… your future prospects are very good. If you’ve gone to one of those for-profit private schools, profit making schools, your future is bleak. The statistics say the likelihood that you will get a job, for which you paid a heavy tuition, is very low. And because of our laws, even if you went into bankruptcy you’ll never get rid of those student loans. So they have a lifetime filled with debt, with no future prospects….

  This ties in with my earlier point of Baby Boomers selling a massive amount of stocks and bonds, essentially to the next generation. The problem of so many people retiring at once is so obvious that the San Francisco Fed finally noticed it.

  However, the Federal Reserve also assumes somewhat rosy economic prospects for the economy in the coming years. They don’t really factor in the structural problems of an economy in which the best and brightest can’t find good-paying jobs and are forever in debt.

  Therefore even the Fed’s research paper that forecasts a 15 year bear market on Wall Street (with no recession) underestimates how bad it will get.

 Which brings me to ask the question again: Why is anyone here still putting money into their 401k?

Is the Pony/Pie/Hide rating system too cutsie?

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    • gjohnsit on August 27, 2011 at 12:49 am

    I keep warning people, but is anyone listening?

  1. Strikingly similar to housing I guess.  Who you going to sell your house to?  All potential buyers will be paupers.  Not much chance of getting a decent return.

    But I would like to know, since I am stuck like most Americans, just how do you even keep what you have got, or is that just a pipe dream?

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