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Expect A Crisis: Financial Advisors' Daily Digest

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By SA Gil Weinreich :

Yesterday we discussed the issue of boomer retirements, arguing in agreement with Rob Marstrand ( click here to follow his feed) that the demographic surge of boomers taking required minimum distributions is not likely to crash the market.

Today we discuss a crisis that to me does seem inevitable (though I eschew any predictions about how it will affect the stock market) based on an article Lance Roberts wrote about the pension problem. He writes:

Using faulty assumptions is the lynchpin to the inability to meet future obligations...It is the same problem for the average American who plans on getting 6-8% return a year on their 401k plan, so why save money. Which explains why 8-out-of-10 American's are woefully underfunded for retirement.

Roberts calls this " the unavoidable pension crisis ," and while I am generally loathe to throw the towel in on a problem, I just don't see any way to avoid this looming crisis since the political leadership at every level of government refuses to address underfunding of Social Security and the various state, city and other governmental retirement systems. Everything is working against long-term solvency: Expected market returns are diminishing (as economic growth slows and mean reversion assumes its natural course); the numbers of claimants are surging while the number of those supporting the system are dwindling, and both worker and sponsor contributions are low. Assets are not sufficient to cover promised benefits and the funding gap only grows over time.

I was struck by a couple of numbers in one of Roberts' tables. Over the years I have heard commentators deride the Japanese system, saying the country was committing a form of economic suicide by neither producing children nor importing them while the society rapidly ages. It was always easy for Americans to piously intone such warnings because our numbers were so much healthier. But note that the inadequate 2.6 workers for every Japanese 65 or older in 2010 matches the projected 2.6 workers the U.S. will have in 2050! We're really not that far behind.

As I mentioned earlier, I don't know how this specifically will connect to the stock market, but it doesn't take much imagination to see how it will result in a massive social and economic crisis in the U.S. It wasn't very much fun bailing out huge banks in the last crisis, and it's not unforeseeable that the next one could involve bailing out large cities or even states.

Even if young millennials could be suckered into paying a lot more to fund the extravagance of their elders, their poor employment prospects and enormous student debt loads makes that project like squeezing blood from a stone.

For his part, Roberts concludes that whatever Americans are saving, they are not saving enough. My view is that investors should expect a crisis and prepare for it in the only way possible by ensuring they've placed their eggs in multiple baskets including business investments, land and cash - not necessarily all domiciled in the same place or denominated in the same currency.

I welcome your comments on this, most especially if you can foresee some positive demographic or economic dynamic that has escaped my notice. I really would like to be wrong! In the meantime, the Financial Advisors' Daily Digest is taking a Passover break but will resume publication after the holiday's end on April 18.

Please share your thoughts in the comments section. For now, here are today's advisor-related links:

  • Aberdeen Asset Management discusses Singapore's approach to coping with a fast-aging society .
  • Adam Hoffman: The IRS , like Crazy Eddie, is offering promotional deals.
  • Jeff Miller's Stock Exchange considers trading ideas in a low volatility market , with special guest Chuck Carnevale.
  • WisdomTree: How emerging markets have sneaked back into vogue.

See also Ultra-Loose Terminology, Not Policy on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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