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Government Debt and Your Retirement

Written By: Tom Hankes  |  Posted: Thursday, July 30th, 2015

The problem hasn't shown up in your monthly statements yet but soon will.

          A couple years ago, I had a discussion with a family friend about his pension plan. He's a retired teacher and draws checks from a well-known retirement fund, according to public documents, close to a fully funded pension. I tried to explain to him that the pristine audit report was valid only for the audit opinion date - a June 30 fiscal year end. He could not understand the responsibilities and limitations of a financial audit even though I carefully explained to him that auditors are not in the forecasting business. Once a company is truly in desperate straits, you'll see a "going concern" opinion letter, which means the company is nearly dead.

          Auditing firms and rating firms, as distinguished from their consulting businesses, are in the financial autopsy business, not in the marketing and projection business. Case in point, approximately 200 mutual funds have over 5% of their investors' money invested in Puerto Rican bonds. Those bonds are now worthless; you won't see that in your fund statements until September 2015 at the earliest and they will do their best to window dress to hide the damages. Did you see that in last year's audit report? Nope! And, when you see it in the newspaper it's way too late, you've already lost your money.

          My friend's confusion has lessons for virtually everyone. Nobody will escape the ravages of the great debt unwind untouched. If it doesn't affect you, it will impact someone in your family, your workplace, or your friends.

          Vast unpayable debt has been issued by many states and countries, corporations, and individuals across the globe. If you read the financial news, you've seen a lot about Greece lately, mostly optimism about how an agreement will be worked out between the European Central Bank and Greece to make the problem go away. The money comes from Germany as the other European countries are broke also. But German citizens are not happy with their less industrious southern neighbors in Greece, Italy, Spain, Portugal, and France. They're not fond of the idea of advancing any more money.

          However, it's not just Greece and Puerto Rico; a report from the Jubilee Debt Campaign identifies 24 nations facing a debt crisis and another 14 about to face one. The debt to gross domestic product ratio of the entire planet is estimated to be 286%. Total dollar denominated debt was 59 trillion at March 2015 compared to 53 trillion in 2009. Does anybody seriously think this can be paid off?

          Margin debt, gambling money advanced to "investors" is ridiculous: $507 billion now vs. $279 billion in 2000. The crude oil fracker collapse continues, junk bonds will soon default and live up to the name they so richly deserve. If oil sinks below $20 as some people believe it will, kiss the frackers goodbye; their debt will finish them off.

          European banks are levered up to the strangulation level at about 26-28 times the equity on the books; even a 4% market loss, destroys all their capital. They are bankrupt zombies, but the audit reports have not yet been published. When they are they will still not represent reality due to arbitrary "mark-to-market" rules and significant overvaluation of assets on their balance sheets.

          The first cracks in the dam are now visible and it's starting to show in market security values and like the serious depression it is. More signs of severe distress are popping up every week. We haven't had a depression since the 1930s - about 80-85 years ago. The reason is global demand is slowing rapidly, profits are shrinking, and cash is becoming more valuable. Note the transportation index is down 13%. That's really bad news. All of this is happening while debt of all kinds is at extraordinary levels. This is a recipe for massive defaults on bonds of heavily levered companies, which we're beginning to read about in the news. 

          The good news is: there are some things most investors can do: unless this is your first time reading these scribblings, you'll remember the suggestions: No stocks, no bonds, no mutual funds, and no annuities to name a few popular gambling options. Get into cash, safe short term bonds, perhaps a small amount of Treasury bonds and stand back while the Ponzi collapses.

          There are other more profitable options. Forget the silly notion that cash doesn't earn a decent yield. Today safety is the only factor to consider. Also there is a strong possibility that our government may help itself to some of your cash. Welcome to Obama's world.

          DISCLAIMER: The concepts in this article are exclusively those of Independent Advisors, Inc. - a Wisconsin Registered Investment Advisor. They may not be suitable for you. Past performance is not indicative of future performance. Discuss these strategies with your advisor or call us - (715) 579-8125. 


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