29.07.2019 – Special Report. In the USA, a demographic explosive device is lurking in secret. Secretly and quietly, the pension gap has grown into a worrying size. It is supposed to be 6 trillion dollars – who will pay for it? The explosive ingredients: Ageing, rising pension entitlements and fewer contributors. A new crisis of confidence is looming in the mortgage market. This mix could tear Wall Street and thus also the DAX and global trade into the abyss. We’ll tell you what signals you need to watch out for.
The pension is safe!
The former Labour Minister Norbert Blüm (CDU) already wanted people to believe that the German pension can somehow be financed in its present form. The USA has the same problem. While here in Germany shrewd politicians try to obtain fresh money by means of an alleged CO2 tax, the financing in the USA is supposed to run on pump. The American pension plans are guaranteed by a quasi-governmental organization, the Pension Benefit Guarantee Corporation (PBGC). But according to the website “RealInvestmentAdvice.com”, the PBGC will be dry in 2025. The solution of the congress: Pension funds should be allowed to get into debt individually in order to pay out the savers whenever a pension plan is no longer liquid. But who lends already fresh money to an insolvent fund! That looks like a state bailout – or a loss of savings for pensioners.
Global black pension gap
Incidentally, the pension issue is not a purely American problem. The financial website Visual Capitalist quoted the World Economic Forum as estimating that there had been a $70 trillion global pension funding gap in 2015. If the trend is not stopped, the gap will probably have risen to 400 trillion dollars by 2050 – about five times today’s global economic output. This is precisely why central banks are afraid of an international recession. But the US is likely to become the epicentre of the pension crisis, if only because, unlike in totalitarian countries, the state cannot conceal the problem here. And because the crisis is likely to hit the stock market quickly.
The 6 trillion dollar problem
In April 2016, Moodys had estimated the unfunded debt burden for all state and local pension plans in the US at $3.5 trillion, writes RealInvestmentAdvice.com. This is the amount that is not covered by current or future pension contributions or investment interest. The calculation is based on interest of 3.7 to 4.1 percent. Another estimate at the time by the conservative think tank American Enterprise Institute put the gap at 5.2 trillion dollars, i.e. 5,200 billion dollars, assuming a bond yield of 2.6 percent.
Today the bomb is ticking louder than ever. Last year, according to “RealInvestmentAdvice.com”, Moody’s Investor Service put the total US bond gap at 4.4 trillion. A few months ago, the conservative non-profit organization American Legislative Exchange Council estimated the black bond gap at almost 6 trillion dollars. That would be almost a third of the American gross domestic product, it had amounted to a total of 20.5 trillion dollars in 2018.
And the situation is getting worse. According to “RealInvestmentAdvice.com”, around 75 million baby boomers in America are currently retired or about to retire by 2030. That is about 26 percent of the American population. A gigantic pension crisis thus seems unavoidable. The crisis will break out when the next recession forces US pensioners to tap into their pension plans.
The Next Mortgage Muckle
And now of all times, when saving and trust in the financial market would be the order of the day, a smart mortgage bank is about to lure savers without sufficient creditworthiness into new loans. HousingWire, the Wisconsin-based Waterstone Mortgage Corporation, which specializes in the real estate market, reported that it is now lending mortgages to people without any credit history. Under the Non-Traditional Credit Program, financial receipts such as telephone bills, rent or electricity bills are to be used. The Consumer Financial Protection Bureau (CFPB) estimates that around 26 million Americans have no credit score. Ten years after the collapse of Lehman Brothers, Waterstone is again relying on extremely insecure borrowers. The only thing missing is that these shaky subprime loans are reappearing as alleged collateral in securitised bonds.
Countermeasures as a trader
So how do traders and investors defend themselves against the possible explosion of the American or even global pension bomb? Unfortunately, this is not possible at all. If the entire financial system collapses, the following will happen: Companies will lay off employees, states will save on investments, banks will tip over, businesses will close, money will be devalued. Then unrest breaks out, internal security collapses. In this case only weapons, barbed wire, bunkered food or vegetables from your own garden, petrol for a diesel generator and patience will help you. Perhaps gold and silver in small denominations to refresh supplies.
But a total crash doesn’t come overnight. In the months before, you can still earn one or the other Euro through short engagements, which you as a CFD trader then exchange for precious metal, for example.
The first signals would be the accumulation of bank bankruptcies: Most US pension funds are likely to have invested their accounts with local savings banks, i.e. savings and loans. If they are increasingly plundered, the small banks will tip over first. The big banks will follow, which would give us a new credit crunch, a freeze on the credit market. Retailers in particular would also feel the increased reluctance to buy before the crisis finally reaches Wall Street and then the world’s stock markets.
So let’s hope that the worst case doesn’t happen. We will keep you up to date!
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