Obama Fires the First Shot on Your Retirement Account
Dear Reader,
Did you watch the State of the Union address?
I didn't, because, well… I didn't want to.
But I did read the transcript the morning after. And boy is there a doozy in there. A lot of news outlets are talking about it. But very few dissected Obama's tricky language enough to understand its significance.
I'm talking about his unveiling of the "MyRA," which is ostensibly a new retirement account for working-class Americans. Sounds innocent enough.
But read a little closer, and… well, rather than put words in his mouth, let's let the skilled orator tell us about the MyRA himself, word for word from his State of the Union address.
Take it away, Barack. (His words, verbatim, are in bold.)
"Let's do more to help Americans save for retirement. Today, most workers don't have a pension. A Social Security check often isn't enough on its own."
Can't argue with that. The personal savings rate has been declining since the 1970s. Reversing that trend would help get America back on track to prosperity. Tell me more.
"And while the stock market has doubled over the last five years, that doesn't help folks who don't have 401(k)s."
Good point. It's hard for lower-income earners to save enough money to invest in the stock market. Helping them access stocks is a great idea, provided they enlist a competent advisor.
Granted, it's not a perfect solution. But allocating a portion of one's savings to stocks is smart—certainly better than allowing inflation to bleed one's savings account to death.
"That's why, tomorrow, I will direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA."
Actually, Mr. President, working Americans already have access to IRAs. You're giving the impression that lower-income Americans don't have access to tax-advantaged retirement accounts, but that's not true at all. Even if my employer doesn't sponsor a plan, I can start one on my own. Anyone under the age of 70½ can open a self-directed IRA, and plenty of brokers allow people to enroll with as little as a $500 initial contribution.
So where are you going with this?
"It's a new savings bond that encourages folks to build a nest egg."
Whoa, hang on there. You were just talking about the stock market. How do savings bonds help the average Joe tap into stocks?
"MyRA guarantees a decent return with no risk of losing what you put in."
Stop it. First of all, bonds neither guarantee a decent return nor protect people from losing their principal. In fact, with interest rates still near historic lows, buying bonds today and holding them for the long term virtually guarantees they'll lose money.
Second, a bond is not a one-sided transaction. Whoever issues the bond is borrowing money from the buyer. The US government would be issuing these bonds, so that would mean… wait a minute, you wouldn't be trying to covertly confiscate workers' earnings to fund the government, would you?
"And if this Congress wants to help, work with me to fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little to nothing for middle-class Americans."
Don't change the subject, Mr. President. Do you expect me to believe it's just a coincidence that your new plan will finance billions of dollars in US debt, just as your pal Bernanke is finally reducing the Fed's QE bond purchases? You guys are too much.
"Offer every American access to an automatic IRA on the job, so they can save at work just like everyone in this chamber can."
Automatic? Now you're really starting to scare me. I hope that means the payroll deductions would be automatic for participants, and not that everyone at certain income levels will be automatically enrolled in MyRAs unless they proactively opt out. Forgive me for being suspicious.
Regardless, let me see if I have this scheme straight. If someone is lucky enough to be a MyRA participant, the government will skim a percentage of his income from his paycheck. In exchange, it will issue him an IOU, which of course won't pay out until he retires. So working-class Americans would effectively be giving the government a long-term loan.
Taking money from our paychecks before we ever see it… promising to pay us back in umpteen years… this all sounds eerily familiar. Where have I heard of this arrangement before?
Oh, right. It's exactly the same as Social Security. Minus the compulsory aspect (for now).
I'm not trying to be sensationalist; it's all right there in Obama's language. As I write on Thursday morning, more details are leaking out. According to several sources, the MyRA will essentially be a Roth IRA, with one huge difference: it can only invest in government savings bonds.
Given that a normal Roth can already invest in government bonds, I fail
to see how a MyRA offers any advantage whatsoever. All it does is
restrict participants' investment choices to the one asset class that
most benefits the bankrupt US: US debt.
And that seems to be the point. US retirement accounts hold well over $5 trillion in assets. The US government owes a mind-boggling $17+ trillion in debt. You can almost hear Uncle Sam salivate. The MyRA looks like the first baby step toward acclimating people to the idea that retirement savings are too important to entrust 100% to the market. Government bonds, you see, are much safer.
If the government can pass a mandate that IRAs must allocate just 10% of their assets to Treasuries, a cool $500 billion would flow straight into Washington's coffers. Not enough to solve its debt problems—there isn't enough money in the world to do that. But enough to stave off bankruptcy or a crisis of confidence in the dollar for a few more years.
What to do? Liquidating your IRA isn't an option, since you'd incur hefty penalties and lose all of the substantial tax benefits they offer. For now, keep an eye on how the MyRA saga unfolds. Watch especially for any strong-arming by the government, such as forcing employers to offer MyRAs. Or, as I mentioned above, automatically enrolling some subset of the population into the MyRA program. Such actions would provide clues as to how much the government thinks it can get away with.
You also might want to learn a bit about past confiscations of retirement savings. They're more common than you'd think. Just since 2008, the governments of Argentina, Poland, Portugal, Ireland, Hungary, and Bolivia have all pillaged citizens' private retirement assets in some fashion.
Of course, your #1 recourse against any grabby government is to hold a substantial portion of your savings in physical precious metals. Though the past two years have been a rough ride, history unequivocally shows that gold is unrivaled in its ability to hold value over the long term. And what's more, evidence is mounting that gold's decline is coming to an end—for both the metal and the miners.
I'll pass the baton to Doug Hornig to let him explain.
It's not exactly news that gold mining stocks have been in a slump for more than two years. Many investors who owned them have thrown in the towel by now, or are holding simply because a paper loss isn't a realized loss until you sell.
For contrarian speculators like Doug Casey and Rick Rule, though, it's the best of all scenarios. "Buy when blood is in the streets," investor Nathan Rothschild allegedly said. And buy they do, with both hands—because, they assert, there are definitive signs that things may be turning around.
So what's the deal with junior mining stocks, and who should invest in them? I'll give you several good reasons not to touch them with a 10-foot pole… and one why you maybe should.
First, you need to understand that junior gold miners are not buy-and-forget stocks. They are the most volatile securities in the world—"burning matches," as Doug calls them. To speculate in those stocks requires nerves of steel.
Let's take a look at the performance of the juniors since 2011. The ETF that tracks a basket of such stocks—Market Vectors Junior Gold Miners (GDXJ)—took a savage beating. In early April of 2011, a share would have cost you $170. Today, you can pick one up for about $36… that's a decline of nearly 80%.
There are something like 3,000 small mining companies in the world today, and the vast majority of them are worthless, sitting on a few hundred acres of moose pasture and a pipe dream.
It's a very tough business. Small-cap exploration companies (the "juniors") are working year round looking for viable deposits. The question is not just if the gold is there, but if it can be extracted economically—and the probability is low. Even the ones that manage to find the goods and build a mine aren't in the clear yet: before they can pour the first bar, there are regulatory hurdles, rising costs of labor and machinery, and often vehement opposition from natives to deal with.
As the performance of junior mining stocks is closely correlated to that of gold, when the physical metal goes into a tailspin, gold mining shares follow suit. Only they tend to drop off faster and more deeply than physical gold.
Then why invest in them at all?
Because, as Casey Chief Metals & Mining Strategist Louis James likes to say, the downside is limited—all you can lose is 100% of your investment. The upside, on the other hand, is infinite.
In the rebound periods after downturns such as the one we're in, literal fortunes can be made; gains of 400-1,000% (and sometimes more) are not a rarity. It's a speculator's dream.
When speculating in junior miners, timing is crucial. Bear runs in the gold sector can last a long time—some of them will go on until the last faint-hearted investor has been flushed away and there's no one left to sell.
At that point they come roaring back. It happened in the late '70s, it happened several times in the '80s when gold itself pretty much went to sleep, and again in 2002 after a four-year retreat.
The most recent rally of 2009-'10 was breathtaking: Louis' International Speculator stocks, which had gotten hammered with the rest of the market, handed subscribers average gains of 401.8%—a level of return Joe the Investor never gets to see in his lifetime.
So where are we now in the cycle?
The present downturn, as noted, kicked off in the spring of 2011, and despite several mini-rallies, the overall trend has been down. Recently, though, the natural resource experts here at Casey Research and elsewhere have seen clear signs of an imminent turnaround.
For one thing, the price of gold itself has stabilized. After hitting its peak of $1,921.50 in September of 2011, it fell back below $1,190 twice last December. Since then, it hasn't tested those lows again and is trading about 6.5% higher today.
The demand for physical gold, especially from China, has been insatiable. The Austrian mint had to hire more employees and add a third eight-hour shift to the day in an attempt to keep up in its production of Philharmonic coins. "The market is very busy," a mint spokesperson said. "We can't meet the demand, even if we work overtime." Sales jumped 36% in 2013, compared to the year before.
Finally, the junior mining stocks have perked up again. In fact, for the first month of 2014, they turned in the best performance of any asset, as you can see here:
To present the evidence and to discuss how to play the turning tides in the precious metals market, Casey Research is hosting a timely online video event titled Upturn Millionaires next Wednesday, February 5, at 2:00 p.m. Eastern.
You'll hear from resource legends and investment gurus such as Frank Giustra (watch this short and, I think, highly entertaining video for a taste of what you're in for), Doug Casey, John Mauldin, Porter Stansberry, Ross Beaty, Rick Rule, and our own Louis James and Marin Katusa. Don't miss this event—register here for free.
My favorite quote of the week comes from Hungarian Prime Minister Ferenc Gyurcsany who was caught on tape admitting, among other things, that "We did nothing for four years. Nothing. … We screwed up. Not a little, a lot. … Plainly, we lied throughout the last year and a half, two years," and the prized sound byte "We lied in the morning, we lied in the evening, and also at night."
The notion that politicians might actually prevaricate apparently caught the Hungarians by surprise, so much so that the not-so-loyal opposition rumbled into the streets with pitchforks and torches in hand. This, despite Ferenc also being heard to say about the lying that "it must stop."
(As an aside, my second-favorite quote had to be from Chávez the Entertainer, when he commented that the podium our distinguished president had spoken at the day before himself, "smells of sulfur still today." Whatever his many faults, you have to give Chávez credit for a fine sense of the dramatic.)
Back on point, our own Bud Conrad recently took a closer look at the correlation between the price of gasoline and the popularity of the aforementioned president of these United States.
The parallels are really quite revealing, as you can see for yourself in the chart just below.
Being unencumbered by budgets, and so having limitless staff available
to sniff out these things, it's a safe assumption that elected
officialdom has also taken notice of this corollary. Especially given
that the connection is so logical.
After all, if you're a working stiff for whom gasoline-powered transportation provides the daily connection to your paycheck, each weekly or semi-weekly visit to the pump has to be a painful reminder that things are not going exactly to plan.
Or at least not your plan.
Which is to say, having enough money left over at the end of the week for a six-pack of beer or a modest bottle of red (forget about enough money to actually retire and live like a human being some day; the steady erosion of disposable wealth has long since extinguished that hope in the bosom of much of the Boobus).
So might the politicos push gas prices down pre-election? Perhaps. Power has its privileges, including the privilege of lying without consequence, and having a free pass to yank on the levers of the state at will. I fully expect those levers to be pulled frantically in the run-up to any election.
Trimming the Fat
A manufacturing plant, feeling it was time for a shakeup, hired a new CEO. The new boss was determined to rid the company of all slackers.
On a tour of the facilities, the new CEO noticed a guy leaning against a wall. The room was full of workers, and he wanted to let the people know that he meant business.
He asked the guy, "How much money do you make a week?"
A little surprised, the young man looked at him and said, "I make $400 a week. Why?"
The CEO said, "Wait right here."
He walked back to his office, came back in two minutes, and handed the guy $1,600 in cash and said, "Here's four weeks' pay. Now GET OUT and don't come back."
Feeling pretty good about himself, the CEO looked around the room and asked, "Does anyone want to tell me what that goofball did here?"'
From across the room a voice said, "He's the pizza delivery guy."
Before we close up for today, let me remind you again of our fast-approaching Upturn Millionaires
event on Wednesday, February 5. If you haven't signed up yet, I
strongly recommend you do so now—even if you can't make it on that day,
as long as you're registered, you'll receive a video recording later on
that you can watch at your leisure. Go here to save your seat.
That's it for this week. Thanks for subscribing to a Casey Research product, and have a wonderful weekend!
Dan Steinhart
Managing Editor of The Casey Report
Did you watch the State of the Union address?
I didn't, because, well… I didn't want to.
But I did read the transcript the morning after. And boy is there a doozy in there. A lot of news outlets are talking about it. But very few dissected Obama's tricky language enough to understand its significance.
I'm talking about his unveiling of the "MyRA," which is ostensibly a new retirement account for working-class Americans. Sounds innocent enough.
But read a little closer, and… well, rather than put words in his mouth, let's let the skilled orator tell us about the MyRA himself, word for word from his State of the Union address.
Take it away, Barack. (His words, verbatim, are in bold.)
"Let's do more to help Americans save for retirement. Today, most workers don't have a pension. A Social Security check often isn't enough on its own."
Can't argue with that. The personal savings rate has been declining since the 1970s. Reversing that trend would help get America back on track to prosperity. Tell me more.
"And while the stock market has doubled over the last five years, that doesn't help folks who don't have 401(k)s."
Good point. It's hard for lower-income earners to save enough money to invest in the stock market. Helping them access stocks is a great idea, provided they enlist a competent advisor.
Granted, it's not a perfect solution. But allocating a portion of one's savings to stocks is smart—certainly better than allowing inflation to bleed one's savings account to death.
"That's why, tomorrow, I will direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA."
Actually, Mr. President, working Americans already have access to IRAs. You're giving the impression that lower-income Americans don't have access to tax-advantaged retirement accounts, but that's not true at all. Even if my employer doesn't sponsor a plan, I can start one on my own. Anyone under the age of 70½ can open a self-directed IRA, and plenty of brokers allow people to enroll with as little as a $500 initial contribution.
So where are you going with this?
"It's a new savings bond that encourages folks to build a nest egg."
Whoa, hang on there. You were just talking about the stock market. How do savings bonds help the average Joe tap into stocks?
"MyRA guarantees a decent return with no risk of losing what you put in."
Stop it. First of all, bonds neither guarantee a decent return nor protect people from losing their principal. In fact, with interest rates still near historic lows, buying bonds today and holding them for the long term virtually guarantees they'll lose money.
Second, a bond is not a one-sided transaction. Whoever issues the bond is borrowing money from the buyer. The US government would be issuing these bonds, so that would mean… wait a minute, you wouldn't be trying to covertly confiscate workers' earnings to fund the government, would you?
"And if this Congress wants to help, work with me to fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little to nothing for middle-class Americans."
Don't change the subject, Mr. President. Do you expect me to believe it's just a coincidence that your new plan will finance billions of dollars in US debt, just as your pal Bernanke is finally reducing the Fed's QE bond purchases? You guys are too much.
"Offer every American access to an automatic IRA on the job, so they can save at work just like everyone in this chamber can."
Automatic? Now you're really starting to scare me. I hope that means the payroll deductions would be automatic for participants, and not that everyone at certain income levels will be automatically enrolled in MyRAs unless they proactively opt out. Forgive me for being suspicious.
Regardless, let me see if I have this scheme straight. If someone is lucky enough to be a MyRA participant, the government will skim a percentage of his income from his paycheck. In exchange, it will issue him an IOU, which of course won't pay out until he retires. So working-class Americans would effectively be giving the government a long-term loan.
Taking money from our paychecks before we ever see it… promising to pay us back in umpteen years… this all sounds eerily familiar. Where have I heard of this arrangement before?
Oh, right. It's exactly the same as Social Security. Minus the compulsory aspect (for now).
I'm not trying to be sensationalist; it's all right there in Obama's language. As I write on Thursday morning, more details are leaking out. According to several sources, the MyRA will essentially be a Roth IRA, with one huge difference: it can only invest in government savings bonds.
And that seems to be the point. US retirement accounts hold well over $5 trillion in assets. The US government owes a mind-boggling $17+ trillion in debt. You can almost hear Uncle Sam salivate. The MyRA looks like the first baby step toward acclimating people to the idea that retirement savings are too important to entrust 100% to the market. Government bonds, you see, are much safer.
If the government can pass a mandate that IRAs must allocate just 10% of their assets to Treasuries, a cool $500 billion would flow straight into Washington's coffers. Not enough to solve its debt problems—there isn't enough money in the world to do that. But enough to stave off bankruptcy or a crisis of confidence in the dollar for a few more years.
What to do? Liquidating your IRA isn't an option, since you'd incur hefty penalties and lose all of the substantial tax benefits they offer. For now, keep an eye on how the MyRA saga unfolds. Watch especially for any strong-arming by the government, such as forcing employers to offer MyRAs. Or, as I mentioned above, automatically enrolling some subset of the population into the MyRA program. Such actions would provide clues as to how much the government thinks it can get away with.
You also might want to learn a bit about past confiscations of retirement savings. They're more common than you'd think. Just since 2008, the governments of Argentina, Poland, Portugal, Ireland, Hungary, and Bolivia have all pillaged citizens' private retirement assets in some fashion.
Of course, your #1 recourse against any grabby government is to hold a substantial portion of your savings in physical precious metals. Though the past two years have been a rough ride, history unequivocally shows that gold is unrivaled in its ability to hold value over the long term. And what's more, evidence is mounting that gold's decline is coming to an end—for both the metal and the miners.
I'll pass the baton to Doug Hornig to let him explain.
A Turning Point in Junior Gold Stocks?
Doug Hornig, Senior Editor
It's not exactly news that gold mining stocks have been in a slump for more than two years. Many investors who owned them have thrown in the towel by now, or are holding simply because a paper loss isn't a realized loss until you sell.
For contrarian speculators like Doug Casey and Rick Rule, though, it's the best of all scenarios. "Buy when blood is in the streets," investor Nathan Rothschild allegedly said. And buy they do, with both hands—because, they assert, there are definitive signs that things may be turning around.
So what's the deal with junior mining stocks, and who should invest in them? I'll give you several good reasons not to touch them with a 10-foot pole… and one why you maybe should.
First, you need to understand that junior gold miners are not buy-and-forget stocks. They are the most volatile securities in the world—"burning matches," as Doug calls them. To speculate in those stocks requires nerves of steel.
Let's take a look at the performance of the juniors since 2011. The ETF that tracks a basket of such stocks—Market Vectors Junior Gold Miners (GDXJ)—took a savage beating. In early April of 2011, a share would have cost you $170. Today, you can pick one up for about $36… that's a decline of nearly 80%.
There are something like 3,000 small mining companies in the world today, and the vast majority of them are worthless, sitting on a few hundred acres of moose pasture and a pipe dream.
It's a very tough business. Small-cap exploration companies (the "juniors") are working year round looking for viable deposits. The question is not just if the gold is there, but if it can be extracted economically—and the probability is low. Even the ones that manage to find the goods and build a mine aren't in the clear yet: before they can pour the first bar, there are regulatory hurdles, rising costs of labor and machinery, and often vehement opposition from natives to deal with.
As the performance of junior mining stocks is closely correlated to that of gold, when the physical metal goes into a tailspin, gold mining shares follow suit. Only they tend to drop off faster and more deeply than physical gold.
Then why invest in them at all?
Because, as Casey Chief Metals & Mining Strategist Louis James likes to say, the downside is limited—all you can lose is 100% of your investment. The upside, on the other hand, is infinite.
In the rebound periods after downturns such as the one we're in, literal fortunes can be made; gains of 400-1,000% (and sometimes more) are not a rarity. It's a speculator's dream.
When speculating in junior miners, timing is crucial. Bear runs in the gold sector can last a long time—some of them will go on until the last faint-hearted investor has been flushed away and there's no one left to sell.
At that point they come roaring back. It happened in the late '70s, it happened several times in the '80s when gold itself pretty much went to sleep, and again in 2002 after a four-year retreat.
The most recent rally of 2009-'10 was breathtaking: Louis' International Speculator stocks, which had gotten hammered with the rest of the market, handed subscribers average gains of 401.8%—a level of return Joe the Investor never gets to see in his lifetime.
So where are we now in the cycle?
The present downturn, as noted, kicked off in the spring of 2011, and despite several mini-rallies, the overall trend has been down. Recently, though, the natural resource experts here at Casey Research and elsewhere have seen clear signs of an imminent turnaround.
For one thing, the price of gold itself has stabilized. After hitting its peak of $1,921.50 in September of 2011, it fell back below $1,190 twice last December. Since then, it hasn't tested those lows again and is trading about 6.5% higher today.
The demand for physical gold, especially from China, has been insatiable. The Austrian mint had to hire more employees and add a third eight-hour shift to the day in an attempt to keep up in its production of Philharmonic coins. "The market is very busy," a mint spokesperson said. "We can't meet the demand, even if we work overtime." Sales jumped 36% in 2013, compared to the year before.
Finally, the junior mining stocks have perked up again. In fact, for the first month of 2014, they turned in the best performance of any asset, as you can see here:
(Source: Zero Hedge)
The writing's on the wall, say the pros, that the downturn won't last
much longer—and when the junior miners start taking off again, there's
no telling how high they could go.To present the evidence and to discuss how to play the turning tides in the precious metals market, Casey Research is hosting a timely online video event titled Upturn Millionaires next Wednesday, February 5, at 2:00 p.m. Eastern.
You'll hear from resource legends and investment gurus such as Frank Giustra (watch this short and, I think, highly entertaining video for a taste of what you're in for), Doug Casey, John Mauldin, Porter Stansberry, Ross Beaty, Rick Rule, and our own Louis James and Marin Katusa. Don't miss this event—register here for free.
Casey Gems: David Galland on Gas Prices and Politics
David Galland, Managing Director
Originally published 9/29/2006My favorite quote of the week comes from Hungarian Prime Minister Ferenc Gyurcsany who was caught on tape admitting, among other things, that "We did nothing for four years. Nothing. … We screwed up. Not a little, a lot. … Plainly, we lied throughout the last year and a half, two years," and the prized sound byte "We lied in the morning, we lied in the evening, and also at night."
The notion that politicians might actually prevaricate apparently caught the Hungarians by surprise, so much so that the not-so-loyal opposition rumbled into the streets with pitchforks and torches in hand. This, despite Ferenc also being heard to say about the lying that "it must stop."
(As an aside, my second-favorite quote had to be from Chávez the Entertainer, when he commented that the podium our distinguished president had spoken at the day before himself, "smells of sulfur still today." Whatever his many faults, you have to give Chávez credit for a fine sense of the dramatic.)
Back on point, our own Bud Conrad recently took a closer look at the correlation between the price of gasoline and the popularity of the aforementioned president of these United States.
The parallels are really quite revealing, as you can see for yourself in the chart just below.
After all, if you're a working stiff for whom gasoline-powered transportation provides the daily connection to your paycheck, each weekly or semi-weekly visit to the pump has to be a painful reminder that things are not going exactly to plan.
Or at least not your plan.
Which is to say, having enough money left over at the end of the week for a six-pack of beer or a modest bottle of red (forget about enough money to actually retire and live like a human being some day; the steady erosion of disposable wealth has long since extinguished that hope in the bosom of much of the Boobus).
So might the politicos push gas prices down pre-election? Perhaps. Power has its privileges, including the privilege of lying without consequence, and having a free pass to yank on the levers of the state at will. I fully expect those levers to be pulled frantically in the run-up to any election.
Friday Funnies
Trimming the Fat
A manufacturing plant, feeling it was time for a shakeup, hired a new CEO. The new boss was determined to rid the company of all slackers.
On a tour of the facilities, the new CEO noticed a guy leaning against a wall. The room was full of workers, and he wanted to let the people know that he meant business.
He asked the guy, "How much money do you make a week?"
A little surprised, the young man looked at him and said, "I make $400 a week. Why?"
The CEO said, "Wait right here."
He walked back to his office, came back in two minutes, and handed the guy $1,600 in cash and said, "Here's four weeks' pay. Now GET OUT and don't come back."
Feeling pretty good about himself, the CEO looked around the room and asked, "Does anyone want to tell me what that goofball did here?"'
From across the room a voice said, "He's the pizza delivery guy."
That's it for this week. Thanks for subscribing to a Casey Research product, and have a wonderful weekend!
Dan Steinhart
Managing Editor of The Casey Report
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