Another disturbing week for retirees, with potential for dangerous precedent

After a decade that has seen retirement savings rise and fall, retirees were hit with more bad news this week: Detroit has filed for bankruptcy, and proposes that it pay out a mere 10% in what it owes in pensions. What kind of dangerous precedent might this set for others with retirement savings? Find out in this week’s Market Update.

As the stock market has ridden to record highs on the back of the Fed's stimulus programs, many have been calling into question the true health of the economy. Is today's stock market truly a good indicator of improvement to the economy?

Detroit is feeling no improvement. In fact, it has gone off the cliff: Last week the city filed for bankruptcy, making it the largest ever to do so.

The plan – at least for now – calls for a huge reduction in payouts to secured and unsecured creditors as well as slashing pension fund payouts by 90%. No doubt it would be a devastating blow to the municipal-worker retirees who had put their retirement savings in the hands of what was once a flourishing metropolis, with the fourth largest population in the United States and highest per capita income.

Unfortunately the implications of such a move could reach beyond Detroit and across the entire country. Consider what some are saying:

  • "If you end up with precedent that allows the restructuring of retirement benefits in bankruptcy court, that will make it an attractive option for cities." – Karol K. Denniston, bankruptcy lawyer (link)
  • "Detroit is not unique. It's the same in Chicago and New York and San Diego and San Jose. It's a lot of major cities in this country." – Eric Scorsone, Michigan State University Economist (link)
  • "Detroit could be a stepping stone in destroying public pensions." – John Logan, director of the labor studies program at San Francisco State University (link)

That's the sobering reality from last week. And sadly it's just one more piece of bad news for current and future retirees from the past 10-15 years. Consider that from 2007 to 2010, Americans over 75 lost almost a third of their assets and that historic low interest rates (thanks to the Fed's push to flush the markets with liquidity) have diminished the retirement savings of those with assets in fixed-rate investments.

And what of the stock market's recent gains? Think they've put Americans into the black? Think again: According to Morgan Stanley's Greg Fleming, $1 in the stock market in 2000 would today be worth exactly $1. 13 years of zero growth won't cut it. Which goes a long way towards explaining why nearly half of seniors die broke, with less than $10,000 in assets.

It's a tough time to protect your retirement savings, no doubt. And with Detroit now placing public pension programs on the chopping block – and in the process potentially setting a very dangerous precedent for other cities – many will find just one more challenge to overcome.

If you believe you need to reexamine the security of your retirement savings, we encourage you to take action now. We wish you the best, and a bright future.

Precious metals on the move

London Fix PM price at week's end, and change over previous Friday:

  • Gold: $1,295.75, up 1.3%
  • Silver: $19.42, down 1.2%
  • Platinum: $1,422.00, up 1.4%
  • Palladium: $743.00, up 3.8%

In the news

The one (and most shockingly candid) quote you'll ever need to read from Ben Bernanke
To the House Financial Services Committee: "I don't think the Fed can get interest rates up very much, because the economy is weak, inflation rates are low. If we were to tighten policy, the economy would tank." (link)

Video: A strong year for demand of physical gold
"It's a very good year for physical demand. We've seen a very strong Q1, then we had the big price drop in April, we saw huge physical demand coming in Asia as a result of that price drop, and since then demand continue in India and China. China is probably going to come in between 900 and 1,000 tons this year, last year was a record at 776 tons, so that gives you the best indicator." – Marcus Grubb, World Gold Council’s Managing Director of Investment (video)
Video: QE end will make 2000 bubble "look like a day at the beach"
"You're printing $85 billion a month, and really at the end of the day you're not creating any more jobs, you're creating a wonderful asset bubble. It should end, if nothing else, let the market start to price things based on fundamentals again rather than money printing... When you think about how much you pay for a dollar's worth of sovereign debt income in the United States or investment grade debt, if you create a PE multiple out of it, that would make the stock market bubble of 2000 look like a day at the beach. It's really quite remarkable. The sooner we get back to a market pricing... the more sustainable it becomes." – Hans Olsen, chief investment officer of Americas at Barclays (video)
Video: Nasdaq chairman warns about "bubbly valuations" in markets
"What happens when you get too much cheap capital – which we've had for quite some time – is of course, there is a risk you could get bubbly valuations in the financial markets. And that is clearly a risk." – Borje Ekholm, the chairman of Nasdaq OMX (video)


Chart of the week

Does it even matter if the Fed tapers (the damage has already been done...)
fed taper vs no taper

The week ahead

  • What next from Bernanke?? Markets sure to react to any comments
  • Can gold break through $1,300 threshold?
  • Reports due on existing home sales, new home sales and durable goods
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