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Personal Finance: Is Your Pension Safe?
New York: February 15, 2004
By John R. Stephenson

For both investors and politicians, the party appears to be going strong. Unbelievable economic growth was recorded in the third quarter, housing starts have hung in and the employment situation has stabilized and is possibly improving. Gold is up sharply and other commodities have risen some 40 percent on average since the October 2001 trough. Things are good and going to stay that way. The US is back as the economic engine of the world and will be leading the world out of recession - or at least that's the party line.

While it is probably far too soon to put away the punch bowl and send your guests home for the night, there are a few things to bear in mind. Gold and other hard assets are gaining in popularity because there is growing unease that things aren't quite right. Both households and governments are heavily in debt at a time when they should be building resources for a massive baby boom generation that is approaching retirement. Households have been encouraged to consume, thanks in part to an accommodative stance from the Fed, which has kept interest rates to a forty-five year low. But the cost of this policy has been to induce the public to over-consume. This over-consumption has many desired political and short-term economic benefits including: keeping the economic growth rates up, factories busy and supporting job creation.

But to keep the economic miracle going, China has to keep growing at a torrid pace and the US consumer can't run out of credit. To relieve the burden on the US consumer, it would be helpful if the rest of the world would consume a little more. That looks unlikely. To date, the US consumer has single handedly managed to keep deflation at bay and helped to finance construction of all those factories in low wage countries. But increased production of low cost goods into a world market that is already saturated with goods and services might cause western economies to deflate.

The US dollar remains under pressure and might well have fallen further if it had not been for interventionist policies by Asian central banks, most notably Japan's. To reverse the slide in the dollar, the US could raise interest rates, which would steady the currency and help attract capital back to the US, but that course of action has serious repercussions. The US consumer is already so highly levered that a rise in interest rates would cause consumption to plummet, not to mention the housing sector which has so far remained buoyant largely on the back of record low interest rates.

Trends have a way of persisting for some time and it seems too early to call an end to the market rally. For cautious investors, it might be wise to move some of your portfolio into hard assets such as gold or even base metal funds and consider lightening the debt burden somewhat.


StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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