The Daily Reckoning October 16th


Who Is Plotting to Steal Your Pension?

A huge pool of money lies just beyond the grasp of government’s itching fingers: private pension funds. Various money-grab schemes have been floated, including a legal requirement that all private pension funds contain a set percentage of Treasury bonds. The most innovative scheme comes from California, which is attempting to do an end run around the most powerful obstacle to a government grab: namely, backlash from existing pension holders.

What is Bill 1234?


California Senate Bill 1234 creates America’s first state-sponsored and state-managed retirement program for private-sector workers. Because the scheme creates new pensions for nonunion workers, however, it escapes the wrath of private unions and powerful corporations who would rebel if government grabbed at existing plans. The bill has already been signed by California Gov. Jerry Brown.

The new system addresses private employers with five or more workers who are not already covered by an employer-sponsored pension plan. Such employers must arrange for an automatic deposit of 3% of the income of “eligible employees” into a government-run retirement plan.

Employers can also make additional deposits on behalf of employees in much the same manner as matching 401(k) contributions. An “eligible employee” is defined as any worker who does not go through the process and paperwork to opt out of the retirement arrangement. Otherwise, the employee is opted in. Over 6.3 million California workers are expected to be eligible.

(Note: The bill allows employers to set up private pensions as an alternative, but this would be costly. Private-sector retirement plans are regulated by the federal Employee Retirement Income Security Act, or ERISA. This subjects employers to strict standards, complicated reporting requirements, and significant penalties. Small employers are highly unlikely to implement the private alternative.)

The new retirement plan will be administered by a board headed by the state treasurer, and it will select either a private investment firm or the state’s public pension system, California Public Employees’ Retirement System (CalPERS), to maintain and manage the new funds.

(Newspapers and other accounts seem to take it for granted as a default position that CalPERS will be at the helm.) The scheme is estimated to add $6.6 billion in the first year to the state funds managed by CalPERS, which is already the biggest U.S. pension fund, with 1.6 million public employees and $233 billion in assets at the end of fiscal 2012.

Why Bill 1234?

CalPERS is in fiscal death throes. Writing in opposition to Bill 1234, state Sen. Mimi Walters declared, “California has amassed a terrible track record when it comes to maintaining its public pension systems; the systems are currently a combined $240-500 billion in debt.” The two paths out of the dilemma are a steady and solid return from investments or a raw infusion of cash. CalPERS returned only 1% on investments last fiscal year. Bill 1234 accomplishes the raw infusion alternative in at least two ways:

1) A category of investment explicitly permitted by the bill is “United States government and government-sponsored entity debt obligations.” The government can use the pension funds to purchase its own debt.

2) 3% of the income of approximately 6.6 million private-sector workers will be suddenly under its management.

Walters noted that the infused money might go directly to public employees because “those public employees are obligated [by law] to be paid first from the pool of investment dollars.” She concluded, “SB 1234 looks like nothing more than a cynical effort to prop up the floundering public employee pension debt with new funds from private investors, sent in by employers who are forced to participate under penalty of law.”

The Patina of Bureaucratic Reassurance

Proponents of Bill 1234 offer reassurance to the skeptical.


The employee enrollment is voluntary, apologists say. And it is true that the automatic enrollment has an opt-out feature… for the moment. But as executive director of the government-watchdog California Common Sense Autumn Carter observes, “Opting out of state-run programs is notoriously difficult and bureaucratic.”

Bloomberg estimates the average income of the new pension “subscribers” at $46,420 and Carter guesses “that many at that income level would want to recapture the automatic $1,400 annual paycheck deduction, but for whatever reason, they will not attempt to do so.” While the bill’s author says the private pensions set up by SB 1234 are voluntary, the bill’s language states that private sector employers “must opt out.”

Moreover, employees must opt out every two years. The bill reads that “at least once every two years, participating employers shall designate an open enrollment period during which eligible employees that previously opted out of the program shall be enrolled in the program unless the employee again elects to opt out…”

The additional employer deposits are voluntary, apologists state. And it is true, they are… for the moment. But the eerily accurate investment adviser Michael Shedlock insists, I “don’t buy it. This would be the first step toward mandated involuntary contributions.” Government programs begin with whatever measures the public will accept, and then they grow from there.

The new retirement accounts will not necessarily be managed by CalPERS, apologists observe. CalPERS will bid against private firms for the asset management, with the state treasurer overseeing the process. In the unlikely event that CalPERS does not become the manager, however, the state of California will still have legal authority over the funds. Bill 1234 creates the California Secure Choice Retirement Savings Trust, which will be administered by the California Secure Choice Retirement Savings Investment Board. Bureaucrats will be in charge.

New retirement accounts will be maintained and managed separately from the CalPERS ones, they vow. Frank Keegan, the editor of, responds, “Anyone who believes this money… will be left sequestered should check how well that promise was kept for Social Security.”


Only one barrier to the implementation of Bill 1234 remains. The bill as it stands may not meet the requirements of the IRS or of the Employee Retirement Income Security Act of 1974. And so another bureaucratic board has been established to determine compliance.

Bill 1234 will not prop up the public employee pension for more than a flicker of time. CalPERS is a Ponzi scheme — a scam that returns money to older investors only by acquiring new ones. Private Ponzi schemes have relatively short life spans, after which the perpetrators are fined or jailed. Public Ponzi schemes are longer lived because laws can force more and more new people into “investing.” But after the Ponzi that is CalPERS goes bust, the bureaucrats will collect their protected pensions and go home.

Bill 1234 may well make California go bust sooner, rather than later. The infusion of cash depends upon the continuing existence of small businesses. Shedlock captured well the impact the bill would have on that sector:

1. Immediate large-scale firings by small businesses. No small business owner in his right mind would have over 4 employees.
2. Any business that could would leave the state.
3. Many businesses that do stay would be destined to go bankrupt.
4. California would end up like Detroit or Greece.

The most ominous aspect of this shortsighted money grab? California is a trendsetter not merely in fashion, but also in politics.

Wendy McElroy

Original article posted on Laissez-Faire Today

Who Is Plotting to Steal Your Pension? appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Metals Miscellany

Silver is starting the day at $32.84. But a mysterious group of traders billing themselves as “Wynter Benton” is promising to move it big during the next six trading days… on the way to $50 before year-end.

“The Leader wishes to inform our followers that the group will be demonstrating our ability to move the price of silver between Oct. 16 to Oct. 23, 2012,” according to a post on a Yahoo! Finance message board. “We will be updating our moves in real-time during this period.”

Yes, we’re getting deep into the conspiratorial weeds here. But in the midst of contemplating the crimes of politicians and central bankers, to say nothing of “The War on You”, we need an amusing diversion now and then.


“Wynter Benton” purports to be a group of former J.P. Morgan Chase commodities traders who say that JPM engineered the meltdown of MF Global a year ago because the traders were trying to take delivery on a huge amount of physical silver. (How that was supposed to work, we’re not sure, but it’s fun to play along…)

The traders — or the lone fantasist posting in his underwear, depending — made several prescient calls in the silver market in early 2011, but disappeared from view after the MF Global episode.

Wynter Benton reappeared a month ago, promising silver will trade above $50 before Dec. 31, 2012. And last week, he/they promised the demonstration of his/their ability to move the silver price, starting today.

In all likelihood, nothing will come of it. But in case it does, we have it on the record. Heh…

Meanwhile, hedge funds and other big players have upped their gold positions to the highest levels in more than a year.

The weekly Commitments of Traders Report issued by the Commodity Futures Trading Commission showed that holdings of gold-backed ETFs grew by 282,000 ounces last week. That’s the 11th-straight week of inflows.

“Many new positions in both exchange-traded funds and futures have been established in recent weeks,” says Saxo Bank vice president Ole Hansen, “especially short-term leveraged investors who are not married to their positions in the same sense as long-term ETF investors.”

That short-term leverage likely goes far to explain gold’s tumble since Friday.

This morning, the price is starting to recover a bit at $1,742.

Stock traders are carrying over yesterday’s jubilation into today. With sunny earnings reports from Goldman Sachs, Coca-Cola and Johnson & Johnson, the Dow has pushed past 13,500.

The big economic number of the day is consumer prices — up 0.6% last month thanks to rising gasoline prices. The year-over-year increase works out to 2.0%; ditto for the “core” rate that excludes food and energy because they’re “volatile.”

With this morning’s numbers, Social Security’s annual cost-of-living adjustment next year will be 1.7%. Any resemblance to your own cost of living is purely coincidental.

Addison Wiggin

Metals Miscellany appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Nigel Farage on the Fall of Europe and the Parallels for the US

In the following clip from’s Capital Account with Lauren Lyster, the always controversial Nigel Farage discusses his critical view of the Eurozone, why he believes it will fail and why his videos tend to “go viral.”

Nigel Farage on the Fall of Europe and the Parallels for the US appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Your Gold And Silver Questions Answered!

I encounter many readers at conferences, such as the recent Agora Financial Investment Conference in Vancouver. Also, readers send me all kinds of email, asking about my newsletter portfolios and investment themes. We have some great correspondents out there.

I appreciate the inquiries, but you should know that Agora Financial has a tight policy on what happens next. I can’t reply to you with “personal financial advice.” Still, it’s OK for me to address these questions in articles — like this one.

So in that spirit, let’s review the precious metals mail…

Gold and silver prices recently moved upward. Thus, the mailbox received questions about where precious metal prices are heading. “Will gold and silver prices keep moving up?” asked one reader.

“Do you think that gold prices will fall back?” asked another reader. “And when?” he wanted to know.

“Why shouldn’t gold and silver just keep trading in the current range?” asked a third reader.

My tongue-in-cheek answer to all three questions is “Yes.”

All kidding aside, we have to figure out how best to invest in gold and silver. You see, the past decade has been good for precious metals.

Let’s start with a look at gold…

Look at the 10-year price trend. For more than a decade, we’ve lived with generally rising gold prices. This was certainly the case for the first years of the 2000s. And precious metal prices have risen strongly since I started writing Outstanding Investments in 2007.


As the chart shows, gold prices were in the $350 per ounce range about 10 years ago. When I came on board, in February 2007, gold traded in the $650 range. There was a price rise over the next year, and then a price swoon during the crash of 2008. People sold gold to raise fast cash. Gold is liquid and someone will always buy it — which makes for a strong eternal lesson.

From 2009 through the end of 2011, gold prices rose steadily, from the $900 range to, at one point, well over $1,800 per ounce. Then, in the first half of 2012, we had a price retreat. Now gold prices are up about 13% for the year, with almost 11% of that just in the third quarter.

Focusing on 2012, gold prices have bounced around between $1,600–1,750 per ounce. That range may annoy short-term traders, but in my view the spread is akin to background noise for long-term investors. I’ll give away the ending to the story by telling you that I believe there’s more upside coming to gold. Lots more.

Silver Trends

How about the 10-year trend for the price of silver? Let’s start with the chart (below), which is similar to that for gold, although not exactly a match:

Let’s discuss that last point, because I’ve had questions about it from readers. Unlike gold, silver is widely used in industries like chemicals and electronics, as well as jewelry and bullion. Thus, silver pricing is more sensitive to macroeconomic swings — something we saw all through the 2008–09 global crash and ensuing weak recovery.

To amplify that point, many industrial applications “consume” silver, in that the basic metal gets incorporated into compounds that don’t recycle. For example, consider how many hundreds of millions of cellphones and computer keyboards have gone out with the trash into landfills over the past two decades. (C’mon. You know that you’ve tossed a few out!) Each item contained some amount of silver, as often as not a small amount in the nature of a fraction of an ounce.

By comparison with silver, one of the most heavily recycled metals in the world is lead (no pun intended). Just based on weight of materials alone, almost every car battery on the planet has enough value that people recycle the innards. Thus, lead recycling offers quite a contrast with many “throwaway” products that contain silver.

So as for the basic dynamics of silver prices? Over the past decade, silver prices have gone up and down during short time frames. That’s what trading is all about. But the general trend has been up, up and up some more.

Currently, silver sells at about $35 per ounce, which is way up from $5 looking back 10 years. In 2012, we’ve had a nearly 25% rise in silver prices — almost all of that coming in the third quarter. Is there more to come? Probably, barring a global economic crash.

Yes, there were up and down periods for gold and silver, so timing matters to some extent. But generally, and overall, it’s been good if you think long term.

Looking ahead, will gold and silver continue to preserve wealth? At the end of the day, how can we make some money?

Another Round of QE…

Let’s start with the macro picture. In fact, let’s start with the macro views of readers, whose emails lately reveal deep unease about the economy. One big source of worry is the Federal Reserve’s recent announcement about another round of “quantitative easing” (QE3). Basically, the Fed will keep interest rates super-low, while buying mortgage-backed securities far into the future.

Common concerns about QE3 include this from a reader: “The Fed is bailing out the banks, again! But what about strangling me and my savings? The banks make money off the Fed, and in return I get almost no interest — a fraction of a percent. I get squeezed from both ends, once by inflation and again by low interest income.”

Further along these lines, another reader wrote to say, “What’s going on with the dollar? I just keeps on declining in value. It seems like I pay more and more to buy less and less.”

The way I see it, that’s been the case since the creation of the Federal Reserve in 1913!

At root, QE3 looks like the Fed is just throwing up its hands — at least figuratively. In essence, with QE3, the Fed has announced that it’ll let inflation roll for a while. That, and the Fed will further destroy capital with long-term low interest rates.

From the outside looking in, it appears that the Fed has all but given up on the American political class. I get it. For the past couple of generations, U.S. political leadership simply was not serious about the nation’s money, let alone maintaining the foundations of national wealth. Even (allegedly) conservative former Vice President Dick Cheney once said, “Deficits don’t matter.” Oh, really?

What’s left for the Fed to do? Right now, the Fed is playing its last cards — “jokers,” some might opine — via QE3. The Fed rationale is, evidently, that the “political” part of the national government can’t harmonize tax receipts with overall expenses. So the unelected, “independent” Fed will open the currency spigots and inflate away!

It leads to the question of whether or not the U.S. is committing national economic suicide. One reader summed it up thus: “There’s no political mileage in cutting spending. Not for Republicans. Not for Democrats. There’s no political consensus to raise taxes, either, not that the economy could stand it. I feel like I’m riding a train that’s about to fall off the tracks, into a canyon, and I can’t get off.”

Another reader to sums things up pretty well with this comment: “It’s all out of my control. I don’t know exactly what to do, so I’m in cash, gold and silver. I have shares in a few mining plays, and a couple oil companies. But mostly cash, gold and silver.”

I couldn’t have said it better myself.

That’s all for now. Thanks for reading.

Byron W. King

Original article posted on Daily Resource Hunter

Your Gold And Silver Questions Answered! appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

avatarThe Daily Reckoning - The Daily Reckoning posted Tuesday, October 16th, 2012.

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