The No. 1 Reason to Buy Stocks

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Published on Tuesday, 16 October 2012 14:55

Written by Andrew Snyder, Editorial Director, Inside Investing Daily

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The system is broken... It's great news for stocks.

Finally... a simple solution to America's deadly pension dilemma. We can go to bed tonight without the worry of how to pay for more than $1.2 trillion worth of unfunded liabilities on our minds.

No more worrying about soaring taxes. No more fretting about slashing pension promises. Heck, with a plan like this... there's nothing but blues skies and sunshine ahead.

And who do we have to thank? Oh yeah... Big Bad Ben Bernanke.

His free-money agenda may be saving millions of Americans from a poverty-stricken retirement. Or, come to think of it, it may have doomed us all.

For the color on this story, we turn to this morning's edition of The Baltimore Sun:

Baltimore County will borrow up to $260 million for its pension system and pay off the debt over the next 30 years, under legislation approved Monday by the county council...

The council's 7-0 vote will let the county invest the borrowed funds in the stock market, a move that carries risk but that county officials say will close a gap in pension funding while saving money in the long run.

It's unanimous... Let's roll the dice and see what the hell happens. Worst-case scenario, the county goes bankrupt and some other fool will be on the hook.

Here's the plan. Baltimore County will issue over $250 million worth of bonds. Thanks to Bernanke's ultra-low rates for an ultra-long time, the coupon on the debt will be in the neighborhood of 4.25%.

All the county has to do is invest in stocks that earn more than 4.25%, and it's a winner.

If every one of the county's commissioners gave the plan a thumbs-up, it must be a great idea? What could possibly go wrong?

Here's the picture in my mind:

View larger chart

You remember what happened four years ago, right? Those stocks everybody is betting on these days lost more than half of their values.

If it happens again -- or even if we see just a fraction of that kind of pain -- Baltimore County's commissioners won't look so smart. Not only will they come nowhere close to meeting their pension obligations... but they'll default on a hefty pile of bonds. They will have doubled their pain.

Of course, Baltimore County is not alone. Oh, no... this is a national trend. It ties in perfectly to what Bill wrote in his message today.

The idea of the Fed policy is to lower the dollar and raise the "animal spirits" that lead investors to take chances and consumers to take down inventories...

These animal spirits have taken the shape of "pension obligation bonds." They are not new. California has been losing money with them for years.

First, it was Oakland that lost $245 million (a quarter of its annual budget) in the gambling. And then it was Stockton that quickly lost a third of the $145 million it borrowed and invested on Wall Street.

The city filed for bankruptcy in June. Its creditors lost $1 billion.

It is a similar story in New Orleans. It borrowed $170 million to help cover the obligations it owes to 800 firefighters. With its lousy credit rating, the city's debt came with an 8.2% interest rate. It figured that, with smart stock selection, it could earn a double-digit return on Wall Street.

In just a few months, though, the city is on the hook for a $115 million balloon payment.

Ruh-roh...

"We might as well hand over the keys to the city," said the city's chief administrative officer, Aaron Kopplin. The chances of it finding the money are less than slim.

Even with the large losses in Louisiana and California and the ensuing bankruptcies, cities across the country are falling for Wall Street's sales pitch (lawyers and banks make a killing issuing these bonds).

Fort Lauderdale just borrowed $340 million. Cincinnati made a similar gamble. Same story for Hamden, Conn., and now San Diego is about to join the club. In all, some $5.2 billion was borrowed by municipalities in the name of pension obligation bonds and tossed to the winds of Wall Street last year.

Again, if it weren't for Bernanke and his ultra-low rates, none of this would be possible.

And he knows it. Of course he does.

That's why he's promised such low rates from now until infinity. That's why he is overtly manipulating the debt market. He knows if he stops -- even to catch his breath -- the scheme will collapse.

If interest rates rise, pension funds would implode. Cities would stop feeding billions of dollars into the stock market. And countless Americans would suffer as our system melts down.

That's where we're at, dear reader.

Our system is broke, and there is no way to fix it... at least, not without massive pain. The only solution is for our government to continue printing money and using it to prop up each leg of our tipping stool.

I argue the aging of the American population is the greatest threat to today's investor. The great Ponzi scheme that brought our stock market to where it's at today has fallen apart. There's no longer a solid base -- there are more folks pulling from the system than adding to it.

It's unsustainable. It is unstoppable. Yet our leaders will continue to lie to us and tell us they can fix it.

The good news is -- until this scheme finally unravels -- the Fed will push the market higher and higher. The bad news is you had better be out of the water before the tide turns. This ship is going down.