Nice Timing! Cutting 401(K) Matches as Dow Rises
By - May 11, 2009

The spunky spring rally of 2009 is upon us, with the Dow Jones industrial average up a tidy 2000 points since its March 9 lows. Too bad that tens of millions of Americans didn't get the chance to participate in some much-needed retirement repair over the last eight weeks. That's troubling news if you're one of the 60 percent of all US workers who use a 401(k) as their prime savings vehicle. It's even more vexing because so many employers have been compounding the problem. Faced with dwindling profits, more than one-third of employers, including FedEx, EMC and Starbucks, have reduced or eliminated matching contributions to retirement plans, according to the Spectrem Group. – New York Post

Dominant Social Theme: A difficult time for investors …

Free-Market Analysis: While we don't buy off on the idea of a V-shaped recovery, stranger things have happened. If such a thing were to occur we would still look for a W rather than a V, as we believe what goes up might well go back down (before going back up yet again) because of difficulties with the commercial mortgage market, insurance, derivatives, etc. – and maybe inflation most of all. A securities rally might indeed lessen some of the pressure, but the economy itself is still the problem.

Stock markets, to a degree, can literally be forced back up by printing money and providing funds to commercial banks that are not lending but may indeed find it feasible to "invest." But the real economy is a different story. The real economy is apparently shaking out 40 or 50 years of mal-investment. The bubbles that collapsed are numerous and not subject to immediate reflation. As a result, jobs are scarce, profits are scarce and people are saving what they have rather than investing.

Savings plans vary throughout the Western world, just as health care plans do. But for America anyway one positive note amidst the carnage is the enforced savings provided by 401(k) savings plans. These are tax advantaged plans that are often matched by employers. The employee decides to put a certain percentage of his or her paycheck into certain investments and the company matches that amount.

But now, just as stock markets seem to have recovered a bit, American corporations are announcing that they are cutting their contributions to employee savings plans. This is yet another blow to Americans who work very hard to generate an income and retirement savings but have been savaged by the events of the past two years.

Not so very long ago, the Bush administration examined putting Social Security funds into the stock market – and the Clinton administration investigated the idea as well. Of course, this begged the question about exactly what to invest as there are no funds apparently, only IOUs that the US government has written out to itself. Anyway, the idea of investing any kind of government funds into stocks has seemingly gone a-glimmering and it may be a long time before that debate is renewed.

And now investors must face an onslaught of positive press about the stock market and the agonizing dilemma of whether to jump back in – assuming they left in the first place. Of course, there is modern portfolio theory, which should theoretically have allowed individuals to diversify their way through the past two years of market downturns. But in fact that would have been difficult. The Dow itself, the world's most major stock market, dropped from 14,000 to under 8,000 – thus losing near half its value. This comes on top of a Nasdaq market that dropped from 5,000 to nearly 2000 over time after the great tech crash of 2000. These are major American markets, then, that have lost nearly half their value in fairly short order. The Nasdaq has never regained the heights of its previous glory and there is no guarantee that the Dow will do so either, or not in the near term.

But still the propaganda is revving up. Profits are supposedly there for the taking. One simply needs to be disciplined – and of course solvent. Pity the poor investor! He or she may be facing a very tenuous job situation in America or Europe and may have pulled his or her paltry savings from markets if they were there to begin with. Many may indeed have invested at the top of the market, experienced losses and then pulled out. In America the average in retirement savings is apparently something between US$100,000 and US$200,000 – and that's not going to see one through a sumptuous retirement, even with Social Security. But now the message, almost universally, is that stocks are going to go up hard and fast and that this is a terrific opportunity to make back losses.

One thing these sorts of messages are sure to produce is guilt. It's probably safe to say the average person is fairly beat down at this point, worried about saving enough for retirement and in the meantime staying solvent. Now comes the message that it's time to buy equities once more. Is the average individual up to it? The product of such messages is likely to be guilt and inaction rather than confident rebalancing of portfolios. Sure, there are people that can do this sort of thing for real, and regularly; they are often compensated in the millions.

We think it is reasonable to speculate that panic takes over for most middle and working class people long before they get to the point of creating a reasonable contrarian strategy. They fear, rightly, that it could all come tumbling down, even though investment pros have traditionally scoffed at such scenarios. In fact, the familiar refrain is that modern markets are in no danger of unraveling. But to hear former American Treasury Secretary Henry Paulson and others tell it, American (and global) marts came within hours of doing just that last September before TARP supposedly saved the day.

Of course it wasn't just TARP. Central banks injected trillions into the marketplace – the Fed supposedly shoved some US$2 trillion into the market, but there are reports that the amount, all told, in off-balance sheet transactions are closer to US$9 trillion, or nearly the annual GDP of the United States.

So this is what the "average" investor is supposed to face. That the stock market and the banking system can indeed fall to pieces, but he or she should go ahead and "invest" anyway. Invest in a system that can indeed implode. Invest in a system supercharged by central banking money creation – not that most savers and investors understand the process, only the horrifying result.

And now matching 401(k)s are to be withdrawn? This will probably have an impact on American equity markets, and it will certainly have a further impact on investment psychology. We don't know where it will end, but in America, and to a lesser extent in Europe, there are tens of millions and even hundreds of millions of individuals that make white-collar wages but live paycheck to paycheck, nonetheless, in danger of toppling into poverty from a lost job or a serious illness. The system that was supposed to create retirement income is fairly well broken. No matter whether the recovery is V-shaped or W-shaped, does anyone think that the average investor will rush back into the market with meaningful funds? And even if they make a killing, is it any way to build savings over a lifetime, much less a retirement nest egg?

One can chase the business cycle and especially the stock market in America and abroad. But as even so savvy a hard-money investor as Peter Schiff has apparently found out, it is not stocks (even abroad) but money metals that hold value during the latter stages of a business cycle. It is not pleasant or easy to invest through the kinds of volatile markets that have marked the 2000s. But one may well take comfort in the length that money metals – and the final phase of this business cycle – have to travel before we come to the start of a new one.

After Thoughts

Yes, we've got a long way to go before central banks begin to raise rates to combat price inflation, in our opinion. That will, of course, present another timing issue to investors who have jumped back into this market. Meanwhile, we've pointed out that both gold and silver are relatively underpriced compared to where they ended up in the 1970s during a similar (though less ruinous) business cycle. For those who don't feel up to a stock or bond market experience given the current unsettled environment, parking funds in gold and silver and waiting out the inevitable economic volatility may provide an antidote to the agitation of current financial swings.