Retirement Investment Sucker Rally: $800 Billion in ADDITIONAL Bailout Money Sending Dow Surging

Retirement investment money question:  Did the market hit bottom on November 20th… or is this recent rally a bear trap to beat all bear traps?

That is, indeed, the $6 million question.

The Dow Jones Industrial Average has surged 1,200 points in the past five days. It could surge another 1,000 points next week after the U.S. government announced that it would be spending ANOTHER $800 billion to bail out credit card companies.

That brings the total amount spent on this federal bailout to a staggering $5 trillion, roughly equivalent to what the U.S. spent fighting World War II.

Here is the breakdown:

Government Entity/Bailout BILLIONS
Term Auction Facility   $900

DISCOUNT LENDING WINDOW
Commercial Banks  $99.2
Investment Banks  $56.7
Loans to Buy ABCP  $76.5
AIG   $112.5
Bear Stearns   $29.5
(TSLF) Term Securities Lending Facility   $225
SWAP Lines $ 613
(MMIFF) Money Market Investor Funding Facility  $540
Commercial Paper Funding Facility  $257
(TARP) Treasury Asset Relief Program  $700
Automakers  $25
(FHA) Federal Housing Administration  $300
Fannie Mae/Freddie Mac  $350
Zero Interest Rate Policy (ZIRP)  $800
TOTAL: $5,084.4

The problem is, despite this sharp rally-back, the global economy appears to be growing worse by the day, not better.

Government officials from Treasury Secretary Paulson to President-Elect Barack Obama say we’re facing a “once a century” economic crisis:

Unemployment is skyrocketing: The Labor Department just reported that new claims for unemployment benefits jumped to a 16-year high 542,000 – the highest they’ve been in 20 years. That is 52% higher than they were a year ago. Just this week, CitiGroup announced it is laying off 53,000 more workers.

Foreclosures are going through the roof: According to RealtyTrac, home foreclosures soared 25% in October. More than 279,500 U.S. homes received at least one foreclosure-related notice that month. The outlook for 2009, especially in commercial real estate, is even more bleak.

America’s biggest companies are bankrupt: The latest companies filing for bankruptcy read like a “Who’s Who” of American business: GM… Lehman’s Brothers… Washington Mutual… Circuit City… Linens ‘n Things… Frontier Airlines… Kimbell’s… and on and on.

Federal spending has gone berserk: According to a recent tally by CNBC, the U.S. government is spending $5 TRILLION in a desperate effort to bail out bankrupt banks. Even that is doomed to fail: it would take $600 trillion to cover all the bad derivative debts that are wiping out the global economy.

Consumer spending has dried up: Consumer spending… the lifeblood of American business… has dried up. That’s why literally THOUSANDS of U.S. businesses are reporting their earnings are plummeting: Home Depot, down 31%… Target, Lowe’s, down 24%… Kohl’s, down 17%… GM down 36%.

Massive tax increases ahead: Federal, state and city governments are all flat-broke. They are victims of massive overspending, combined with plunging tax revenues. California Governor Arnold Schwarzenegger announced this week an estimated budget shortfall of $11 billion. The U.S. budget deficit this year could easily top $1 trillion. Virtually all arms of government are encouraged by the Obama mandate for “change.” They will quickly raise taxes through the roof. This will drive the current recession into a full-blown depression.

Insurance Money and Senior Investment Income Under an Obama Administration

It’s difficult to estimate the effects an Obama presidency will have on insurance benefitsy (including annuities) and senior investment income. On the one hand, Obama has proposed eliminating income tax altogether on “the elderly” making less than $50,000. Also, both John McCain and Obama have been competing for the middle class – and thus, BOTH candidates have proposed significant tax cuts for people making $100,000 to $200,000 income a year.

According to the non-partisan Tax Policy Center, a two-earner family with six kids making $150,000 a year will get a $6,500 per year reduction in taxes under McCain’s plan and a $7,500 reduction under Obama’s.

Yet despite Obama’s claim that he will “cut taxes for 95% of the American people,” many experts believe he will end up presiding over the largest tax INCREASE in history on ordinary Americans. Here’s why.

First, Obama and his fellow Democrats will allow ALL of the Bush era tax cuts to expire – which will result in automatic tax INCREASES for most people .

Second, according to the authoritative “Preliminary Analysis of the 2008 Presidential Candidates’ Tax Plans,” published by the Brookings Institution/Urban Institute’s Tax Policy Center, Obama’s published plan would actually result in an INCREASE of 13% in taxes on families earning $31,000 to $45,000 a year. The reason why is because Obama increases the tax credits to families but makes them “refundable,” meaning they push families into higher tax brackets.

Third, Obama’s definition of “rich” is not $250,000 a year, as he claimed during the campaign, but actually $110,000 a year. His policies would result in a staggering 45% effective marginal rate for families in the $110,000 to $120,000 income range – an increase of 11% over current law .

Fourth, according to the non-partisan Tax Policy Center, the Obama plan would reduce taxes for low- and moderate-income families, but “raise them significantly for high-bracket taxpayers.” The institute estimates that even “middle-income taxpayers would see their after-tax income RISE by about 5% over the next four years.”

Fifth, Obama plans on increasing the amount of income subject to Social Security and Medicare taxes from the current threshold of $00,000 annually to NO LIMIT.

Sixth, Obama will nearly DOUBLE the capital gains tax, such as on sales of homes, from the current 15% to 28%.

Seventh, if Obama does not significantly alter or eliminate the dreaded Alternative Minimum Tax (AMT), his “tax cuts for the middle class” will instantly go up in smoke.

Finally, the great unmentioned factor in all of this discussion is the global economy. Both McCain’s and Obama’s projections for their tax proposals have been based on the Congressional Budget Office’s projections for the future based on the recent economy. However, if the U.S. goes into a significant recession, even depression, the tax revenues will plummet – and Obama will need to make enormous tax increases just to maintain current levels of government spending.

Our advice: Retire now and relocate to a tax haven outside the U.S. while you still can. With control of BOTH houses of Congress and a filibuster-proof majority in the Senate, liberal Democrats will have TOTAL CONTROL of the U.S. government for the first time since the 1930s.

Dow Drops Another 678 Points! Investors Worry About Retirement Investment Income, Money!

It’s been a rough month for the stock market, no doubt about it! In just the past week, the Dow has plummeted nearly 2,000 points or 18.1%. The S&P has lost 41.8% of its value since its recent high a year ago of 1565.15 on October 9, 2007. More than half of that loss, 25.7%, has come in just the past month!

The question everyone is asking is the same one investors ask after every big market crash: Is it different this time? Is this the time the market will not come back? Are these credit problems so huge that this time the market will go down, and stay down, for a decade or more?

One thing is clear: The bear market decline we’re seeing is, so far at least, about par for the course. There have been five major market declines in the past forty years of 20% or more. We’re near the high end of those declines and we can’t know, right now, how long the market decline will last. Here they are:

1. March 24, 2000, to Oct. 9, 2002. Decline of 49.1%. 5 years to fully recover from bottom of market.

2. July 16, 1990, to Oct. 11, 1990, Decline of 20%. 6 months to fully recover from bottom of market.

3. Aug. 25, 1987, to Dec. 4, 1987. Decline of 33.5%. 18 months to fully recover from bottom.

4. Nov. 28, 1980, to Aug. 12, 1982. Decline of 27.1%. 3 months to fully recover from bottom.

5. Jan. 11, 1973, to Oct. 3, 1974. Decline of 48.2%. Nearly 6 years to fully recover from bottom.

As you can see, a market decline of nearly 50% is hardly unprecedented — and both times it took two years, give or take, to recover. But recover the market did: Following the nearly 50% wipeout after the Oil Crisis of 1973, the market went on to gain 2168% over the next 27 years. Every $10,000 invested in the S&P 500 would have grown to approximately $216,800.

The same thing happened after the Tech Wreck and the 9/11 attacks: People wondered if this time it might be different. After all, the market was absurdly overvalued with all those worthless dot.com stocks. Surely we were headed for Dow 2,000, as many “gurus” told us.

What actually happened? The market did not continue plunging, as the doom and gloomers told us, but it took a very long time to recover, nearly 5 years in fact. After hitting a peak of 1,527 on March 20, 2000, the S&P began plunging lower and lower and then lower still: finally bottoming out at 800.58 on September 20, 2002. The market then began climbing back, eventually recovering its old high just last year (in October 2007). That’s a pretty long recovery period.

The same thing happened with the 1973 Oil Crisis.  The market hit a peak in January 1973 and then began plunging over a period of 19 months, hitting bottom on September 30, 1974.  Then, it began climbing steadily… but it didn’t fully recover its January 1973 highs until July 28, 1980 — or nearly SIX YEARS later.

So: What can we early retire folks learn from all this? Historically, the market does always come back — but it can take five or six years to do so, not months. A drop of 50% is not historically unprecedented. However, drops of this magnitude tend (at least twice!) to require a longer recovery period that stretches over at least 5 years.

Bottom line: We could be in for a long recovery. It’s definitely time to play things safe. If you can avoid selling out right now, you’ll probably end up better off as the market will probably recover (unless “this time it’s different”). If you need money to live on or for big expenses like college, however, you may have to wait quite a while before the market recovers.

The only comfort we can take from all this is that this recent continuing bloodbath is about as bad as it has gotten in the recent past. We haven’t seen a decline in the market of more than 49% since the Great Depression. But anything is possible.

What Will Happen To Money in Investment Income Accounts?

If you have money in an investment account, 401k or similar retirement account, you’re probably panicking right now.

After all, it looks like the world’s central banks are running out of ammo! After dramatic interest rate cuts worldwide, global equity markets continued to crash Wednesday. The Japanese Nikkei Index fell 9.38% in a single day! The Hong Kong index dropped 8.17% overnight. The German DAX fell 6.25%. The British FTSE dropped 5.5%.

The world is panicking as it watches the entire global financial system grind to a dead stop. Stocks are in free fall all over the world! The Dow closed down 508 points on Tuesday but that barely tells the story. The S&P 500 has lost 21.4% in the past 30 days alone… 31% so far in 2008… and 36% since October 2007.

Worst of all, there is no sign the bloodletting is going to stop. Banks worldwide are collapsing. The global economy is grinding to a halt. Unemployment is rising.

Social Security will be there after the coming stock market wipe-out. So will government pensions. The Fed will see to that. Private pensions are a different matter altogether. You cannot count on them. During the 1970s and 1980s, pensions were grossly underfunded. Many major corporations had to put more cash into their pension funds, to bring them up to minimum standards. During the bubble stock market, companies were able to take out that cash, and put stock in its place.

People think their pension funds are solid. Nothing could be further from the truth. If your retirement plan is tied to stock or money market funds— and they all are — expect to take a big hit.

Consider cashing in your retirement or pension plan even if you must pay the tax consequences. Someone once said that money you can’t control is not your money. Get out of any IRA, Keogh, 10K, retirement plan or pension fund. Transfer the assets first into bank savings accounts and then quietly take it out and stuff some in your mattress. Remember, during the last stock market depression, people who had cash in their mattress were kings.

On balance, the dollar is going to continue falling for the next 20 years. America’s balance of trade disaster and the coming global stock market wipeout guarantee this. You absolutely should diversify into foreign currencies.

We are now entering a new era of massive deflation. Real estate, of course, is plunging lower and lower almost everywhere on the planet. Stock prices are in free fall. The prices of most commodities are dropping fast. The Dow Jones-AIG Commodities Index Total Return ETF (DJP) is down 37% since mid-July. Oil has dropped from $140 a barrel to under $90 today.

We’re in for a wild ride the next few months.