A funny thing is happening to the American economy.

Remember all those stories with the dire predictions of labor shortages as the oldest of the baby boomers retire and Generation X, at half the size, not being able to fill all the job openings?

Surprise!

The Baby Boomers aren’t retiring after all.

And those that already have, are re-entering the workforce after the market collapse shredded their portfolios and the housing bust decimated the value of, probably, their largest asset.

In some cases, 60-year olds are competing against their 25-year old children for the same jobs. And, sorry to say, with the changes in technology, if you’ve been out of the workforce even 5 years (let alone 25), you’ll be at an extreme disadvantage.

From the New York Times:

It has been a humbling time. Mrs. Diamond, who has a master’s degree in library science and was chairwoman of the library committee at her sons’ school for a decade, is applying for work with a 25-year gap in her résumé. “On one application, there was a whole page of databases I didn’t know and had to leave blank,” she said.

In November, Mrs. Diamond and Matt, whose major at Johns Hopkins was neuroscience, were vying for the same job, a research analyst for a pharmaceuticals company — until she withdrew. “As a mother, I felt it was more important for Matt to get his foot in the door,” she said. It didn’t matter; the position was frozen. No one was hired.

Then there are those Baby Boomers who are in need of jobs because the housing “dream” didn’t quite turn out as they thought it would.

Shouldn’t they own their houses outright by now?

Forgive me for sounding harsh, but if you bought a home in your 30s and you’re now 65 or 70, shouldn’t you be sitting pretty?

But apparently there wasn’t as much “downsizing” during the boom, but instead “up-sizing” as many Baby Boomers bought retirement homes worth far more than they should have thinking that real estate only goes up.

And now, they’re sitting on a declining asset as well as a high mortgage payment at the very same time that their 401ks have declined sharply.

Both of my grandmothers, aged 89 and 90, respectively, have owned their homes outright for decades. They were of the Greatest Generation- those that saw the Great Depression and World War II. Most of them didn’t mess around with re-financing or buying bigger houses or vacation homes as they got into their 70s and 80s.

But the Baby Boomers had no fear.

And now, what do they do?

They are trying to re-enter the workforce. Fully 1 in 10 of those in their 60s believe they will never retire. And nearly 30% believe they’ll work well into their 70s.

This will have a dramatic effect on both Generation X and Y- both of which need the Baby Boomers to exit the stage in order for them to advance.

Could there be generational warfare in the future as each group fights for limited resources?

In the New York Times piece, if you were a recruiter at that pharmaceutical company, do you hire the older worker who hasn’t worked in 25 years or do you hire the young college graduate who at least knows what Twitter is?

That is the reality.

The Baby Boomers, which enjoyed several of the greatest bull markets (in both stocks and real estate) the country has every seen, didn’t capitalize much on those bull runs. There’s no way of calculating the ramifications of this. But we do know it probably won’t be good.

Famed hedge fund investor Jim Rogers has often said he is not a “trader”, as that term is used, because he can never get the timing right. He says he almost always is too early on a trade.

In the last decade, his timing seemed to be more “on” than “off” as he predicted the rise in commodities that we saw up through 2008- along with the rise in China as an economic force to be reckoned with on the world stage.

But maybe Jim Rogers is famous for simply being “right” every once in awhile. You know the old saying- that even a broken clock is right twice a day.

I was struck by how hard it is to be an economic and investment forecaster while I was reading a book called “Market Wizards: Interviews with Top Traders” by Jack Schwager.

It’s a roadmap, of sorts, for those who want to be superstar traders.

The version I was reading was from 1988, and was published right after the Crash of 1987 when it seemed that the bull run of the American stock market could be coming to a swift end even as the markets bounced off of the 1987 lows.

Jim Rogers was one of the traders interviewed for the book.

I was struck by how eerie his forecast was for the future.

Q: Given the magnitude of the deficit problem, is there anything that can be done at this point? (in talking about the collapse of the dollar)

A: The basic problem in the world today is that America is consuming more than it is saving. You need to do everything you can to encourage saving and investment: Eliminate taxation of savings, the capital gains tax, and dual taxation fo dividends; bring back the more attractive incentives for IRAs, Keoghs, and 401Ks.

At the same time, you need to do everything you can to discourage consumption. Change out tax structure to utilize a value added tax, which taxes consumption rather than saving a nd investing.

Cut government spending dramatically - and there are lots of ways of dxoing it without hurting the economy too badly. We would have problems, but the problems would not be nearly as bad as when they are forced on us. If we don’t bite the bullet, then we are going to have a 1930s-type collapse.

Sound familiar?

Rogers was just 20 years too early. The government didn’t do anything he suggested and the American consumer kept spending and a consumption lifestyle took over.

In other parts of the interview, he talks about how Americans saved only 3 to 4% of their income and that couldn’t be sustained.

Many investors and economists saw the impending economic crisis coming. Some warned of it way too early- as Rogers did.

He, at least, admits he stinks at market timing.

Where does that leave his current predictions though?

Commodities, Commodities, Commodities

He still believes we are in the middle of a multi-year commodities bull market, despite the recent downturn in commodities prices.

He recently told Seeking Alpha:

You’ve been bullish on commodities for a long time, recently you said you’re buying the Rogers Metal Index. Do you think that the Obama stimulus plan will create more demand for commodities?

Rogers: Well of course, anything that causes a revival of economic activity causes a revival of demand for everything including commodities. I mean if you’re gonna build bridges you’ve got to build them out of something you cannot build virtual bridges you have to build real bridges, etc.

As with anything with Jim Rogers- he could be right in 2009 or maybe 2010 or 2011 or beyond.

Investment forecasting isn’t easy- even for the “gurus” or superstar traders. Even they can be 20 years too early.

The old saying used to be, “whither General Motors, whither the nation” because GM was among the largest companies in the country and its tentacles stretched across the nation.

In the last 20 years, its become, “whither California, whither the nation” as California, on its own, stands as the 5th largest economy in the world.

That economy, it’s own mini-nation state, if you will, is now in a world of pain.

Just some of its current problems:

1. The majority of cities on the list of the worst numbers of foreclosure are in Calfornia

2. Unemployment hit 9.3% in December

3. The unemployment system is maxed out, with new claimants unable to get through to the offices to file claims, and worries that the system could run out of money by the end of the year

4. Analysts expect several hundred thousand more foreclosures in the next 2 years

5. The state has a projected budget deficit of $42 billion

6. Home prices have plunged in most of the state- with 50% reductions not uncommon

The stimulus plan could inject much needed cash into the state. From the New York Times:

All told, Congressional estimates show that California’s two-year take from the House version of the bill, which was approved on Wednesday, could top $32 billion, or nearly $1,000 a resident. The State Finance Department puts the number even higher, at $37 billion.

With nearly twice as many motor vehicles as any other state, California would receive at least $4 billion under the House plan for highway, rail and transit projects.

California used to be the state of the American Dream. Even after the dot-com bust earlier in the decade, entreprenuerial people still flocked to the state for the good job base, the sunshine, and the beaches. The state’s natural beauty blinded many to lurking problems which are now coming to the fore.

Real estate doesn’t always go up (whoops.) And the job base, while still among the best in the country, isn’t immune to economic slowdowns.

How does California get out of this mess?

If we can figure that out, maybe we can figure out how to get the rest of the nation out of its current predicament as well.

Question is- how WILL we fix the state? The housing market has not yet reached a bottom. When it does, only then can the state start to recover.

Because, while many in other parts of the country want to deny it, the best and brightest do still flock to California. And whither California, whither the rest of the nation.

It’s been an interesting start to 2009.

The stock markets are down over 10% for the month in one of the worst starts to a new year in the last 80 years.

But never fear, you’ve been hiding out in treasuries, right? Because they’re “safe”?

Only last week, we saw the largest decline in the treasury complex in over 20 years.

Beware. The flight to treasuries for safety is probably already over and that ride is going to get very, very rough.

From Reuters:

“Treasury bonds have sold off as markets have started to digest the rapidly growing volume of future government issuance,” said Mohamed El-Erian, chief executive of bond giant Pacific Investment Management Co, or Pimco.

Treasuries performed spectacularly in 2008, returning more than 25 percent in long-maturing bonds, as investors piled into the securities when it became obvious the economy was heading off a cliff.

In fact, yields on long-maturing bonds were trading below 3 percent and only 1-2 basis points on three-month T-bills, the lowest in decades, in December.

The proximate cause for the selling in Treasuries stems from expectations that the government will need to borrow about $2 trillion of debt this year to finance its rescue packages for the battered banking sector. Already, outstanding Treasury debt stood at $5.5 trillion at the end of September.

The 10-year treasury, for instance, has moved from around 2.00% to 2.62% at the end of last week. That big of a move is clearly noticeable in things such as 30-year fixed mortgages.

For a brief few days, the 30-year fixed could be had for under 5.00%- and as cheap as 4.80%. But as quickly as it was available, then it wasn’t- as ten year yields rose throughout the week-which pushed up mortgage rates.

What will happen to the housing market if the Fed and the Government cannot get mortgage rates to stay low?

I’m talking about if rates rise back to 6 or 7%.

Already, the housing market is grim. Part of the “plan” was to push down mortgage rates so that they were cheap enough to encourage home buying. The cheap rates also were to “save” some home buyers from foreclosure, as they could refinance into a much better rate at cheaper monthly terms.

But what will more cheap money actually accomplish?

There has never been a time when housing did well in a recession- and this time it will not be any different. The Fed is trying to counter people’s instincts: if you’re scared about losing your job, you’re not going to buy a house. It doesn’t matter what the mortgage amount.

Beware of the treasury complex. What was once seen as a source of stability, could become a destabilizing part of the market in the next few months.

Then the question becomes: where will all the money flow to?

Stocks?
Commodities?

Or cash?

Stay tuned.