Thursday, September 15, 2011

Superannuation wake up call - markets do not always work for the better good

People around the world are slowly waking up. Politicians and the financial industry have been perpetually lying to us about our retirement future.

In the US this first became abundantly clear in 2008 with the collapse of Fannie Mae and Freddie Mac, Lehmann Brothers and AiG and more recently with the smoke and mirrors game over US national debt. Likewise in Europe, the ongoing myriad of debt is rising to the surface exposing the vulnerability of sovereign nations to a poorly designed monetary system controlled by an international banking cartel which lies outside the nation's political systems. Whether Europe and the US continue to monetise debt and expose more debts, or embrace so called spending cut measures (austerity), the current monetary/economic systems will fall apart regardless. The point of no return was well over a decade ago. This point cannot be understated and it will have severe implications for everyone's every day lives, and expected future retirement years.

In Australia, the spin machine of politicians (on both sides of the fence) has perpetually endorsed the need for compulsory superannuation to fund individuals’ retirement needs. The biggest furphy of all is that “markets on average always go up” and that the Superannuation system will always work. A quick glance at one’s recent Super statement suggests otherwise. For several years I have had an agonistic view of the compulsory Superannuation system. The system is fatally flawed as it is heavily tied to the fortunes of the sharemarket, which itself is heavily influenced by changes in age demographics, major booms and busts brought about from a global debt-based monetary system and speculative malinvestments.

It was no coincidence that major changes were made to superannuation arrangements in the early 1990s, when Paul Keating introduced the "Superannuation Guarantee" in 1992 (or compulsory superannuation for individuals). The political class knew they needed to act quickly to transfer the responsibility of one’s retirement from employers (and ultimately the Commonwealth Government through old age pensions) to individuals, as by 2025 one-in-five Australian’s would be over the age of 65.

What better time for the Government to introduce a compulsory retirement “savings” system, than to do it when the largest demographic, the baby boomer generation, were half way through their working careers – there would be at least another 15 years of compulsory contributions to help prop up the Australian sharemarket.

After more than a decade of compulsory contributions, Australian workers have now amassed over $1.28 trillion in superannuation assets. Australians now have more money invested in managed funds per capita than any other economy. Sadly, markets are prone to huge swings, and people will have to revise their superannuation retirement expectations markedly - and act to preserve what they have.

As Alan Kohler stated in his article of 15 August 2011, Stranded at super’s ground zero
The aim of retirement incomes policy in Australia for two decades has been to shift the burden of risk to individuals before the next big bear market hit. It
worked quite nicely. …

Kohler further explains:
The first fifteen years since the superannuation guarantee legislation was first introduced in 1992 went extremely well. The compound annual rate of return provided by the sharemarket – like manna from heaven – was 15.5 per cent.

And Australia was, and still is, overweight equities. That is, the proportion of our retirement savings invested in shares is about the highest in the world. The OECD average is for about half to be invested in fixed interest; in Australia that’s 10-20 per cent.

If we take a quick snapshot of the sharemarket and annualised returns for the last five years are now sitting at a big - ZERO.

The reality is that the 1990s was a period of excessive credit creation across the Western World. All big booms, end in big busts, and the 90s boom gave us the NASDAQ (dot.com) bubble and bust, and later the massive real estate boom and bust in Europe and the US (and soon to be China and Australia). The superannuation system relies on a worldwide debt-based monetary system with perpetual money creation and debt rollover to function. What we aren’t told is that expansion of the monetary system erodes our purchasing power, creates inflation (cost of living pressures) and misallocates capital and labour to non-productive industries and pet projects.

The other fact is that the “compulsory” element to superannuation in Australia is inflationary by nature. With the Government forcing employers to provide 9 per cent pay, by law, into a super fund, there is a continual inflow of extra money entering the sharemarket system every year, regardless of the current state of the economy or the mood of the sharemarket. In a bull market, super funds, as a substantial proportion of market participants, compete with other buyers in the market, which ultimately leads to higher and higher share prices. In bear markets, the Super funds continue to buy companies in the S&P indexes regardless of poor market or company fundamentals (including companies with suppressed share prices due to large capital raisings to raise liquidity).

The biggest problem of all, is the finance industry itself. Whether the market goes up, down or sideways, the fund managers collect their annual fees and commissions for doing next to no monitoring of your portfolio. They get billions of dollars of inflows into their industry regardless of economic conditions, which ultimately props up the financial industry than what would otherwise be the case. The Government in effect is intervening in the market in a huge way, nurturing bad economic habits by providing the industry with lots of capital it may otherwise not have had. As a result, bad behaviours have grown over time. Parts of the financial community (particularly investment bankers) have used more and more "financial wizardry" to make particular investments more attractive (such as infrastructure assets) and more leveraged. However the catch is that all the bad money gets flushed out of the market system at some point in the future. The future cannot be permanently bought through debt (monetary promises).

Percy Allan’s recent article of 14 September 2011, Bucking the bear market, suggests that things may well get worse and stay bad for many years to come. His studies indicate that the world is stuck in a secular bear market. Secular bear markets is a period of typically 15 to 25 years of major volatility, of large upswings, and several primary bear markets. For instance, between 1965 and 1981 (as seen in Chart 1)there were four primary bear markets in the US, displaying falls from peak to trough of 25 per cent to 45 per cent.

Chart 1: Secular bear markets example

Chart 2: 100 years showing major secular bull and bear trends

Chart 3: The typical phases of a secular bear market. We are in phase 3.

Chart 4: Secular bull vs secular bear markets


The next secular bull market my not begin until 2015 – 2021


A “buy and hold” strategy (or some say a “hope and pray” strategy), which is continually flouted by the financial industry and Government can be disastrous for investor share portfolios (including superannuation) during secular bear markets. Many investors and now many superannuation accounts are spending a great deal of energy trying to recover from previous losses. What if the next four to ten years continues to be a secular bear market? Could you wait until 2021 for the major volatility swings to end?

Allen states that “the Great Depression, like the global financial crisis was the product of excess debt which had to be expunged before a bull market resume”. The 1929 bust for instance resulted in secular bear market that didn’t end until the debt deleveraging was over. Does anyone seriously believe, at this point in time, that the hundreds of trillions of dollars worth of Government debt (from the US, to Europe to China) and banking debt could magically disappear within 10 years?

There are always profitable trading opportunities for those willing to look and manage the risk. Capital preservation should be the primary goal for any trader, particular in this secular bear market. Timing is everything and those traders who have their finger on the pulse of the market, could generate substantial return from the market swings. A mechanical (non-emotive) trading plan is absolutely essential should you dabble in the market, at any stage of a secular bull or bear market.

The Government needs compulsory Superannuation

Yet another reason why compulsory superannuation is a giant rort in Australia, is the excessive taxation place on it. In FY2011 the Australian Government collected $7.1 billion in superannuation taxes, not bad from a “compulsory” system the Government itself setup (expected to rise to $12.8bn in four years time). The Government also uses lots of other calculations and methodologies to manipulate individuals financial decisions when it comes to retirement. The Government’s aim is to keep people in the workforce longer. The perseveration age is being incrementally lifted so that by 2025, no one will be able to access “their” superannuation until the age of 60. Why should the Government decide this for you? Would you wait to 60 years age if these access restrictions weren't there?


So what is the alternative?


What if the advice of your financial planner, accountants, stockbrokers over the decades ended up being totally off mark at the point of retirement or during retirement? There is no backspace button to turn back time.

The alternative is to take responsibility for your own financial decisions, and be sceptical about all the financial advise thrown around. If we invest TIME into financial education about how markets work, investment opportunities and threats become a lot more visible. Further, a basic understanding of monetary history is an absolute must (particularly precious metals). Currency (or money substitutes) isn’t the most preferred form of money in certain times and debt systems which produce big governments do not always work out for the better. We need to understand what happens to markets during transitionary periods. Monetary systems typically only last 40 years and the last change was in 1971 - so its overdue to change again. The US-reserve currency system, and the Euro will not last for many more years in their current form. All fiat currencies are A new monetary system will emerge. Will your savings be tied to the old system or the next system?

For superannuation, diversification to reduce exposure away from the sharemarket is a must - asap. If you are 100% relying on Superannuation to work by the time you retire and throughout your retirement, you are not diversified from the major ups and downs from the market at all. By diversification I mean different assets classes such as exposure to gold and silver and cash. (Not diversification between banking shares and mining shares – all shares are susceptible to the major market swings). Gold and silver have both easily outperformed the world sharemarkets and all currencies for the past decade, and this is highly likely to continue for the next decade. Gold and silver in the hand has no liability (debt promise) to anyone and is a hedge against the Government and banking inflation-machine.

Self-managed superannuation will gain in popularity as more individuals take the responsibility of retirement from the financial industry back to where it belongs, in the home. Recently in August 2011, it was reported that self-managed superannuation grew by $3 billion in three months (7,500 new accounts).

I would also be inclined to think twice before taking any Government-induced incentives before throwing money into your compulsory super account (such as the superannuation co-contribution scheme). Would you make this decision without the Government offer on the table? If not, why should the Government incentive change your actions?

One needs to change their context on investing and have a light bulb moment where your context on the economy changes. The vast majority of people are still thinking about investing with a 1970s, 1980s, 1990s, 2000s mentality. The next decade will be very different. Always remember that the market does not care if you gain or loose money!, so you must take ownership of your money and do it as soon as possible.

Alan Moir Cartoon - this is how your super works

Southpark's take on the finance industry:


Cheers
Scott