Who Wants to Be a Millionaire?

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Who wants to be a Millionaire?

Once again, achieving millionaire status is within reach for the average Sydney home owner, according to media hype.

Maybe the illusive dream of six zeros is within reach for all people around the world. All you have to do is borrow a million dollars. The fact that you owe the money to the bank isn’t relevant. According to news.com, you are still a millionaire!

Even if you owe the majority of the value of your Sydney house to the bank, a forecasted doubling in price bodes good news, right? Well, it does if you want to sell and move to a neighbourhood where prices haven’t gone up as much. Otherwise, you haven’t changed your real financial position much.

That’s probably not entirely correct. You may also be stuck with an unexpected house guest, costing you vast amounts of money. These squatters, known as children, claim to be unable to afford moving out and thus act as a drain on household finances well into their 20s. The Age identified this as a serious issue, along with the Super funding shortage that features regularly in the Daily Reckoning.

What is in the median Super account for women?

A professor at the National Centre for Social and Economic Modeling pointed out the following in the Age article:

  • The average super account balance for males aged 60 to 64 is $135,000.
  • For females it is $62,000.

But, apparently, the average isn’t terribly descriptive, because of a minority with very large Super balances.

(Those evil rich people, who bother to provide for retirement, are understating just how poor we are!)

So, let’s check out the medians instead.

  • The median balance for men is $33,000
  • The median balance for women is a big fat 0.

So, half of women have no super. Please let that sink in.

Here is the link to the article again. It’s still 0 when you read it a second time.

Of course, this is misleading, as it includes those women well before retirement.

  • the median account for men aged 50-59 is $44,000
  • the median account for women aged 50-59 is $10,000

Retiring on $10,000 in the next few years isn’t an attractive proposition.

But wait, there’s more. The professor reckons that “the old assumption that people would retire debt-free will not hold true for the next generation of retirees.”

Ah. They have debt too. That means interest as well.

No bother, people use debt to buy assets (and some then claim to be a millionaire). So, retirees aren’t as poor as their super indicates. They have assets to sell. At least that was the gist of the comments left by Age readers:

“They may not have enough super, but the typical baby boomer has on average 3.27 investment properties valued at $1.46 million.”

Regardless of the accuracy of that statistic, the point is probably quite valid. But, chances are, the bunch of retirees with investment properties are the same bunch that skewed the average super figure upwards. In other words, the Super poor are probably property poor as well.

Let’s ignore that for the moment and assume that the boomers are Super poor, but property rich.

Any ideas what may happen when these people decide to cash in on their retirement assets?

Not only will their stock market based super crumble, but their “safe as houses” strategy will collapse.

The solution to all this is, of course, to get the boomers to give their houses to their grandchildren, who refuse to move out of their parent’s house…

The comments section of the article was full of sympathy for the baby boomers:

  • Free university education… cheap home… ability to raise a family on one income… life’s tough being a Boomer.
  • If boomers are whinging at the moment about their super, just imagine how bad things will be when generation Y takes charge of things in ten years and, in revenge, terminate tax free boomer retirements retrospectively and throw them out of their expensive nursing homes.

But these comments come at the peril of those making them. Remember those militant pensioners in Greece who raided government offices? Well, ze Germans are taking matters into their own hands as well:

“Four elderly Germans were handed jail sentences for kidnapping their financial adviser and holding him prisoner in a basement in an attempt to recover around 2.5 million Euros in lost savings.”

The financial advisor was “bound and gagged” before being bundled into the boot of a car and driven across Germany by two men and two women, between 61 and 80 years old.

I guess retirement savings are just a sensitive matter to retirees. Dunno why…

Meanwhile, as Dan discussed on Thursday, the Super industry is posting its meagre returns and taking large fees for the pleasure.

A Healthy Welfare State

So it seems that the American healthcare legislation has gone through – for now.

On Monday, Dan pointed out something remarkable about the timing:

“It does seem a little odd that America is expanding the Social Welfare State at just the moment the whole experiment seems to be collapsing in Europe… It’s as if investors and pundits are convinced this is just a run of the mill deficit problem and not an indication that the finances of the Welfare State are hopelessly compromised and failing.”

But Obamacare is going to decrease deficits, isn’t it? Not according to Democrats and the Congressional Budget Office.

According to a former CBO director, the budget office “is required to take written legislation at face value and not second-guess the plausibility of what it is handed.” That is why he has written an article in the New York Times explaining how the bill for the new law will sit at $562 billion in the first ten years. That’s a significant divergence from the $138 billion reduction in the deficit forecasted by the CBO.

The individual states have done the all American thing in the face of adversity and decided to sue the federal government over its plan. Fourteen of them filed lawsuits before you could say “spilt coffee”.

If you remember the repossessed cop cars in Illinois, then you will enjoy the latest from California. The state is considering releasing prisoners, as it tries to get a grip on its budget. Obamacare puts a 2-3 billion dollar bill on top of California’s impressive pile.

Meanwhile, a key problem with the legislation has emerged. Apparently, now that health insurers cannot turn down customers because of pre-existing conditions, you can just buy healthcare insurance as soon as you get sick. Paying the penalties for not having health insurance is supposedly cheaper than paying for the health insurance, so why bother getting it until you need it?

Those clever politicians. Lucky we don’t have a similar thing happening in Australia.

Who Gets the First Laugh?

The Sydney Morning Herald reported last week that “an assault on the [British] pound appears inevitable. It is foreshadowed by the bond market, where the yields on British 10-year gilts are 4.14 per cent, even higher than Italian bonds.”

That seems contradictory to previous articles cited in the Daily Reckoning, so what’s going on?

In true form, Dan points out that Italy has more gold than Britain, largely due to what is referred to as the ‘Brown Bottom‘. The UK’s prime minister decided to sell the nation’s gold at an impressively cheap price, way back when gold sat at the lower end of three digits.

Now that the pound looks vulnerable, the continental Europeans are feeling rather smug.

But it’s Portugal that holds the headlines. Be-ratings agency Fitch decided to downgrade their rating of the country’s debt. Why?

“A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal’s creditworthiness.”

Oh.

More interestingly, Dan pointed out on Thursday that “in Greece, rising interest rates are already consuming the savings made by emergency budget cuts.”

Is Barnaby Joyce’s warning about the potential for debt to spiral out of control being vindicated by the Greeks? Tony Abbot obviously doesn’t think so.

Notably, the Spartans haven’t lost their taste for war and the Germans have been banking on it – literally.

“…some Greek officials privately say Paris and Berlin are using the crisis as leverage to advance arms contracts or settle payment disputes, just when the Greeks are trying to reduce defense spending.

“Greece spends more of its gross domestic product on the military than any other European Union country, largely due to long-standing tension with its neighbour, historic rival and NATO ally, Turkey.”

How Greece plans to fund its purchase of German U-boats and French frigates has become a little clearer in recent days. The Euro countries’ ego took a hit from the modest Germans in the process. They don’t want any bailout to be a Euro matter only. Why not get the reputable IMF involved…

France, which had previously wanted to keep the Eurozone’s problem a local one, gave in to the IMF suggestion. Apparently the IMF does this sort of thing all the time.

Unconscionable Conduct Issues for Government – SURPRISE!

Ben Bernanke, who features on our office dart board, seems to be experiencing the revival of his conscience. He has described the act of rescuing large banks, and thereby his own conduct, as unconscionable.

But what of his money printing activities? Are they unconscionable too?

Treasury officials are taking the route of denial on their policy failures. Unconscionable or not, Bloomberg reports they have stuffed up and then misrepresented their stuff up.

“The Obama administration is inflating the success of its main foreclosure prevention program, which may end up doing more harm than good by “spreading out the foreclosure crisis” over several years, according to federal investigators.”

It’s not just the investigators doing a good job.

Taking financial advice from America’s “#1 political prisoner” may seem like a bad idea. Martin Armstrong’s handwritten newsletters are rather intriguing though. It seems that going to prison allows him to step outside of the media hype and look into the world from a different angle. Except that he is actually on the “inside” looking out. Dan wrote about his insights on Monday.

Stay at Home Children

The Age economics editor Tim Colebatch sits firmly on the side of the family home squatters (children) when it comes to house prices. He is distressed at the property price claims that major newspapers are encouraging.

If they come true, “it would put home ownership out of reach for millions of younger and lower-income Australians. It would complete our transformation from a nation of home owners to one of landlords and tenants.”

This is the key bit:

“But it won’t happen. Melbourne house prices have trebled since 1997, not because our incomes trebled, but because we paid those prices by a massive increase in debt. In the 20 years to January 2010, household debt to the banks grew 10 times over, from $118 billion to $1224 billion. As a share of our disposable income, they more than trebled, from 45 per cent of what we earn to 156 per cent.”

A continuation of this is simply not plausible. For more, check out this video about growth rates. The key point is made early on:

“The greatest shortcoming of the human race is our inability to understand the exponential function.”

Risk Free?

Much of finance is based on the idea of a “risk free” asset and its return. The asset of choice has been the US Treasury’s debt for a long time. This is all about to change – actually it already has.

Warren Buffett may have fallen in the rich list rankings, but lending to him is safer than to Barack Obama, according to Bloomberg and the bond markets. Procter & Gamble, Johnson & Johnson and Lowe’s also have lower yields than treasury debt of the same maturity. Dan reckons it’s just an obvious progression.

What do the Americans at home think?

A recent Bloomberg national poll has thrown light on the recovery underway in America:

“By an almost 2-to-1 margin Americans believe the economy has worsened rather than improved during the past year.

“Among those who own stocks, bonds or mutual funds, only three of 10 people say the value of their portfolio has risen since a year ago.”

Mark Zandi, chief economist of Moody’s Economy.com, begs to differ. He says “it’s just a fact that everyone’s stock portfolio is up, or nearly everyone’s.”

Even Bloomberg can’t avoid poking fun at Zandi:

“… among investors with annual incomes exceeding $100,000, … who might be expected to follow their financial holdings’ performance, more say they have lost money compared with a year ago than say they have made money.”

Have a great weekend.

Nickolai Hubble.
The Daily Reckoning Week in Review

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
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2 Comments on "Who Wants to Be a Millionaire?"

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Sambo
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I’d like to see more of these types of articles Nickolai, they seem to cover so much but contain links and are well laid-out :)

chris
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I love your articles too. Gimme more. I love all the authors of daily reckoning too- youse are the only common sense voice, in amongst all the lies

wpDiscuz
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