It’s Time To Admit It: They Can’t Even Count

It’s Time To Admit It: They Can’t Even Count

Debates are supposed to be argued on the facts. When we discuss things like Australia’s housing bubble, Brexit, the financial crisis, and retirement ages, we argue using facts. To some extent, anyway.

You’ve probably quoted many of the facts in discussions with your friends and family.

Like facts about Australia’s housing shortage. Or net migration to the UK, which sits at around 250,000 a year, making many people vote in favour of Brexit.

According to a long-standing media furore, huge amounts of foreign students vanish into the British workforce each year, instead of going home at the end of their degree.

Or you might’ve mentioned the world’s whopping US$225 trillion of debt when discussing the impossibility of high interest rates. And how the Greek government’s debt to GDP ratio of 180% still isn’t solved.

There are vast underfunded pensions that we must find a way to honour too. The World Economic Forum says the funding gap will be US$224 trillion by 2050 for the six biggest pension systems, of which Australia is one.

But what if all the figures are wrong? What if your facts are dodgy? What if people can’t count?

Where would that leave our discussions, votes and policies? What sense would analysis, debate and data-driven decisions make then?

None at all.

Unfortunately, it looks like we can’t count. All too often, our facts are baloney.

Recently, all sorts of dodgy data have been exposed. To the point where you have to admit it…

They just can’t count anything

The UK’s immigration figures — which pushed Brexit over the line — were based on small-scale surveys done at airports. Seriously. And those are the government’s official figures.

The surveys missed tens of thousands of people leaving the UK, especially the much-maligned foreign students who were accused of vanishing into the workforce to steal British jobs. It turns out barely any stay. The new immigration system, which exposed the pathetic old one, still doesn’t match up with airline data. The private sector actually counts people properly…

But it also hides numbers…

The Bank of International Settlements (BIS) recently discovered $14 trillion in debt it didn’t know about. Using derivatives, firms can borrow vast amounts of money in a hidden way that looks like wheeling and dealing, but is in reality funding their operations.

This shows how pathetic and pointless attempts at regulation and deleveraging are. Corporate finance responds to incentives, not slack laws with more holes than Swiss cheese, and without personal consequences for breaking them.

Of course, governments use the same tricks.

Do you remember when Goldman Sachs was caught manipulating Greek finances to get the country the report card it needed to join the EU?

Well, the BIS’s newly discovered debts used similar techniques to hide.

Australia’s mortgage lending system is riddled with dodgy data too.

Half a trillion dollars in liars’ loans

When investment bank UBS recently surveyed more than 900 borrowers, a third admitted their loan application wasn’t honest. That leaves the Aussie banking system sitting on half a trillion Aussie dollars’ worth of liars’ loans, again according to UBS.

Throw in the data from my own research, which analyses how mortgage brokers change their clients’ applications without them knowing, and you have an even bigger problem.

But our regulators and prudential supervisors will tell you the risks are low.

The numbers say these borrowers have plenty of income. No matter that it doesn’t exist anywhere but on their loan paperwork and in the bank’s figures. The fake numbers are still ‘facts’ they can quote, analyse and discuss.

Economists can’t agree on whether we have a housing shortage or surplus in Australia, either. Nor who is buying our homes now that they’re so unaffordable. Restrictions on lending and overseas buyers are easy to get around.

In America, reporting of loan delinquencies suffers from a rather surprising problem. Vast amounts of borrowers are only a few months behind on their mortgage repayments. Very few of these go on to be delinquent for long periods of time though.

Except they do. It’s just that the loan companies don’t bother updating the figures…

What looks like a short-term problem, which gets solved eventually for most borrowers, is really accumulating water behind a cracking dam. Vast amounts of borrowers are far more behind on their mortgage repayments than the numbers say.

Back in Britain, there’s furore over the 350 million pounds that Boris Johnson wants to give to the National Health Service (NHS) — instead of the EU — once Britain leaves.

But it’s not a net figure — it doesn’t take into account how much Britain receives back from the EU. Leaving the union won’t leave Britain with that much of a cash windfall. But it’s still a ‘fact’ that Britain sends that much to the EU.

When things don’t add up, you eventually have a problem

Perhaps the biggest miscalculation is pensions…

All around the world, companies and governments have been accumulating assets in preparation for the vast amounts of pension payouts they’ll have to make as promised.

They invested those funds based on the academics’ claim that they’d return about 7% a year in financial markets. Australia in particular overinvested its vast superannuation assets into risky bets to get high returns.

But those returns never materialised.

The problem is how reliant those funds are on the returns they banked on. The US state of Kentucky recently illustrated the problem. The politicians proposed reducing the expected return on investments from 7.5% to 6.5%. That seems like a tiny change, and it’s still an unrealistic return.

But the resultant change to the estimated pension problem was extraordinary. Pension costs jumped 50% for the state and the total liability jumped 27%. From a 1% change in returns.

John Mauldin has a coming book out on these issues, and summarises the problem in the US:

‘…unfunded pension liabilities for state and local governments was $2 trillion. But that assumes an average 7% compound return. What if we assume 4% compound returns? Now the admitted unfunded pension liability is $4 trillion. But what if we have a recession and the stock market goes down by the past average of more than 40%? Now you have an unfunded liability in the range of $7–8 trillion.

We throw the words a trillion dollars around, not realizing how much that actually is. Combined state and local revenues for the US total around $2.6 trillion.

Mauldin claims that many pension fund managers are in favour of adjusting the expected return to more honest levels. But it would force many politicians to acknowledge the problem and budget for it. Some would have to do so by law, making them reject any notion of an honest assessment of the problem. They prefer the current set of facts.

My point is that the emperor has no clothes. You can’t trust any figures, facts, or analysis of either. The whole notion of informed debate is a red herring. And eventually that means the house of lies will come crashing down.

The only thing you can count on

With the financial system, politicians, companies and economists all playing games with incorrect figures, investors have to ask themselves what they can count on.

Jim Rickards of Strategic Intelligence has always given the same answer. And I think it’s the correct one because it’s the antidote to all the nonsense above.

Physical gold in your possession can’t be fudged, obfuscated, manipulated, counterfeited or defaulted on. It’s the only asset not reliant on someone else doing their job.

Gold is just gold. Simple as that.

And that’s why it needs the 10% portfolio allocation that Jim Rickards has always recommended to his clients.

But it’s not the only reason you should take note of the yellow metal. I’ve prepared a special report on just why gold is the perfect investment for Australians in particular. The details will hit your inbox soon.

In the meantime, don’t believe the facts.


Nick Hubble Signature

Nick Hubble,
for The Daily Reckoning Australia