KW: In discussion recently with someone in their mid 30’s who had taken financial advice about retirement planning from an Authorised Financial Adviser (AFA) I wasn’t surprised by the comment that the ‘savings figures that I was quoted to get my target retirement income are simply impossible’. (You can go and do this stuff online at www.Sorted.org.nz.) Earning a good salary (around $75,000pa) and with $13,000 in his KiwiSaver the poor guy is expected to save $300 per week or 20% of the gross income or about 26% of the net after tax. The calculator anticipates 2% inflation and an earning rate of 2.4%pa from a managed fund. He needs to accumulate a fully consumable $535,000 on top of any other investment such as a home to live in to be able to sustain an income of $1,000 per week in retirement I was told. And this includes the unlikely prospect of NZ Super being there in place generating $385 per week of this amount.
Well a ‘grand’ a week doesn’t really cut the mustard as in 25 years it will be nothing but the latest puk by Stanley Fisher Vice President of the Federal Reserve deserves ridicule. Of course market analysts, bank economists and a dim witted financial advising industry, still stuck in the 20th century thinking about these sorts of things hang on every word of central bankers as though they are the gurus of knowledge but no where else apart from the self serving financial industry does the market make any sense. Fisher openly (as the previous Financial Article from Peak Prosperity alludes to) slags common sense and explains that negative rates “seem to work” while admitting they are bad for savers but they “typically they go along with quite decent equity prices.”
There are two problems in play. The first is an explicit admission that the Fed sponsors wealth inequality…. and by definition so does the Reserve Bank of NZ because it is pursuing the same failed policies here in New Zealand The second problem is Fisher does not understand how markets even work.
John Hussman of Hussman Funds takes Fisher to task on how markets work. ‘Any economist with even a vague understanding of how securities are priced should understand that elevating the price that investors pay for financial securities doesn’t increase aggregate wealth. A financial security is nothing but a claim to some future set of cash flows. The actual “wealth” is embodied in those future cash flows and the value-added production that generates them. Every security that is issued has to be held by someone until that security is retired. So elevating the current price that investors pay for a given set of future cash flows simply brings forward investment returns that would have otherwise been earned later, leaving little but poorly-compensated risk on the table for the future (see QE and the Iron Laws for an illustration of this process).’
Bad for savers! Yes it’s OK to sustain market speculators (derivative traders are pretty much all that is left in the major markets) by destroying savers who once they get to retirement face the prospect that even if they have $1,000,000 in the bank at todays rates they fall way short of being able to generate $1,000 per week with any degree of safety becasue bonds of any quality trade at zero or negative rates. Only by introducing a great deal of investment risk does one enable the measily $1,000 per week income to be generated. Of course this is a self perpetuating cycle of defeat. By stealing from savers the reasonable return on their savings they should be able to expect savers do what they can to preserve wealth. They reduce spending! Central bankers want MORE spending to ignite economic growth and ‘mild inflation’ so the policies they pursue are self defeating policies.
The same mantra is being repeated here in NZ but we should expect no less. RBNZ Governor Graeme Weaver is a student from Wall Street where he trained, he will simply follow the rule book as set out by the FED. One can almost feel a backlash stirring. Why should I save for retirement when the numbers are so impossible and once I get there I get so little return? Good questions for your financial adviser.
More importantly is that everywhere I look in alternative media, financial commentators are all (and I mean ALL) talking about a monstrously distorted market and a financial crash that is imminent becasue central banks have run out of ideas, their policies have failed yet the response is to do even more of the failed policy. (Negative rates are not working, even tho they are counter productive lets lower them more or QE has failed to lift inflation so lets do more QE). Quantitative Easing (QE) is now running at around $2.5 trillion annually with central banks simply printing the money (electronically of course) to buy more and more distressed assets from banks this now appears to be a massive Leveraged Buy Out (LBO) of global assets. Citi says the 6 big central banks have a balance sheet that is equivalent to nearly 40% of global GDP, a number which if extrapolated will hit 50% just after 2018.
Those wondering if this means that central banks are engaged in a creeping, stealthy, indrect LBO of the world’s assets on behalf of third parties, the answer is perilously close to a resounding “yes.”
And a flip side of central bankers manipulating interest rates lower and lower to even negative ( although not yet in NZ) becomes glaringly apparent when you consider the impact on house prices. Almost daily media has new stories about housing shortages and rising house prices. Indeed Auckland house prices are now at a level where +$1 million is now the average price. While the easy answer is to blame immigration pressures that are no doubt partly responsible for this, ask yourself the question, what about low interest rates? It’s obvious that a significant pressure valve would pop if when lining up at the bank to get a house loan you would be required to pay mortgage interest of 8%-10%pa. Rampant demand for Auckland houses would evaporate. At that rate the saver whose deposits are calculated by the bank into its margins for lending would in turn be receiving around 6%-8% on their deposits. Every depositor would be happy and the house buying pressure would evaporate overnight. But the tight fix the RBNZ finds itself in is referenced off global rates that are manipulated by the FED. Should NZ stand out as a safe place for investors money and rates here stood positively out of line with global rates the carry trade would flood NZ with foreign money and the kiwi$ would soar to unthinkable levels. Our exporters would act like they are in death throws.
Catch 22! The US FED is not only distorting its own market but becasue it is the global lead central bank it stuffs everyone else as well.