Thursday, March 26, 2015

Why you have to be careful listening to anyone's financial advice.

Below is an email I received today from Harry Dent's marketing machine.  I wanted to take a minute and explain why you really can't listen to anyone in the business.  In short, they are talking their book.  All of them.  Have a quick read of it and then I will pick up the discussion below.

Dear xxxxxxxx,
Recently, CNBC’s Kelly Holland wrote a commentary on the apparent failure of the 401K system. She explained that the typical family only had just less than $19,000 in their retirement accounts. How can anyone retire on that?

401Ks were supposed to be the new, better way to save for life after work… a replacement for the old, burdensome pension plan program that has faltered for many years now. With a 401K, you get your own retirement account and get to manage your own destiny!

More importantly, the 401K would take all the pressure off companies. Pensions were a great idea for companies and municipalities during good economic times. They were a draw card for workers. You could offer them good salaries today and pay the rest later. Sounds just like today’s QE policies, wouldn’t you agree?

But during bad economic times, the good ol’ pension plan turned out to be a very bad idea. As a defined-benefit plan, they became too heavy a burden for companies to shoulder, especially as investment returns became more volatile since 2000.

401Ks, on the other hand, put the market risk in the hands of the employee.

As a defined-contribution plan, companies would contribute a certain amount in a 401K, or match a certain amount of employee contributions, but it was up to the employee to invest the money tax-free and get the long-term benefits.

There are just several, glaring problems with this. For starters, 401Ks are mostly voluntary. You can choose to make the investment or not…

So what does Homer Simpson do? Go to Disneyland instead, or buy a new car. Worry about retirement? Please. That’s tomorrow’s problem.

The second problem is that most everyday people do not maximize their contributions. That’s why they have such low balances. You can’t blame that on the performance of the stock markets over the last few decades, or even safer bonds that have gone up in value.

The third problem is that people are bad investors. They pile into a trend in the late stages with the herd, and then pile out when there is a major correction or crash. If the stock market was averaging 10% before, they are lucky to get 4%.

Here is a graphic illustration of how bad this situation really is…

Today, only 11% of workers in the private sectors have a pension plan in place. There are another 7% or so in the public sectors that have that.

On the other hand, 31% of workers in the private sector just have a 410K.

But there’s an even bigger problem here: How will all of those people with 401K plans fare when most financial assets crash in the next and final bubble burst? If they’re doing so poorly now, the events I forecast for the next several years are going to blow them right out of the water.

There is no doubt that we need a better plan for retirement. Besides delaying retirement by several years — seriously, we live for 20 years longer than we did when retirement was introduced and we can’t sit and do nothing for that long — we need a savings plan that doesn’t leave it all to the employee or employer.

The best I have seen is in Australia. They require a mandatory contribution — not voluntary — to a superannuation fund, that you own and manage, not the government.

Because of that their average citizen has three times the net worth of the average American (they also have the advantage of high housing prices that are continuing to climb).

So I say make retirement plans compulsory, not voluntary. Otherwise our natural inclination to value the present over the future will make them fail as 401Ks have already.

And then implement some guidelines for how participants invest if they are going to get the tax advantages.

For now, do yourself a favor:

Don’t lose what little, or a lot, you have in your 401K retirement plans. Cash out of any passive investments and get more defensive now!


Talking one's book is not necessarily a bad thing.  People need to be sold on new ideas.  The vacuum cleaner is an important piece of equipment but it didn't sell itself to America.  The Hoover salesman had to go door to door talking his book and booking sales.  It was in fact a good thing, a labor saving device.

Unfortunately, with stocks you find that the best salesmen mix 90% shocking truth in with 10% big lie (or perhaps in some cases, big inability to do math).  As you can see from the email above, Harry hits on all the ugly truths about the coming boomer retirement mess and about retirements in general:
  • Pensions are Wimpy promises and were really designed to defer corporate expenses into the future.  Take less salary now if you get a pension later.  I will gladly pay you Tuesday for a hamburger today.  There is no difference between the two statements.  Most companies have done away with them because they realized it was going to end badly and they did not want government coming after them for having scammed the people.  Government did not do away with them because government does not think there is any oversight on it and thus nobody to come after it.  Of course that is wrong, the people themselves will come after government.  In any case, expect the government pension experience to end badly as well.  
  • Typical family has only $19k in retirement acct.
  • 401ks enable unwashed masses to "invest" as a savings mechanism.
    • Many just won't.  Harry calls them Homer Simpsons.  They consume all they produce effectively living hand to mouth with no retirement savings.
    • Many do invest but they suck at market timing.  Wall St. gets them coming and going.
    • The main problem: assumption of unknown risks without even understanding that they are doing so.
  • Even those with 401ks are likely to lose most of them during the next big crash.  By definition, only a small fraction of the players can get out of a Ponzi scheme with any profit.  The more that do this, the less that is left for the remaining players.  This is just simple math.  I always wonder why simple math is always made so complex.  I suspect that this is always the case if a fast talking con man is trying to rip you off...
OK, so I agree with all what Harry said there.  But now here is the bad part.  Harry's answer is to nationalize everyone's retirement money.  He writes:

"...we need a savings plan that doesn’t leave it all to the employee or employer. The best I have seen is in Australia. They require a mandatory contribution — not voluntary — to a superannuation fund, that you own and manage, not the government...  So I say make retirement plans compulsory, not voluntary... And then implement some guidelines for how participants invest if they are going to get the tax advantages."

Harry thinks Australia's so called Superannuation fund (AKA "Super") is the way to go.  Somehow magically a person is forced to contribute but the person gets to own and manage while the government herds everyone using tax treatment that supports government's agendas.  If you invest the way they want you to, you get a lower tax rate.  Otherwise you get penalized.

There are several things wrong with this approach.  First, while I am always opposed to government forcing its will upon the people, I do agree that liberals will spend it all today and then beg from conservatives in retirement (Aesop's ant's and grasshopper fable personified...).  Since one cannot aim laws specifically at those who the laws are intended to protect, I have to fall on the side of not really against some form of mandatory savings.  The alternative is that liberals will have nothing at retirement at which time they will vote for socialism and demand that government reach into my pocket to support them.  So if I am for mandatory savings it is really in order to protect myself from hapless liberals whose bent toward consumption over production is a real threat to my own financial security.

Given this, it's the savings mechanism which I think needs to be questioned.  If mandatory savings are all herded into stocks and bonds (AKA paper assets) then I guarantee at some point the system is going to implode because stocks and bonds are not an actual form of real savingsThey are both, in fact, a form of gambling.  In the form of bonds, the gamble is whether or not your money is ever returned to you before the debtor goes BK.  In the form of stocks, the gamble is whether or not a greater fool than you will come along and take your fake paper wealth off your hands when you need to trade the underlying value in for retirement food, shelter, clothing and healthcare.

Harry's unsaid but clearly underlying assumption is that capital markets are a wealth generation mechanism.  If only you follow his advice, he tells you, your retirement will be assured.  He in fact promises something for nothing in this way.  You put something into the system and then round and round it goes.  Alchemy occurs and new wealth for everyone magickly pops out the other end.  This is the conclusion that ALL stock salesman end up with.  And make no mistake, Harry is selling stocks.  He just wants you to buy HIS stocks because he is sure he can outsmart the market.

Harry might be right about that.  He might have excellent insight and great models.  But that is no guarantee of success because he still relies on the old somthing-for-nothing principle of market alchemy which is, at it's core, as mathematically impossible for everyone to achieve as lead metal is physically impossible to be converted to gold.  Just because lead feels a bit like gold in the hand does not make it gold!  If you spray paint it gold or plate it with gold, many will be fooled into thinking it is gold but it never will be.  Likewise, excess labor that is stored in paper assets is not savings and it never will be.  It is always gambling, period.

There is one and only one real savings mechanism and that is to store your retirement wealth in gold (and perhaps silver) bullion.  These things can fluctuate greatly in dollar terms but rarely move very far in terms of real purchasing power.  Most importantly, they have never gone bankrupt whereas every other asset class has including real estate.  During the Detroit bust I found perfectly livable quadplex apartments going for $4 per square foot!  Any reasonable flooring costs that much yet there was such a credit crash in that declining city and such a reduction in services and safety that this was the going rate for many rental properties and single family residences.  In fact as you can see from below, there really has been little if any recovery in median sales price since Bernanke quadupled the monetary base and if you look at the sale chart below that it appears heading into the next wave down.  Note that changes in the number of sales precede sales price moves.   So I expect that those homes which peaked, on average, at $80k in 2007 will be ON AVERAGE $10k or less by 2017 as the C wave of this collapse plays out with sales collapsing to nearly zero.  In other words, a collapse as great or greater than the Great Depression.  Anyone with cash in hand should seriously be looking to invest in real estate there once that happens because inflation will follow once that deflation is complete.

As long as mankind has the ability to produce more value than is needed to purchase food, clothing and shelter on a daily basis he will also need money to store that excess value in.  JP Morgan already told us that gold is money and everything else is credit.  Thus, gold and silver bullion coins, stored in one's own personal possession, are in fact the only real savings mechanism and everything else is gambling.  Period.  That is the math of it and many are going to find out the hard way about this in the coming years.

By the way, Harry should do more reading on the Superannuation.  Aussies like those running Money Morning are not so keen on the idea and have been warning that it is a scam.  Read their latest on this subject on their web site.  When someone else has control of your money, you do not own it and that goes triple during a financial crisis.  As soon as things look bad you start to see the capital controls arrive.  This cannot happen to those who own gold and silver even if government outlaws cash transactions under the guise of needing to track everything in order to catch tax cheats.  There will always be a black market in these cases where your gold and silver are happily accepted at full market value and not some haircutted value mandated by government.  When financial collapses occur, those who own gold and silver metal always fare the best.  Always.

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