In theory compulsory superannuation is a wonderful thing; it makes sure that people’s pensions are provided for, we will all live happily ever after on the money we've been forced to save, and as a bonus moves the debt for future retirement from government to the private sector.
Funnily enough that is exactly what happened with one of the greatest financial train-wrecks of all time, the “South Sea Bubble”.
The bubble began in 1711 when the Lord Treasurer, Robert Harley, created the South Sea Company. Its primary activity was the funding of government debt incurred during the war of Spanish succession.
In 1719, the company again sold shares of government debt, gaining a 5% dividend. By the end of that year, the South Sea Company held over 20% of converted British national debt.
In 1720, the share price rose from 128 pounds in January to over 1,000 pounds by the end of the year.
Suddenly (and abruptly) in August of the following year, the party came to an end.
The bubble collapsed.
Why you may ask am I bringing up something that happened in 1720? Because it defines the four cornerstones of a bubble AND the one critical piece for disaster, government “theory”:
The necessary fallacy.
Investors believed that the South Sea Company was behaving like a bank.
The consumer blind spot.
Customers ignored the fact that there was really no company producing revenue.
The creation of South Sea allowed the Government to offload 20% of its debt.
Finally the industry in which the bubble occurs develops a security rationalization.
Executives come to believe that there are certain “rules of the game” that will protect them.
Does all this sound familiar? The Superannuation Guarantee Scheme and its siblings in the western world are creating massive cash-flow, chasing diminishing returns, ending in a series of disasters, bubbles of every increasing magnitude.
Why, because our Superannuation funds are essentially reliant upon stock markets. Sure they say they invest across different sectors but the cash only flows to AAA rated listed shares.
We as a global economy are experiencing one of the most deep and severe recessions since the great depression. This has been caused by over investment, and the creation of bubble markets, so far we have seen bubbles of shares, property, sub-prime debt and, in the case of Greece and Ireland, sovereign debt.
Markets which are set up to bubble and burst are always very risky; they almost always cause a bigger fall than rise. The wealth generated from a bubble market is false; it is built on unsustainable growth fuelled only by one factor. Quite often the growth comes from unsustainable levels of demand in a market. People enter the market because of fast “guaranteed growth”, however sooner or later the market will burst. The demand entering will eventually not fuel the false growth, and the bubble bursts.
“In the case of superannuation we are seeing markets force fed cash like French Geese, swelling the liver fatally.”
So to regress I will take you through the four cornerstones of a bubble, in light of the South Sea Bubble and superannuation and see how you feel at the end of it:
The necessary fallacy, Simply getting people to save more can’t be a bad thing. Can it? After all it’s just like money in the bank we get paid interest pretty much no matter what, and the passage of time guarantees we retire to live like kings.
The consumer blind spot
Consumers who invest in superannuation are forced to; the decision making is taken away from them and given to employers, unions or financial planners.
The government has used the ruse of super guarantee to reduce its future debts for the aged pension and public service superannuation e.g. increase the Super levy and we can increase the pension age.
I am not making a judgment about whether or not the government has a responsibility. I am pointing out that it benefits in an inordinate way from continuing the fallacy. This in turn makes the effects worse.
Finally the industry has a security rationalization
The financial planning industry insists on quoting returns over the long haul, in thirty years you‘ll average “x” return. They want to show you that superannuation performs like a Government Bond, with a higher yield, when we know it does not.
Ask any fund manager, financial planner or government official and you will be told superannuation is the best thing since sliced bread! In fact merely questioning the assumption will yield a torrent of outrage, shock and abuse worse than if you were kicking a puppy.
The message is don't follow the herd, get a SMSF and start thinking and planning for yourself.
Franklin Partners Mortgages
Headquartered in Noosaville, Australia, The partners of Franklin Partners Mortgages have been working in the mortgage investment market niche for over 15 years. As a boutique mortgage funder and manager, Franklin Partners specialises in buying, selling and managing loans as principal and on behalf of individual investors and hedge funds based in the United States, Australia, United Kingdom and Canada.
Many of their clients are Australian Self-Managed Superannuation Funds investors.
Gary FitzGerald, who established Franklin Partners Mortgages in 2009, is supported by a cadre of mortgage investment professionals, who together have over 100 years of combined wealth of experience covering $50 billion in global financial transactions.
Franklin Partners primary goal is to help Investors and their financial advisors manage their direct mortgage investments to achieve diversification of risk and a higher yielding alternative to more traditional fixed interest securities.
The current financial situation has provided a unique opportunity for private mortgage buyers. The global financial crisis has seen a “drying up” of funds available for anything but standard loans which has caused traditional funders to tighten their credit criteria to reduce their overall gearing. This has created a perfect arbitrage for the savvy investor.
Gary J. FitzGerald