SMSF’s are they worth it …. you betcha! August 11, 2013

More and more Australians are looking to take greater control and be involved in their superannuation. With over 1/3 of the total superannuation pool of funds in this sector the Self Managed Super Fund (SMSF) appears to be becoming the retirement vehicle of choice for many Australians. There are now more than 503, 320 funds in existence covering 958,092 members, with the value of assets residing in these vehicles currently standing at close to $496 billion rising faster than any other sector. (source: Self-managed super fund statistical report – March 2013) 

Most commentators attribute the rise in SMSFs to the desire by baby boomers (those born 1946-64) to take control over their retirement assets, rather than leave it to platforms or fund managers they struggle to understand. It’s often not that they believe they can seriously do better themselves but more the fact that they would prefer to have the ultimate control and know that if funds are earning or not earning that they can clearly see why and adapt if needed. Also a clear trend in the last 2 years has been the rise in Gen X (born 1965 to 1980) starting SMSFs as they have had superannuation for most of their working lives and are now meeting the “rough guideline” of $200K to open a Self-Managed Super Fund.

However, there are other key benefits that along with this control over investment choice, that make Self Managed Superannuation such an attractive retirement funding vehicle.

Investment choice:

 

The key attribute of SMSFs has always been investment control, and the wider investment choice (such as direct shares, residential and commercial property, collectibles, art work etc) that trustees have compared to retail and industry super funds. You also have access to using derivatives and other more complex strategies to implement some downside protection or hedging of portfolio risk. One of the main reasons we recommend SMSFs is for small business owners to have business real property ( ie. that is used by their business) owned their SMSF and leased back to the business. This provides a steady income for the SMSF and frees up capital to grow your business as well as provide a secure tenancy.

Borrowing:

 

With the rules now allowing SMSFs to borrow we can aim for larger properties or to implement the strategy earlier in the lives of the members. This ties in with the flexibility of SMSFs and added benefits over and above a retail or industry super fund mentioned earlier.

Tax Minimisation:

 

All Superannuation funds (let’s ignore Defined Benefit Schemes for now), offer the ability to take tax-free pension income streams in retirement which is a big incentive to keep your funds within the superannuation environment. You don’t need to have all your assets in superannuation, especially with the increase in the tax-free thresholds; however, by cleverly balancing the amount inside and outside of super you can minimise your tax on a relatively large income and possibly access benefits you thought beyond reach such as the Commonwealth Seniors Healthcare Card or even some Aged Pension.

Tax Control:

 

A further benefit of SMSFs is the control and flexibility that trustees can exert over the tax position of the fund. Through structuring and timing pensions (in some cases multiple pensions) and tilting investment strategies to use the concessional tax treatment of the funds (such as targeting franking credits) tax can be significantly reduced and in for many retirement phase clients refunds can be claimed from the ATO for excess credits!. There is also added flexibility in terms of dealing with the tax liabilities of the fund, as the fund only does one tax return even though there can be up to 4 different members in the fund and each could have an accumulation and numerous pension accounts.

Passing on Tax Benefits:

 

Using strategies such as Anti-Detriment Payments or Future Service Benefit Deductions your family members can benefit from large tax deductions that may make the fund tax-free many years on the death of a member.

 

Cut out unnecessary CGT, brokerage and buy/sell spread costs:

 

When it comes time to enter the pension phase through a Transition to Retirement while still working or a full Account Based Pension on retiring, an SMSF structure allows an almost seamless transition from accumulation into pension or drawdown mode. You do not have to sell down your assets incurring various fees or taxes in the process as you simply minute the move to pension phase via a Pension Kit and retain your investments as is, no need to change. .

Passing on your wealth – Superannuation Estate Planning:

 

There are many useful estate planning benefits built into the superannuation system and even more so via SMSFs. First, you need to be clear that your Will does not control your superannuation benefits unless you specifically nominate this option. Keeping your superannuation assets outside of your will may be a smart move especially in these days of blended families and “No Win-No Fee” lawyers willing to challenge any and all estates. Within a SMSF you can design a strategy to accomplish exactly what you are after, with superior tax outcomes. This includes being able to leave “taxable” pensions to SIS Dependants who can receive them TAX FREE and tax-free or substantially tax-free lump sums to non-dependants . Likewise you can structure very tax effective income streams to dependant beneficiaries such as a disabled child or sick spouse with control around when they receive pensions and even lump sums and to effectively look after that person long after you are gone. Like the more up to date retail funds, through your SMSF you can make non-lapsing binding nominations unlike older super funds which have to be continually updated a real nightmare if you have an onset of dementia or illness preventing you renewing them).

Asset Protection:

 

The Asset protection afforded in all superannuation vehicles is crucial in a world where litigation and bankruptcy has become commonplace. In either of these events, your benefits are protected, even if you withdraw some of this to live on. From time to time we advise those in a failing business not to try to prop up the business by accessing their super but rather leave the funds protected to give themselves some chance of getting back on their feet and taking care of their family.

Are you starting to see the trend when it comes to the benefits of an SMSF? It’s all about flexibility and control of outcomes. But what about COST which is often the major initial driver of interest in an SMSF.

 

Cost / Cost Savings :

 

This may be an over rated benefit as I find that once people start using the strategies and benefits mentioned above that the cost becomes a minor issue in running a fund. But for some the cost of running a SMSF can be significantly lower than the alternative platforms, especially as service providers bring technological and labour-saving ideas to bear in the administration of the funds. As a guide the average cost of the annual administration of a fund will be around about $2,000 to $2,500 pa including accounting and audit fees. Yes there are cheaper but you pay for what you get.

As with all vehicles you have the option to drive the strategies yourself to minimise advice costs or take on a co-driver(s) via an SMSF Specialist Advisor™, Financial Planner, Accountant or Lawyer. Look for professionals with experience in the strategies that suit your needs. The power of the SMSF solution is that you have ultimate control of what advice you seek and how you pay for that advice through negotiation with your chosen advisor and the ability to end the relationship and move on with limited hindrances.

As a SMSF Specialist Advisor™ we are openly biased when we urge you to look for someone with specific accreditation in the SMSF arena as it is complex area and the strategies available to you are broader than the plain vanilla strategies offered by your typical bank planner or Industry fund planner. Look for someone who explores the strategies available to you and has a passion for the sector as this maybe your biggest asset in retirement and you don’t want a taxi driver in control of your B-double road train!

In summary SMSFs have become popular and effective retirement vehicle through satisfied users passing their feedback on to others. However you must also be willing to take on the responsibilities that being a SMSF trustee entails but a good advisor team will guide and educate you along the way if you are prepared to learn.

If you are, then the potential for what we call “The Sleep Factor” is within reach. The ability to have comfortable night’s sleep knowing you have control of your finances, understand your investments, maximised tax effectiveness and implemented effective estate planning along with some asset protection.

Now pick up your last Superannuation Statement and see if that gives you the same feeling! 

I hope this guidance has been helpful and please feel free to leave a comment. Feedback always appreciated. 

Have a great day 

Luke Eres CFP SSA 

Is it just me …. or is it ground hog day again June 27, 2013

Morning All, 

OK I will admit it. 

I am a self proclaimed political tragic and I loved nothing better than sitting down last night to watch the drama unfold before my very eyes. 

That said I am a little intrigued by what Mr Rudd said. 

According to Mr Rudd, Australian politics had let the people of Australia down …. WTF. 

No Mr Rudd, Australian politics has not let the Australian people down. It has been you and your fellow cohorts who have let the people down by becoming self absorbed and thus allowing Mr Abbott and his merry band of followers to assume Government with little or no resistance. 

While I do believe that an Abbott Government is a given (and deservedly so), you would do this country a great favour by focusing on the task at hand and at least providing the Australian people with an alternative and perhaps challenging Mr Abbott ….. just a thought

Happy days to all

Luke Eres CFP SSA  

The current state of Australian Politics ….. from bad to worse April 2, 2013

Howdy All,

I hope that you had a pleasant Easter break. It always nice to have two short weeks back to back.

I came across this article written by Waleed Aly in this month’s Monthly Magazine and I thought that I would share it with you.

Unfortunately we live in a world where politically things are way out of kilter. We have a Labor Government battling a class war that they have essentially created and we have a Liberal opposition so fearful of making a mistake that they are paralyzed to say anything constructive. Regardless of what your political persuasion is, the fact as they stand are not good. I hope you enjoy Waleed’s article.

There’s an old Jewish prophecy that, as end times approach, history will speed up. Surveying the Australian political landscape, it seems Armageddon must be nigh. Events move in fast forward. The chaotic frenzy of our age, in which leaders are culled the moment a whiff of electoral defeat is in the air, economic stability notwithstanding, is unprecedented.

In the space of three years, three first-term heads of government – a prime minister, a premier and a chief minister – have been ejected by their own parties. For all the political mileage the federal Coalition has extracted from Kevin Rudd’s brutal removal, this is no partisan phenomenon. Ted Baillieu’s resignation in Victoria last month only came because the Liberal party room no longer supported him. And neither Rudd’s nor Baillieu’s demise seems as bloody-minded as Terry Mills’s axing in the Northern Territory, executed as it was while he was in Japan on official business, only a week after he had stared down a challenge from his Country Liberal Party colleagues.

In each case, we can identify direct triggers. For Rudd it was his dumping of the emissions trading scheme (ETS), which saw his approval ratings, and Labor’s, nosedive. For Baillieu it was a rogue MP’s resignation from the Liberal Party, and his chief of staff’s involvement in what at least looked like jobs-for-the-boys behaviour, as well as a series of poor polls. For Mills, it was the complete collapse of public support for his government – including a poll showing Mills had lost around 23% of the vote in his own seat – after large rises in electricity and water prices.

To cite these as explanations misses the point. Governments have faced crises before. They have pursued unpopular policies, and dealt with stubbornly bad polls. The failures are not new, but the speed and savagery of the consequences are. Rudd lasted just over two and a half years in office. Baillieu, just under. Mills, an astonishing seven months.

At least three things flow from this. First, political crises come swiftly, far more swiftly than in any previous era. Second, political parties more quickly assume such crises cannot be remedied, at least not in time for the next election. And third, they think the only way to salvage the situation is to replace the leader.

The new media landscape clearly has much to answer for here. Crisis is swift because news and commentary are swift and judgement is instant. Then it’s shared, constantly, and mostly with those who agree. Viewpoints become amplified rather than nuanced. So we forestall cool, reflective debate, and wind up with a public conversation that has almost no ability to persuade. Everyone’s in a war, everyone has a gun, and we’d much rather go on firing than sit through dull peace negotiations.

Political discussion has become a militarised zone. Perhaps that’s why parties are increasingly reaching for the nuclear option. As the debate gets faster and therefore shallower, our politics must become more presidential because image and personality are the only effective weapons left. This is particularly true given the collapse of serious ideological difference between the major parties. Every political problem therefore becomes a leadership problem. When you’re confronted with political disaster, there’s only one thing to do: get new leadership.

As Gillard’s experience shows, there’s no guarantee that change will work. The problems of contemporary politics are far bigger than that. In this connection, Baillieu and Rudd make an instructive comparative study: despite sharing the same fate, they are profoundly contrasting figures. Rudd is widely despised within his own party; his leadership style was unbearable to many of his colleagues and could be tolerated only as long as he had Newspoll in his corner. Baillieu remains liked as a man by colleagues and journalists alike. To follow the news coverage of his resignation was to be reminded every few moments that he is a “decent” bloke. Rudd is maniacally ambitious and hyperactive; Baillieu is aloof, indecisive and frequently passionless.

Rudd was everywhere. As Opposition leader he dismantled John Howard because his ravenous appetite for media engagement was so suited to our media-drenched age. In government, this caught up with him. His was a government of endless “announceables”. Initiatives poured from his office, but with no follow-through. There was an apology, a stimulus package, then a dizzying array of ideas – a dumped ETS, a maligned mining tax, a failed health take-over – that confused more than they inspired. Rudd governed as though the political cycle was the same thing as the 24-hour media cycle. He just couldn’t keep up with his own announcements.

Ted Baillieu didn’t even try. He belonged to a completely different era. You can imagine him taking three months out over summer to read, perhaps aboard a ship bound for England. He and his ministers frequently declined media requests. At first this seemed to be part of a strategy to lie low for the first year while his team – who were as surprised as anyone to find themselves in government in 2010 – figured out what they were going to do. But the invisibility lingered for a second year. Baillieu opted out of the media frenzy, and wouldn’t opt in even as scandal engulfed his own office.

This low-key approach is more affordable to the second tier of government, but even so Baillieu overdid it. When he announced the end of his premiership, the response was very much “So long, Ted Baillieu; we hardly knew ye.”

The stories of these two utterly contrasting leaders, both brought undone by the relentless waves of digital information that define our world, raise a frightening question of contemporary politics: can anyone shine in the top job? If not Rudd with his unceasing media engagement, and not Baillieu with his apparently deliberate disengagement, then who?

Certainly each man had failures of leadership. But is ours an age that will not be led? Is our political and media cycle so unforgiving, so instant and so damn loud that it punishes those who play the game as much as those who don’t?

Colin Barnett might think not, after his serene victory in Western Australia last month. In many ways he’s the middle ground between Rudd and Baillieu: the quiet achiever whose image is of getting things done with a minimum of fuss. But then, his state has seen massive economic growth in recent years. His opposition is inept, and is of the same party as a prime minister so disliked in the west that she was asked not to cross the state line lest she contaminate the state Labor campaign. This is hardly a replicable model for political success.

It’s early days, but it would seem the rapid, shallow brutality of our political conversation reflects a coarsening and hollowing out of our very public culture: a culture of more judgement and less restraint, of sanctimony unearnt through reflection, of instant rhetorical gratification. We need a new pact, but we have no brokers.

Have a great day

Luke Eres CFP SSA

Currency Wars …. how will the world cope? November 22, 2012

Howdy All,

And what a magnificent day it is in Sunny Melbourne. Below is an article written by Michael Collins, Investment Commentator at Fidelity where he discusses the impact of a potential currency war. I found it a great read and I trust that you will as well.

November 2012

The Great Depression became great, in part, because it featured a trade war. The so-called Great Recession since 2008 has so far escaped the same disaster. Instead it is hosting a so-called central-bank currency war that could damage many countries including Australia. But there’s a difference between a trade war and currency war that make the latter less venomous at a global level.

The trade war of the 1930s was kicked off by the US Tariff Act of 1930 (which is better known as the Smoot-Hawley Tariff after its sponsors). President Herbert Hoover approved the bill, which imposed record high tariffs on more than 20,000 goods, to protect US farmers from imports. US trading partners retaliated and world trade plunged by about two-thirds from 1929 to 1934, when measures were taken to reduce slugs on imports. Not only did the tariff war wreck global trade, it thwarted collaboration between countries to fight the global economic slump. The General Agreement on Tariffs and Trade signed in 1948 that was a precursor to the World Trade Organisation was designed to prevent a repeat of this self-destructive behaviour.

The start of today’s currency war is harder to pin down. It certainly gained speed on September 6 last year when the central Swiss National Bank unexpectedly said it would “with the utmost determination” purchase “unlimited quantities” of foreign currencies to block the Swiss franc’s rise against the euro, the currency of most of its trading partners. Up to that day over 2011, the Swiss franc had jumped 13% against the euro as doubts mounted that the single currency would survive the eurozone’s financial crisis.

China, Brazil and other developing countries would date the currency war to no later than August 2010 when the Federal Reserve flagged its second round of quantitative easing. Although the premise is unproven, many – especially forex dealers – think central-bank-financed asset buying creates inflation, which in theory lowers a country’s exchange rate. Guido Mantega, Brazil’s finance minister, immediately used the term “currency war” to describe the results of the Fed’s asset buying. By November of that year, Beijing berated Washington for risking a “currency war” by adopting “self-serving macro-policies”. The Fed’s quantitative easing, since it aims to promote consumption and investment by lowering interest rates, encourages more imports to the US as much as it might aid exports through a lower currency.

The battle lines

Whenever it started, today’s currency wars fall into two broad skirmishes. The first group involves oil exporters and Asian countries that for a long time have tied their currencies in some way to the US dollar. It’s just that now they need to take bigger steps to hold their targeted rate to the greenback. The second bunch groups the non-eurozone countries with more-or-less market-set exchange rates that are taking action to prevent their currencies soaring as central banks and investors diversify away from US-dollar and euro-denominated holdings because they are losing faith in these currencies. Brazil, Denmark, Israel, Japan and Switzerland fall into this category. The Japanese and Swiss are doing the most fighting, for their currencies are regarded as havens. Countries like Australia, Canada, New Zealand, Sweden, South Africa and the UK fit into neither category for they are taking little, if any, action to prevent their currencies climbing against the US dollar.

The Australian dollar, for instance, has averaged 102 US cents over the past two years as central banks and investors sought havens, compared with 72 cents over the prior decade. Even if it’s falling since the Reserve Bank of Australia cut the cash rate by 100 basis points over May, June and October, the Australian dollar is not too far from the post-float record high of 110.2 US cents that it set in July 2011. That’s a feat given that Australia’s terms of trade have slumped over 2012 and evidence is mounting that China, our biggest export market, confronts an economic slowdown. According to a freedom of information request by Bloomberg News, a Reserve Bank of Australia spreadsheet created in July 2012 shows at least 23 central banks now hold Australian-currency reserves.5 That list didn’t include the central bank of the Philippines, which in September admitted to building up its Australian-dollar reserves.6 A debate is underway in Australia on whether the Reserve Bank should counterattack to protect exporters.

Dire predictions are floating around about how badly today’s currency wars could end. James Rickards, the author of Currency Wars: The Making of the Next Global Crisis, sees that the outcomes could include a collapse of faith in the US dollar and the rise of multiple reserve currencies, a return to the gold standard or chaos, his most likely ending.7 Alarmist predictions can be a trap and help sell books but no one can rule out an uncomfortable outcome for the currency wars. What can be said, however, is that a currency war is more benign than a trade war.

The difference

A trade war is damaging because it upends one of the most central tenents of classical economics, the law of comparative advantage. The theory, which originated with David Ricardo in the early 19th century, postulates that everyone is better off when people and countries specialise in areas in which they are the most efficient and then engage in trade to acquire the goods in which they are less efficient at producing. In short, everyone loses in a trade war, even those US farmers the tariffs in 1930 were designed to protect, because a failure to specialise creates vast inefficiencies.

Currency wars are much less damaging than trade wars because they create winners and losers. They benefit the side suppressing their currency in terms of making that country’s goods more competitive, even if there are side-effects for the winning side. The gain for China from its low-yuan policy of the past three decades is clear; the low yuan helped it become the world’s biggest exporter and lifted hundreds of millions out of poverty. The cost to the Chinese of this policy is more obscure; the purchasing power of the Chinese is lower than otherwise, much of the country’s wealth is tied up in more than US$3 trillion worth of low-yielding US Treasuries and these securities incur losses when the yuan rises.

Those fighting to suppress their currencies these days are reducing the purchasing power of their citizens and face similar risks, even if their exporters are better off than otherwise. The decision by the Swiss National Bank to place a ceiling of 1.2 euros on the franc risks fanning inflation in Switzerland. This is because the central bank must create Swiss francs to buy the foreign currency and, unless fully offset or sterilised, this action will boost the local money supply. The Swiss National Bank’s foreign reserves have soared to 407 billion Swiss francs (A$430 billion), about 71% of GDP, a tenfold increase from 2009, when it first acted to stem the Swiss franc’s rise. If the Swiss central bank loses its battle against a rising Swiss franc, much wealth will be wiped out. So far the Swiss National Bank has broad political support for its action, even though it lost 19.2 billion Swiss francs fighting the Swiss franc’s ascension in 2010.

The losing countries in the currency wars are shedding their competitiveness, upsetting their balance of payments and, in some cases, risking a deflationary shock, even as their consumers enjoy higher purchasing power. If you look back over the past three decades, the cost to the US of the high US dollar versus the yuan was a perennial current-account deficit and a credit bubble that ended up ravaging government finances, even if the country benefited from lower inflation due to cheaper imports and faster economic growth leading up to 2007 thanks to the low interest rates that slower inflation allowed.

It’s too soon to calculate the cost to the losers of today’s currency wars but it would be marginal so far. So don’t think another episode of the 1930’s tragedy is playing out. Unless, of course, the currency wars morph into trade wars.

It’s fair to say that we are living in interesting times.

Bidding you all a wonderful day ahead

Luke Eres CFP SSA

November 12, 2012

Howdy All,

Following on from our most recent posting, today we post an article written by Dr Shane Oliver who similarly writes about the same issues we raised. We thank Dr Oliver for his contribution.

Shane Oliver – Post US Election Outlook

Bidding you all a wonderful day ahead.

With thanks

Luke Eres CFP SSA

Global Political Insights – Obama Re-Elected as Attention Turns to the Fiscal Cliff November 8, 2012

Howdy All,

With the re-election of President Obama now confirmed we turn our attention to the looming challenges that he faces:

• US Political Status Quo Continues: In line with our longstanding call that the 2012 US elections would result in a continuation of the political status quo, Barack Obama has been re-elected President of the United States, winning no fewer than seven of the ten swing states. At 2 a.m. Eastern time, Obama had won 303 electoral votes to Romney’s 206, with Florida’s 29 votes still outstanding. A total of 270 is needed to win. Republican challenger Mitt Romney conceded defeat around 1 a.m., largely eliminating uncertainty over the results. As our poll-based forecasts suggested, Republicans maintain control the US House after losing perhaps 15 seats to Democrats while, in the Senate, Democrats appear to add to their majority.

• Same Political Players Will Address the Looming Fiscal Cliff: This outcome means that the same players remain in place for the upcoming fiscal cliff negotiations in the lame duck session of Congress, making a temporary compromise the base-case scenario, with the timing – before December 31st, or sometime into the new session in January – still in question. Watch for statements from leaders of both parties in both houses of Congress, as well as the leaders of the Ways & Means and Finance Committees, as their signals matter most.

• Presidential Mandates: Does Size Matter? Conventional wisdom suggests that a narrow mandate, as measured by the margin of victory in the popular vote, foreshadows a weak president without sufficient public support to enact reforms. But few contemporary US presidents have enjoyed a significant popular mandate. We note recent academic studies which suggest that there is little relationship in practice between the size of a president’s mandate and legislative outcomes. The ability to work with Congress matters more.

• Divided Government & More Status Quo: The history of the relationship between Obama and the Congressional leadership is one of eventual compromise, though not in the absence of circumstances forcing both parties to the table. Our expectation continues to be that the trail of last-minute, heart-attack compromises will continue, given the same actors retaining their positions, with appetite for comprehensive reform limited.

• Significant Challenges for the Second Obama Term: From the looming fiscal cliff, to the challenge of reforming the tax code, to a likely resumption of Israel-Iran tensions and the need to work with a new Chinese leadership, Obama in his second term faces significant challenges at home and abroad. Domestic pressures will be center-stage, with the fiscal cliff immediately commanding attention for the remaining seven weeks of the Lame Duck session and testing the limits of bi-partisan deal-making in a highly polarized Congress. But international challenges will eventually demand attention.

It is fair to say that we are in for some interesting times ahead.

Have a great day

Luke Eres

Interest Rates Unchanged November 7, 2012

Howdy All,

The Reserve Bank of Australia (RBA) has left interest rate on hold at 3.25 per cent at its November board meeting. It follows a quarter of a percentage point reduction in October. It is first time in six years the RBA has left the cash rate unchanged on Melbourne Cup day.

While homeowners and the retail sector will be disappointed, we are certain that self funded retirees will be breathing a sigh of relief as it is next to neigh impossible to find a decent risk free yield at this current moment in time.

Until next time take care

Luke Eres

God Bless America!! Obama 4 More Years November 7, 2012

Howdy All,

With the results filtering in, it appears more than likely that President Obama will be returned to serve as President of the United States of America for a further 4 years. While President Obama has had his fair share of critics during his first term (and justifiably so) one can not forget the mess he inherited. That said we do believe that he is worthy of another chance and here’s to hoping that he will deliver on the promise of change he made 4 years ago.

The article below has been sourced from the website http://www.realchangepolitics.com

President Barack Obama won re-election in a tight campaign, besting Republican presidential nominee Mitt Romney in enough swing states to secure four more years in office.

Propelled by wins in Ohio, Wisconsin Iowa – states long touted as Obama’s “firewall” – the president won a long-fought election in which the economy, its slow pace of recovery and Obama’s management of it, became the central issue.

NBC News declared Obama the projected winner of Ohio and the election after polls had closed on the West Coast. The president also held onto a series of Democratic strongholds, beating back Romney’s efforts to take back states Obama had won in 2008 and make inroads into traditionally Democratic strongholds, like Pennsylvania, Minnesota and Wisconsin.

Exit polls suggested that the economy was, by far and away, the issue at the front of voters’ minds on Election Day. Romney edged Obama nationally by six points among voters who said the economy was their top issue.

But Obama outperformed Romney on questions of empathy, and voters nationwide were virtually tied on the more direct question of who would better handle the economy and the budget deficit.

Obama also held a demographic edge over Romney among two key groups of voters. The president bested the former Massachusetts governor by 10 points among women (Romney beat Obama by 8 percent among men). Hispanic or Latino voters also broke heavily for Obama by a 39-point margin.

In losing, Romney fails at his task of becoming the first challenger to unseat a sitting president since 1992.

The president will enter his second term facing a political landscape much like his last two – that is, gridlock. NBC News projected that Republicans would retain their majority in the House, and that Democrats would retain their majority in the Senate (because Vice President Joe Biden would be able, in his official capacity as president of the Senate, to break a 50-50 tie).

The specter of gridlock would undoubtedly loom before Obama as he confronts an immediate task in addressing the series of automatic tax hikes and spending cuts – the so-called “fiscal cliff” – set to spring into place at the end of this year. As Obama won a second term, House Speaker John Boehner, R-Ohio, said Republicans’ retention of their House majority meant “the American people have also made clear that there is NO mandate for raising tax rates.”

As election results continued to trickle in, Nevada, Florida, Colorado and Virginia remained too close to call. North Carolina, where Romney was declared the apparent victor, was the lone state that flipped from Obama in 2008 to Republicans this election cycle.

Obama awaited results earlier in the evening at his home in Hyde Park, Chicago, where he had dinner with the first family. Romney joined his family at a hotel suite near his election night party in Boston. The president spent the day doing a series of interviews and participating in a pick-up game of basketball, an Election Day tradition for Obama.

Romney, meanwhile, added some last-minute campaigning to his schedule instead of enjoying down time. He stopped in Cleveland and Pittsburgh in a last-minute bid for votes in the crucial battleground state of Ohio.

Speaking to reporters traveling with him from Pittsburgh to Boston, Romney said he sensed that victory was on the horizon.

“You know, intellectually, I’ve felt we’re going to win this and have felt that for some time,” Romney told reporters traveling with him from his last campaign stop from Pittsburgh back to Massachusetts. “But emotionally, just getting off the plane and seeing those people standing there … just seeing people there cheering as they were connected emotionally with me and I not only think we’re going to win intellectually, I feel it as well.”

Both candidates could know their fate in just a few hours, as vote totals and additional exit poll data paints a bigger picture of the American electorate this Election Day.

Bidding you all a great day ahead

With thanks

Luke Eres

Why Germany will preserve the euro – An Educated View June 19, 2012

I came across this article written by Michael Collins, Investment Commentator at Fidelity and I thought that it would be good to share this with our followers.

I thank Michael’s for his contribution:

Germany’s abhorrence of inflation is easy to explain. The Weimar Republic (1919 to 1933) hosted hyperinflation between 1921 and 1923 when authorities printed money to overcome the disruption caused by political instability and war reparations. Savings evaporated as prices rose 130 times over in 1922 before the papiermark became valueless in 1923.

Inflation wrecked savings again around the end of World War II. While inflation’s scourge was first suppressed by rationing and price controls, its devastation was wrought when the Reichsmark was exchanged for the Deutsche mark at a rate of 10 to one in 1948. Over the past decade, inflation fears were revived when, after joining the euro at too high a rate in 1999, Germany undertook austerity-like reforms to become more competitive and wages and public benefits stagnated. As these inflation fears were stirring in today’s Germans (even though inflation only peaked at 3% in 2007), they were footing the cost of reunification. Deutsche Bank calculates that by the middle of this decade the merging of West and East Germany since 1990 will have cost the equivalent of Germany’s annual GDP

This history explains Berlin’s stances during the eurozone crisis against inflation and its reluctance to salvage another economy, even if past rescues have, in effect, bailed out German banks while shifting risks to eurozone taxpayers.

Citing the moral hazard of saving cheating Greece and other troubled eurozone members, the centre-right government of Chancellor Angela Merkel has pushed the self-defeating policy of austerity over the past two years. She is undeterred, even though this policy has caused record eurozone unemployment (11%), heavier government debt burdens and steeper economic slumps. Her tough approach led to the eurozone fiscal compact that makes Keynesian stimulus illegal.

Germany’s other stances during the crisis are more about what it opposes. Berlin is resisting financial-stability powers for the European Central Bank, such as an ability to meet bond payments. It is against more cheap liquidity from the ECB, which gave banks one trillion euros (A$1.3 trillion) via three-year repos around New Year. Berlin rejects eurobonds or similar collective efforts to underwrite eurozone sovereign debt, which would boost yields for German businesses and mean that Germany would help foot the bill for any default. It has baulked at a banking union, which would involve a recapitalisation fund and deposit guarantees. It cringes at higher inflation in Germany of, say, 4% to 6% that would help erode the real debt burdens of its neighbours.

Oh that upheaval!

What’s Berlin in favour of apart from budget discipline? It calls for “future-oriented” investment such as infrastructure spending, supply-side reforms such as flexible labour markets, greater business access to capital, privatisation programs and freer intra-Europe trade. Merkel is in favour of “more Europe” with moves “step by step” towards a fiscal and political union of eurozone countries.3 And Berlin is prepared to do “everything necessary” to keep Greece in the euro.4
The contradiction within this last intention is that it implies a joint approach to tackling Europe’s woes while Germany’s stance is shattering such unity. The other inconsistency about Germany’s position is that its policymakers have failed to learn fully from their own history; namely, how policies similar to theirs today crushed Germany in the 1930s.

In 1930, Heinrich Brüning began his two-year rule as chancellor of a centre-right coalition, at a time when Germany’s shrivelling economy was battling capital flight and war reparations. Brüning’s strategy for a shrinking economy, rising unemployment and deflation of 7% was to balance a budget in structural deficit. He slashed official salaries by up to 20% and raised income taxes, among other steps, and when revenue fell he lopped spending even more.5
The result was the German’s economy collapsed. Industrial production plunged 40% by 1932 from four years earlier, unemployment soared to about one-third of the workforce and Brüning won the nickname “the hunger chancellor” to encapsulate the misery in society.6The political centre evaporated – as it has in Greece now – and the rise of far-right and far-left parties heralded the end of the Weimar Republic and the ascension to power of Adolf Hitler in 1933.

What could prompt Germany to learn fully from its history and ditch its austerity push and take grand steps to solve the eurozone crisis? Lots of things, of course, including pressure from other governments concerned about the social costs of austerity to political calculations by Berlin at what the collapse of Greece will mean for Europe. And there’s the cost that Target-2 will inflict on Germany.

Involuntary lending

Target-2 is the loose acronym for the Trans-European Automated Real-time Gross Settlement Express Transfer system. In plainer speak, it stands for the eurozone’s interbank system – how a commercial bank in one eurozone country pays a bank from another. The “2” is because the system was expanded in 2007 to capture small transactions that until then were cleared through private systems.

The issues with Target-2 arise because a country’s balance of payments must, well, balance. This means that the current and capital accounts must add up to zero. (These accounts are the widest measures of a country’s trade and capital flows.) Countries with current-account deficits must attract capital to offset this gap, and vice versa. There were no Target issues before the US sub-prime crisis erupted in 2007 because private capital flowed from Germany to southern Europe as Germany enjoyed current-account surpluses while its neighbours had current-account deficits.

But since 2007 private capital no longer funds the current-account deficits of southern Europe – in fact, private capital has gushed back to Germany. It has unwittingly fallen on national central banks within the eurozone to ensure balances of payments balance. They are doing this via pseudo euro transfers, which are a routine part of central banking. In the absence of private capital flows, these transfers create liabilities to the Eurosystem for current-account debtors and claims for those running current-account surpluses – namely Germany.7 The Eurosystem comprises the ECB plus national central banks in the eurozone.

In essence, when, say, Spain or Greece import goods from Germany, national central banks manipulate the money supply in their jurisdictions to facilitate the payment and adjust their balance sheets to show a liability for the importing country and a claim for Germany. As well as showing up on national central-bank balance sheets, the Target transactions appear on countries’ balances of payments. But nothing shows up on the ECB’s books because these payments net out to nothing for the whole system. That’s why they went unnoticed for so long after 2007.

Trapped

Thanks to Germany’s export prowess, the Bundesbank’s claims on the Eurosystem have exploded from five billion euros in 2006 to well in excess of 850 billion euros now, more than 30% of Germany’s GDP. They could easily, according to some forecasts, exceed one trillion euros by year end. Interestingly, bank runs in Greece, Spain and other troubled economies that sent money to Germany boost Germany’s Target claims in a similar way to that of its exports. The Netherlands has some Target claims, too, while Greece, Ireland, Italy, Portugal and Spain have sizeable Target liabilities.

Hans-Werner Sinn, the president of Munich’s Ifo Institute think tank who first warned about the Target menace, claims that since 2008 these transfers have financed the current-account deficits of Portugal and Greece, a quarter of Spain’s gap and all of Ireland’s shortfall plus its capital flight.8 Sinn is among the most important players in the eurozone debt crisis you’ve never heard of as he first used the Target issue to push austerity and block eurobonds.

The functioning of the Eurosystem depends on each country meeting its obligations and is underpinned by the collateral held by central banks. But there is no system whereby national central banks hand over tangible assets to redeem debts as occurs between the 12 regional Federal Reserve Banks in the US over similar liabilities. The lack of such a system led to the collapse of the Bretton Woods fixed-exchange-rate system that governed international finance from 1944 to 1971 though creditor nations could redeem claims for gold. Even if the Eurosystem brought in such a system, central banks from struggling eurozone countries lack the marketable assets to give the Bundesbank anyway. So Germany is poised to pile up no end of these intangible credits.

The crunch for Germany is what happens to these claims in case of default. If a eurozone government goes bust, the ECB would have to write off a defaulting country’s Target liabilities and the cost would be shared among the eurozone’s central banks in proportion to their ownership of capital in the ECB. For Germany, that’s 28%, though this share would marginally increase as the defaulting country’s central bank wouldn’t pay. Thus a Greek default could be managed. But a collapse of the euro would wipe out Germany’s claims because there are no laws determining how they would be paid if the eurozone splintered. “This may be the largest threat keeping Germany within the eurozone and prompting it to accept generous rescue operations,” Sinn said in a co-authored paper.

What he’s saying is that Germany stands to lose so much from foregone Target claims alone if the eurozone shatters that it might as well spend the money needed to save the euro. On top of the wealth that would vanish with lost Target claims, the money Berlin has given to the European Financial Stability Fund and placed in IMF rescue packages would be at risk. Then add on the political and financial costs of an economic seizure if the euro were to collapse. The only downside to Germany’s conundrum is that if the eurozone is to crack up, the sooner the better for Germany because those Target claims climb every day. While events may overtake authorities, it’s easier to believe that German policymakers will act to keep the euro in its most extended form as possible rather than opt to put their country and the rest of Europe through Weimar Republic-like economic torment.

Greek election results positive, but Eurozone uncertainty remains June 19, 2012

Good Morning All,

We trust that today’s posting finds you well.

The result of Greece’s 17 June election were a win for pro-austerity, but only just.

Coalition of New Democracy and PASOK the most likely outcome

The Greek election results in the second vote for the year put the conservative pro-bailout New Democracy party as the winners with 29.7% of the vote and 129 seats compared with the far left Syriza’s 26.9% (71 seats). By leading the count, New Democracy has picked up a bonus 50 seats. The results show a swing to New Democracy and Syriza (both of which increased their vote by over 10%) at the expense of the smaller parties, emphasising the increasing polarisation of the population.
If New Democracy can form a coalition with pro-bailout PASOK (socialists) which gained 12.3% of the vote, then they will be able to form a majority government with 162 out of a total 300 seats. If the Democratic Left also joins the coalition, that will bring the number of seats to 179. Without PASOK, a governing coalition would be hard to form since most of the other parties oppose the austerity package. The communists (12 seats) and far right Golden Dawn (18 seats) seem too extreme for the major parties and the other party, the Independent Greeks, appears too idiosyncratic to be a stable coalition member.

It is not a foregone conclusion that PASOK will agree to a coalition – in the past they have stated that Syriza must be part of the coalition – but the pressure will be intense and PASOK, which used to be the main party of the left, will be mindful that a third election might even further erode its vote to the benefit of Syriza. It may be possible to cobble a coalition together without PASOK but it would probably be an unstable grouping.
The most likely outcome seems to be a pro-bailout government. However, even in this case, the task of imposing a severe austerity programme and turning the economy around will remain challenging. There will be ongoing pressure to negotiate a new agreement. With Francois Hollandes’ election as French prime minister and the victory of his socialist party in the French parliament, the prospects for an easing of the austerity pressure from the European Central Bank (ECB) has increased. Nevertheless, Germany’s hard-line stance will limit the extent of flexibility, as will a general mistrust by other European states in Greece’s ability to deliver on its promises.

Immediate risk may have passed but Eurozone uncertainty remains

A coalition will remove the risk of an immediate Greek exit from the Euro given that Greece will continue to work with the European Union (EU) as opposed to Syriza’s commitment to abandon the agreements made at the end of 2011. The removal of the immediate threat of a Greek exit is a positive if only in that it gives the EU time to prepare for an exit if it becomes necessary – just as they prepared for the Greek default last year.
However, even if the Greek concerns have calmed slightly, the situation in Europe is still pressured by uncertainty about Spain and Italy. Moreover, if the pressure on Greece is relaxed too much, a concern will arise that other member nations will seek similar alleviation of austerity. The contagion risk therefore remains high.

RetireCare’s views are as follows:

The Greek election results are positive but not unambiguously so:

• Greece will not exit the Euro, at least in the short term.
• The cost of collapsing the Euro is such that at this stage we see it as a very unlikely scenario.
• There is no quick fix and Europe will remain challenged, so we would treat any optimistic market reaction with caution.
• Europe has demonstrated a willingness to act decisively over the past 6 months, with its long term refinancing operation and Spanish Bank recapitalization plan. As such, expectations of a collapse of the Euro and its member states are probably unfounded as are expectations of a quick fix.
• Volatility remains the most likely outcome for quite some time

Bidding you all a wonderful day ahead.

With thanks

Luke Eres CFP SSA