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  

Superannuation Changes – Alert Update June 27, 2013

This week there have been a number of long awaited changes to superannuation law that have passed the parliament. This Alert outlines some of the key changes that we should be focusing on and how this may impact your future retirement planning strategy.

 

Off market transfers

The Tax and Superannuation Laws Amendment (2013 Measures No. 1) Act 2013 was passed on 25 June with the significant amendment of the removal of Schedule 4 which contained the proposed changes in respect of acquisitions of assets by SMSFs from related parties and the disposals of assets by SMSFs to related parties.  Importantly, this means there are no additional restrictions or requirements to trade off market in respect of related party transactions with SMSFs.

Schedule 4 of the Bill was introduced as the outcome of the Government’s announcement to ban off market transfers to and from SMSFs where a market exists, following such a recommendation from the Cooper Review .  The bill was set to introduce new section 66A of the SIS  Act specific to SMSFs which proposed that SMSFs must not acquire an asset from a related party (subject to a number of exemptions) and that SMSFs must not dispose of an asset to a related party (subject to a number of exemptions).  The acquisitions exemptions provided for listed securities acquired in a way prescribed by the regulations, however no draft regulations had been released.  Business real property and in-house assets were also proposed exemptions, provided that they were acquired at market value as determined by a qualified independent valuer.  Similar exemptions were proposed in respect of disposals.

The proposed amendments contained a number of issues in respect of their interaction with Corporations law and existing wash sale rules.  Together with the lack of any accompanying regulations , it seemed unlikely that the necessary package of legislative changes could have been prepared and implemented by 30 June 2013.

Whilst the back down is welcome, it is a timely reminder that requirements already exist in respect of off market transfers.  The timing of valuation for the purpose of making off market contributions is the date transfer forms are ready to be lodged with the relevant registry.  There are also requirements for off market disposals of certain collectables to be conducted at a price no less than that determined by a qualified independent valuer.

The removal of the proposed changes means there will be no additional brokerage and valuation costs for SMSFs to trade with related parties. There will also be no potential barriers to closing SMSFs where disposal of frozen funds or unique assets would have caused valuation difficulties.

Higher concessional contribution cap

Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013 was passed on 24 June.  The measure increases the concessional contributions cap to $35,000 for individuals age 60 years and over for the 2013-14 financial year and to $35,000 for individuals aged 50 years and over for the 2014-15 financial year and later financial years.  The temporary cap will cease when the indexed general cap becomes $35,000.

Lower tax concessions for those earning over $300,000

Superannuation (Sustaining the Superannuation Contribution Concession) Imposition Act 2013 was also passed on 25 June.  The measure increases the tax paid on concessional contributions from 15 per cent to 30 per cent for individuals with income above $300,000. The amendments apply to contributions made on or after 1 July 2012.

An individual will pay this tax for an income year if their income for surcharge purposes (less reportable super contributions) plus their low tax contributions for a financial year exceed $300,000.  Special rules apply for defined benefit funds, where the value of contributions will be determined by an Actuary.  Judges who are members of a fund established under the Judges’ Pensions Act 1968 are exempt, as are some senior employee members of constitutionally protected funds.

Superannuation contributions to which the changes apply will be known as low tax contributions and include:
 – employer contributions to accumulation interests
 – personal contributions which are claimed as an income tax deduction
 – contributions for defined benefit interests (valued by an actuary)
 – salary packaged contributions to constitutionally protected funds

The Australian Taxation Office (ATO) will work out an individual’s low tax contributions based on the member contribution statements required to be lodged by super funds each year.  The ATO will also work out an individual’s income for surcharge purposes from their tax return.  It will then issue a notice of assessment. The tax is generally due and payable 21 days after the ATO gives the notice of assessment. The ATO will also provide a release authority so that the individual may request an amount from their super fund (other than a defined benefit fund) to make the payment to the ATO.

SMSF levy

Superannuation Legislation Amendment (Reform of Self-Managed Superannuation Funds Supervisory Levy Arrangements) Act 2013 was passed on 16 May 2013.

The measure increases the maximum amount of the annual levy from $200 to $300 from the 2013/14 financial year.  The actual levy amount for a specific income year is prescribed in the relevant regulations and is $191 for the 2012/13 year and the government has announced an increase to $259 for the 2013/14 year.  The Act also changes the timing of collection of the levy.  Previously the levy was payable upon lodgement of the fund’s annual return whereas now the levy will be due and payable on the day specified in the regulations.

The changes are intended to ensure that the levy is collected from SMSFs in a more timely way (consistent with the collection of levies for APRA regulated funds) and that the ATO’s costs of regulating the sector are fully recovered.

Member benefit protection

On 16 May 2013, the Superannuation Industry (Supervision) Amendment Regulation 2013 (No. 2) was made to repeal the member benefit protection rules with effect from 1 July 2013.  The member benefit protection rules were such that members with balances under $1,000 could not ordinarily be charged more in administration fees than the investment returns earned on their account.

The repeal of the member benefit protect rules were necessary in order to resolve the conflict between the requirement to protect the benefits of certain members and the MySuper prohibition on charging differential fees to members.

As you can see it has been a busy time in Canberra …. So much for simple super 

Happy Days 

Luke Eres CFP SSA 

 

 

RPWM US Tour Day 10 – April 22 April 23, 2013

Meeting this morning with a firm that surprisingly have a similar model to that of ours, which means very different to a lot of the firms we have been speaking to. This firm is a traditional financial planning firm with a strong focus on strategic advice as opposed to the “how much money do you have for us to manage” approach. It is quite a refreshing discussion with a philosophically aligned firm.

Our next meeting takes us to Park Avenue. Most of you are familiar with our story on fund manager selection, and the idea that unless we can eyeball the people that actually run the money we do not recommend the fund. We have recently placed a fund on our recommended list, and they have since had a merger and moved offices so like many of our clients that drive past our office to ensure we are still there we paid their new offices a visit. Pretty impressive setup, no questions on where the management fees go!

This is what the view from the 31^st floor on Park Avenue looks like (very similar to the view out of our offices! NOT!)

One of the highlights of this trip without question was a visit to the New York Stock Exchange (NYSE) on Wall Street. As official guests of the NYSE We had the opportunity to walk the floor and for those of you up early enough you probably saw us on TV during CNBC’s live cross from the floor of the exchange. Our timing was great, as we were there for the ringing of the closing bell.

ReireCare on the floor of the New York Stock Exchange.

 

A view of the world’s biggest TAB!!

From Wall Street we walk down to the emotional place of the 9/11 Memorial. For those of you that have ever seen the Twin Towers it is unbelievable to imagine that they are gone from the Manhattan skyline. They have done an amazing job with the memorial park and serves as a reminder of an event that changed the world for ever.

Some moving words from the 9/11 Memorial Mission Statement:

May the lives remembered, the deeds recognised, and the spirit reawakened be eternal beacons, which reaffirm respect for life, strengthen our resolve to preserve freedom, and inspire an end to hatred, ignorance, and intolerance.

Take Care,

Luke, Mirko & Shane

RPWM US Tour Day 4 – April 16 April 17, 2013

We accepted an invite to visit the Bloomberg head office in New York. What an amazing world of data, analytics and financial information. Bloomberg employs 15,000 people delivering such information using the most innovative of technologies. 6,500 employees occupy floors 1 – 29 of the 55 storey building which has 130,000 square metres of office space (we have 211 square metres!!)

One of the few curved escalators in the world. Very Strange!

Meeting in New York today with a financial planning firm which runs the moto – Sophisticated Wealth Management from Independent Advisors. The similarities between our two firms was eerily close. The size of the firm, its advice and investment process may as well have been taken from the RetireCare playbook to use a US analogy.

Excellent meeting again with like-minded individuals with a refreshing view of the world of wealth management.

Next time you complain about term deposit rates have a look at the photo below. This photo was taken at Chase Bank. Have a close look – How about term deposit rates of  0.25% per annum for 15 months or 1.01% per annum over 10 years!

For you mortgage holders it looks a little better – 2.750% per annum fixed interest for 15 years or 3.500% for 30 years on home loans.

Off to Boston tomorrow, hopefully things have settled down there, however looking at the level of security in New York at the moment we seriously doubt it.

Take Care

Mirko, Luke and Shane 

RPWM US Tour Day 2 – April 14 April 15, 2013

Train ride to Washington today from Penn Station in New York. What a great way to travel, time to catch up on emails, do some reading and actually see a couple of things on the way.

A fast train makes a lot of sense. We do the journey (approximately 400kms) in just over three hours, inclusive of a few stops.  The train hits speeds of up to 240km/h. It does beg the question however how we have no fast train in Victoria connecting us with places like Geelong, Bendigo, Shepparton and perhaps even Sydney. I suppose that would be making too much sense for the powers that be to actually implement such infrastructure.

We arrive in Washington and have a few hours to kill. We are staying near Capitol Hill so we go for a walk. We end up walking the area over a few hours and take in a fantastic precinct that takes us through the Capitol Hill district which takes us past amazing buildings such as, The Capitol (home of the US congress), the Smithsonian museums, the Washington Monument, the Lincoln Memorial, The White House and I must mention my favourite building be the US Government Accountability Office (building was empty, no one in sight, I think they all went out to lunch !).

We were in luck today as the White House gardens are only open on four days of the year and today just happened to be one of those days.So instead of getting as close as about 500 metres we were able to stroll right up to the front door. Let me tell you there were a few nervous secret service members when they saw the Three Wise Men coming.

Luke asked a secret service agent if Barack Obama was home as he had invited us to a BBQ. Needless to say it did not go down to well.

In Washington we caught up with a guy that is part owner in a Wealth Management firm that manages $US1 Billion (that’s about $155 Australian these days)

It was an excellent meeting where we had an opportunity to exchange some ideas and road test some strategies that we have planned for the business. Whilst our markets are very different there certainly are some synergies between what happens in Australia and the US when it comes to Wealth Management.

I have attached some photos that we took today.

Take care,

Regards,

Mirko, Luke & Shane

The White House from the front door

The White House (from as close as you usually can get)

The Capitol

What we were hoping for 

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

Cost of living pressures …… are we delusional May 3, 2012

Today I post an article written by Bernard Keane who is a regular contributor on the Crickey Website.

Whilst I can’t say that I totally agree that costs pressures are not real he does raise some valid points and yes it would be great to finally have an honest politician speak the truth.

Given the train wreck we have at both ends of the political spectrum, I won’t hold my breath, enjoy.

While some in the media insist on pandering to Australians’ vast first world problems conviction that the cost of living is relentlessly rising, it was good to see the new report from the National Centre for Social and Economic Modelling yesterday about disposable income receiving significant coverage.

The NATSEM report showed that Australians’ incomes have significantly outstripped prices since 1984, with disposable incomes rising on average 20% ahead of inflation over the period. The report also showed that the gains were spread across all incomes groups, although the highest income groups had benefited more in the last decade compared to earlier.

It confirmed earlier evidence that, far from facing massive cost of living pressures, Australians have done very well from our extended period of economic growth — the Herald-Sun (commendably for a tabloid) last year found average households were $23 a day better off than five years ago.

If even the tabloid media are prepared to look seriously at exactly how much substance there is to claims about “cost of living” pressures, how about politicians?
On that front, there was a revealing moment last week after the ABS revealed a remarkably low CPI figure, so low it had some pundits suggesting the economy was tanking. Joe Hockey immediately produced a press release claiming the data showed essential household items were outstripping average incomes. Not to be outdone, Wayne Swan declared that the government knew that families were still doing it tough.

Actually, no, the evidence is they’re not doing it tough at all. Strong growth in incomes for the last thirty years and even through a financial and economic crisis is not “doing it tough”. The only households that are doing it tough are those in the bottom quintile of incomes, who spend a much bigger proportion of their income on necessities than the rest of us. But even they have enjoyed nearly 20% growth in real income over the last 30 years.

If you’re not in that income group and you think you’re “doing it tough”, it’s because you don’t know how to live within your means, not because politicians have failed you, or the economy is difficult. Even when it comes to identified issues like electricity prices, they are only playing catch up to the real levels they were at in the early 1980s. And in any event, the evidence shows that if you want lower electricity prices, you should privatise your generators. But voters dislike privatisation, as Anna Bligh can tell you.

No politician is willing to tell the truth, to make the obvious point that Australians are richer than ever before and should be grateful that economic reform paved the way for such a big rise in incomes, rather than whingeing about not being able to afford the wealthy lifestyles they want. Such a politician would be instantly declared “out of touch”. The last politician who tried that was John Howard, not long before he lost his own seat. His example has been heeded by everyone he left behind in parliament.

But here’s where it gets more interesting. Australia has entered a period of low inflation. We’re now saving more than ever before. We’re spending more on services, meaning retailers have to endlessly discount products. We’re shopping online and buying clothing, footwear and books, in fact all sorts of products, offshore, often for half the price we can get them here — a competitive shock that is making its way through supply chains across the country. The Australian dollar is putting downward pressure on everything from fuel prices to household goods. Electronic manufacturers are in a deflationary spiral due to overcapacity.
Traditional retailers are tearing their hair out. Even housing affordability is improving.

Politicians are continuing to live in the pre-GFC world of high demand, high income growth and high interest rates, where they fell over themselves to pander to voters’ delusion that they were under the hammer financially. But occasionally a pollie lets the mask slip a bit and we realise they know perfectly well what’s going on — like when Joe Hockey commendably challenged the “age of entitlement”. They must know what’s going on, because they can see the evidence in the lower tax revenue growth the government keeps having to deal with — David Uren of The Australian asked a good question of Wayne Swan last week when he wanted to know how much the low inflation result would curb revenue growth (Swan deflected the question to Budget Night).

The world has changed. The politicians know it, even if they won’t admit it. Even sections of the media know it. At some point a brave politician has to come forward and tell voters the truth.

Bidding you all a wonderful day

Luke Eres CFP SSA