Protect Your Nest Egg – Know Your Enemies

I’m talking here to Baby Boomers and older who are relying on their retirement nest egg to live off along with any other income sources not from  a full-time job for the next 20-30 years maybe. In other words people on fixed incomes who need to be very risk-averse unless they have “surplus” money over and above that which they will need to live out their retirement.

It is now apparent to me that the people who have been asked to save for their own retirement since the 80’s have been the subject of a major Ponzi scheme legislated for by our governments and carried out by the financial industry for their own financial benefit and at the expense of the investors. These are your enemies NOT your friends.

During the last fifteen years there have been 5 major financial crises which have directly affected your nest egg if it was in a fully diversified p[portfolio. Using such a portfolio you can’t help have it affected by all five of the crises.

That effect was always to reduce your nest egg through accumulated losses. Then you had to sit there waiting for your nest egg to recover the losses before your nest egg grew again.

I now accept that the world banking system is based on the flawed fractional banking system which allows banks to keep lending a fraction of the same money to more and more borrowers. This causes a credit expansion and eventually ends up in a boom economy. This is the primary cause of your nest egg destruction and it will never be fixed.

The Central banks aided and abet this credit expansion and work towards keeping it going for as long as possible. They do this through manipulating the interest rate, the money supply and other tools at their disposal. It all sounds plausible and logical but the economy is just too complex for them to not create unintended consequences over the long term.

Over the last few years most central banks have been targeting inflation and have tried to keep it in under 3%. Why? That means the value of your nest egg is going backwards at 3% a year before you can even hope to grow it.  Your government has planned it that way. Does that make sense to you? For years there was low or no inflation. You could deposit a dollar in your local bank and then withdraw it many years later and it was still worth a dollar.

At some point the boom becomes unsustainable because of a natural law, the parabolic rule that ends all booms.

Until then your financial planner probably seemed like an investment guru and could do not wrong so you didn’t mind paying them their exorbitant fees.

The central bank use their considerable power to try to maintain the boom because most developed countries have run up huge deficits and the one thing they cannot allow is for deflation to set in even though that is part of a boom and bust cycle. This is  the Keynesian thing. Maintain the boom and keep spending your way out of debt.

Dropping interest rates and increasing the money supply along with statements about the need to maintain the credit system are carried out. They need consumers to spend and businesses to borrow again to get the economy going again. By reducing interest rates it is hoped you will decide it is better to spend than to save.

What this does is provide cheap money to the financial industry to massively speculate with because there is no way they are going to lend it to a business during a recession. That makes no sense does it?

The crazy thing is the banks have money and are not lending it. The consumers are saving even though they are getting very little interest on their money. They are paying down their debts even though they are expected to spend.

The governments in good Keynesian style borrow money and selectively distribute that money into the economy either to prop up banks or favoured industries. They conveniently forget to tell you the interest on the loans will be paid by a tax levied on you.

Remember the bankers know how the system works and can game it. They know the banking system is inherently unstable as the credit boom grows because of the flawed fractional reserve system. The trick is to maximise the profit in the early stages of the boom, then try and offload the risk before everything inevitably crashes. If they can insure that risk as well, just in case they cannot unload it or use a GSE (e.g. Fannie and Freddie with an implicit government guarantee) to offset that risk so much the better.

The smart thing is to try to put the most risk through quasi-government organisation or GSE’s that are there to help the poor and disadvantaged, knowing that if things go wrong the government should bail them out because of an implicit guarantee.

It also helps if you can grow your company to be so huge and have it make highly complex and distributed transactions that will cause many other organisations to fail if the government doesn’t bail you out.

One major bonus to the bankers and finance industry is they can also use your money to speculate in the markets by government decree. Right now that retirement money is growing at a rate where they will have trillions to “play with” unless the governments decide they want to use it.

Your money is most likely to be used to test market conditions so the financial institutions can piggy-back their money off investing your money and ride the markets. If it doesn’t work you lo0se and  they can keep their money safe and tell you to look at investments as a long term thing.

As I said there have been 5 major financial crises in 15 years. How confident can you be about giving your money to the financial industry to manage for you and give you a retirement nest egg in 40 years?

Anyone in their right mind would have to say they cannot trust the government or the financial industry to look after their retirement nest egg.

The financial world  make most money the quickest when there is high volatility. They get their bonus every quarter and you don’t collect anything on your nest egg until you retire 40 years later. There is no quick money for them in stable, slow economic growth, the very environment that is best for your nest egg.

This is the Pavlov’s dog investment model. The financial world salivates when the boom is under way. They salivate even more when it is followed by a bust because they always somehow manage to keep their wealth and lose yours and then get your tax dollars to replenish their financial institutions ready for another boom.

Smart financial guys can make money in a boom or a bust.  If it destroys their financial institution in the process they then make money speculating with your tax dollars used to bail them out. They can make billions through government protection, cheap money and market manipulation during highly volatile times.

Based on all this it is my view Baby Boomers should keep at least 70% of their money in easily accessed bank accounts (that’s the lesser evil as it is likely you be guaranteed by governments when they do bank bailouts. The governments don;t want riots in the street by only bailing out the banks). The balance should be set aside for speculating (that’s all you can do in the current Keynesian economy where you don’t know what your government is going to do next).

You have to get in rhythm with the banking credit cycle. Very, very few investment people are gurus.

The tax systems around the world favour publicly listed companies taking on debt to grow their companies in preference to issuing more stock.  Then those financiers and bankers who make the loans put together a good story on the company and how it will grow. Then they take your nest egg  money and  “invest it” in the company based on a glowing report written by them or a friendly broker. This pumps primes the stock and if it starts to trend they invest their own money as well to generate profits for themselves.

All this is short term stuff because they are so over-leveraged they need to be able to be in and out of the markets quickly otherwise they could go broke.

Why do you think algorithmic trading is taking off and is becoming the primary way of trading the share market? Isn’t it because even the financial world realises you have to take profits off the table as soon as you have some. They are so highly leveraged they cannot afford to be caught with large sums of money in the stock market if it crashes because it is being driven into a bubble.

Regulations will not change the things because most of the government people have their money invested in the cycle too.

Remember the government only looks at the short term – the next election.

Remember central banks only look at the short term – to maintain the current boom at all cost.

Remember the financial industry only looks short term – their next bonus payment.

They tell you to look long term so they can use your money short term to enrich themselves at your expense.

These are your enemies and you should never trust them with your money unless you can control it too.

There are financial managers who are exceptions to this and if you find them great but your chances are very slim and they will be fighting against the might of the short term people so may be decimated anyway.

I’m sure there is not a conscious plot by government and finance to take your wealth. It is just the way the system works. Don’t play that game.

Sit tight with your money as close to you as you can safely get it. Watch and wait for the economic cycle to begin again. Get into the rhythm of the government, the banks and the FED and follow the money expansion. You don’t need to be in at the beginning of the Boom/Bust cycle. You can take a chunk out of the middle. Only use 30% of your nest egg at most in risky investments and only invest in very liquid assets that you can exit very quickly. Funds with redemption clauses in them should be a no-no because markets can move too fast now and lock your money up for years.

Until the cycle begins watch out for inflation. If that looks like getting going as it surely will with all that printed money you need to seriously consider borrowing money. Using other peoples money to buy hard assets during high inflation makes good sense as long as you do it smartly. More on that in another post but try looking at Inflation Into Wealth.

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