Juggling Dynamite

An excellent, simple explanation on why buying wildly over-valued financial assets is locking in a bad investment for years to come.  There is no free lunch.  See Blowing Bubbles: QE and the iron laws:

Look across the room you’re in, and imagine there’s a $100 bill taped in the far upper corner, where the walls and ceiling meet. Imagine you’re handing over some amount of money today, in return for a claim on that $100 bill 12 years from now.

Drop your hand toward to the floor. If you pay $13.70 today for that future $100 cash flow, you can expect an 18% annual return on your investment over the next 12 years.

Raise your hand a little higher. If you pay $25.60 today for that future $100 cash flow, you can expect a 12% annual return on your investment over the next 12 years

Raise your hand just above chest-level. If you pay $39.60 today, you can expect an 8% annual return. Move your hand to the top of your head. If you pay $70.10 today, you can expect a 3% annual return. Raise your hand above your head. If you pay $78.90 today, you can expect a 2% annual return.

Now imagine jumping up and touching the ceiling with your hand. If you pay $100 today for that future $100 cash flow, you’ll earn nothing on your investment over the next 12 years.

The exercise you just did is the single most important thing to understand about long-term investing…

It is contrary to all public interest and safety to allow investment banks to continue making speculative bets backed by FDIC coverage/taxpayers. These firms have to be broken up and forced to gamble only at their own risk.

Taxpayer backed “bank” @GoldmanSachs trades more natural gas than ExxonMobil & Chevron! https://t.co/KPAEFJCtuY @meyer_g6

— Dennis Kelleher (@DennisKelleher1) May 16, 2016

A must read article in the Globe and Mail on Saturday from the President of the CD Howe Institute, points out rarely admitted facts about the return assumptions that have been baked into most pension and retirement planning forecasts.  This is something I have been trying to educate people on for many years.  In saving plans it is important to be conservative in return expectations.  To over-expect is to under-save and make risky bets with capital that creates insurmountable deficits over time.  Believing in false prophets (and profits) in the investment industry is a fatal error.   Read:  Assuming big returns on pensions–what could go wrong? (plenty):

What returns can we earn on our saving? In planning for retirement, few questions matter more. Project prudently and all should be well; count on a bonanza that falls through – not so good. What is true for individuals is true for pension plans. Those that forecast conservatively and back their obligations well tend to pay what they promise; those assuming turbo-charged returns to fund rich benefits on the cheap might not. So far, the debate over a bigger Canada Pension Plan (CPP) and the Ontario Retirement Pension Plan (ORPP) has skirted this question.

The going assumption – explicit in the ORPP’s numbers; implicit in conversations about “fully funded” CPP expansion – is that assets in these plans will earn 4 per cent annually in real (inflation-adjusted) returns over decades. Few people have noticed this…