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(P&I) The British Pension Plan “B”

April 9, 2015
The least good for the greatest number of people.

The least good for the greatest number of people.

Drama. The sages in British government have changed the private pension rules – effective this week and only one month before the next general election – to permit British retirees to withdraw their cash rather than buy life annuities (Sky News, April 6, 2015, ‘Radical’ Pension Changes Come Into Force).

Is there anybody in the World who doesn’t know how that will work out?

Nor should it be a surprise because there is a centuries-old “tradition” in British government and politics to do the least good for the greatest number of people (and their votes).

The investment industry (which is small and bespoke) is likely to benefit hugely this year because today there are over 500,000 pensioners who have access to some ready cash in £’000s and another six million pensioners next year who will be able to cash-in their annuities (ibid Sky News) and since not all of the benefits are tax-free, the Exchequer is likely to collect an extra £1 billion per year (for a few years), some of which the government can use to fix their submarine (Mail Online, April 4, 2015, Royal Navy nuclear submarine suffers £500,000 damage after ‘hitting floating ice’ while tracking Russian vessels).

However, the government says today that the people should have access to their money but they might have thought of that sooner after years of complicated and stingy taxes and there is no reason for us to trust in the paternalism of governments or the kindness of strangers; moreover, investing isn’t that hard – it’s deliberately made hard and obscure by the investment industry as if it were a “religion” and they the “high priests” – but investing is a lot easier than making the money in the first place and much, much, easier than keeping it – “no” is the hardest word for most of us but please see below for how we say it.

The Beknighted Kingdom

The British economy appears to be functioning well which is an observation that most economists would deny but we’re not dazzled by the super-charged economies that have emerged in the US and Germany which are at least partially sustained or “reflated” by the policies of quantitative easing which have been avoided in Britain despite some well-known (fantastic) disasters in the banking industry.

Figure 1.1 The Beknighted Kingdom

Figure 1.1 The Beknighted Kingdom

Nor are we impressed by the vast amounts of money ($800 trillion) in float as “securitized” assets that lift market activity but not market productivity; please see out Post “(P&I) Our G20 Weekend and The Rush to India” for more background on the economics of world trade but we note in the chart on the right (Figure 1.1) that the British economy has a modest rate of inflation, 2.6% and down from 3.6% in 2008 that compares well with the other G20 countries that have either too much (India and Argentina 10% “price inflation”) or too little (Japan, Canada, and France at less than 1%) and it is an industrial and services economy that is not easily upset by the demand for commodities.

Moreover, by the standards of the NYSE and the German DAX, the FTSE 100 is substantially “undervalued” because it is an “income producing” market and less driven by the drive for capital gains that excite and ignite the NYSE; the “Free Market Yield” of the FTSE 100 is 3.9% which is more than 5× that of the NYSE and the DAX at about 0.7% or 70 basis points and vastly in excess of the “depression” economy in the Canadian resources industry (-1.7%) and more than 15× the comparable “risk-free” rate that is currently being offered on government bonds – 0.25% or 25 basis points or less and even negative; please see Exhibit 1 and 2 below for how we might ignite this market (and click on it and again to make it larger as required).

Exhibit 1: The Beknighted Kingdom – Free Market Yield

Figure 1.2: The Beknighted Kingdom - Free Market Yield

Figure 1.2: The Beknighted Kingdom – Free Market Yield

Exhibit 2: (B)(N) FTSE 100 – Risk Price Chart

Figure 2.1: (B)(N) FTSE 100 - Risk Price Chart

Figure 2.1: (B)(N) FTSE 100 – Risk Price Chart

For more information on the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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