July, 2010 Archives


Social Security – Privatization Should Be An Option

by Riaan Nel in News

madoff-social-security-cartoonLibertarians and believers in the free market have long argued for the privatization of Social Security. However, the financial crisis has casted a long shadow over the privatization endeavor. Free markets have failed us, we cannot entrust our nation’s basic retirement income program to Wall Street! The aforementioned rallying cry is very powerful, and most Americans would agree.

I disagree. I am not a full fledged Libertarian Free-Marketeer. No, there is room for collective regulation of the market, indeed, we need regulation since fully “free” markets tend to create financial instability over time (see Chapter 1 of my thesis). This notwithstanding, the case could be made for at least partial privatization of Social Security. I base my case on the following:


Philosophically, I do not believe that society as a whole should be responsible to provide the level of retirement benefits provided by Social Security and Medicare. We have a responsibility to assist the poor, but that’s it. It is each and every person’s personal responsibility to save for retirement. The poverty level should be set fairly low – say a lifetime average of less than $24,000 per year in income should qualify people for Social Security benefits. Everyone earning above that should take personal responsibility, and private charitable organizations should be the main source of assistance to those that need help.

The Social Security pay-roll taxes paid by employees and employers on behalf of employees should not be used to fund other people’s retirement benefits. Given demographic shifts, it would be unsustainable to do. Moreover, it’s a ponzi scheme and if the private sector tried an investment income program like Social Security it would be illegal!! The taxes belong to the employee and the employer. Employers shouldn’t be required to pay half the employee’s Social Security and Medicare taxes. These taxes should all be deducted from the employee’s salary, and should be held inside an account on behalf of the employee – it is his money and it belongs to him. (That is if we accept the notion that the government should be forcing people to save for retirement and manage their savings on their behalf).

Lastly, I believe the private capital markets will actually provide superior returns than compared to the Social Security administration’s program. Consider the following comparison done by William Shipman from the Cato Institute. Read the rest of this entry »


Mid-Year Outlook 2010

by Riaan Nel in Global Investments

LPL Financial Research recently released their mid-year outlook.  Please click on the following link to view:  http://www.sanddollarinvest.com/pdfs/mid_year_outlook_2010.pdf



Investment Strategies for the Age of Global Change

by Riaan Nel in Global Investments

Global capitalism is in the process of a fundamental restructuring characterized by the rising of emerging economies, the evolution of large pools of international investment capital, and the slow-down of economic growth in the industrialized world, largely the result of industrial countries’ balance sheet contamination.

These trends are a continuation of economic forces unleashed at the fall of the Berlin wall, which threw billions of workers into the global capitalist labor market and kept downward pressure on wages. Technological innovations in the 90’s helped fuel steady productivity gains and further contained labor costs. Historically low interest rates and a savings glut in rapidly growing emerging markets led to an expansion and ultimate explosion of easy credit. While much of the developed world borrowed and consumed more than it should have, many emerging economies saved and produced to meet the twin demands of easy credit and inexpensive goods. Though some issued prescient warnings along the way, the global masses seemed content to believe getting something for nothing was now possible. Just as it took time for the imbalances to reach critical mass, so it will take time and painful adjustments to regain balance. The 2008 Global Financial Crisis was a devastating manifestation of the secular restructuring taking place.

stock-exchangeTo quote El-Erian, the CEO of PIMCO, and previously in charge of Harvard’s gigantic endowment fund:

Through a series of transitions, collisions, and trade-offs (the journey), we are heading to a world that is re-regulated, de-levered, and growing less rapidly in the industrial countries (the destination). It is a world in which concerns about the dark side of globalization tempers enthusiasm for its net benefits, and in which politics matter a lot for markets and the economy.

Read the rest of this entry »


The New Normal – Do you get it?

by Riaan Nel in News

Bill Gross, the managing-director of PIMCO, a leading global investment management firm, recently wrote about the seemingly unwillingness of investors and policy makers to accept the realities of the “New Normal.”  PIMCO’s concept of the “New Normal” entails a world characterized by stinted economic growth due to deleveraging, reregulation and deglobalization.  Yet many investors and policy makers are ignoring these realities – to their own detriment.  I have argued here and elsewhere that the global economy is restructuring, and that the investment and capital development approaches of yesterday will be wholly inadequate for tomorrow.  The 2008 capital markets implosion is not a once in a lifetime event.  I predict the distribution curve of capital market returns will flatten with a “fatter” left tail.


I recently heard a Kiplinger analyst mention that “2008 was a once in a life-time aberration.”  It is my contention, and many others, that we could conceivably have another event like 2008 in the global capital markets.  I cringe to think what will happen to those that do not grasp this reality – like said Kiplinger analyst.  Bill Gross points out that it seems like only economists with names starting with an “R” gets it!  (He obviously didn’t refer to me – although it is an interesting coincidence don’t you think?)  The economists who are thinking along these lines are Roubini, Reinhart, Rogoff and Rosenberg.

“Debt” was at the heart of the crisis, and is at the heart of the “New Normal.”  Credit is the lifeblood of the global financial system.  Why do companies, individuals and countries borrow in the first place?  It is done to increase standards of living by allowing future consumption to occur in the present.  Imagine if we all had to wait to purchase our homes with cash!  Credit is a contract between at least two parties based on rational expectations.  Read the rest of this entry »