Bismarck’s forgotten legacy

Capital & Conflict – brought to you by Fortune & Freedom

Watch the live stream this Friday

We’ll be streaming our latest episode of Southbank Live on Friday at 10am on YouTube – my guest this week is our resident crypto-nut Sam Volkering. If you have any crypto questions you’d like to ask him, send them over to me.

CHEDDAR, SOMERSET – Otto von Bismarck is remembered more for his ruthless Realpolitik and his grand feats as an empire builder than for his financial innovation. And yet his legacy casts a long shadow across our financial lives today – indeed, one of his creations touches the lives of effectively every working individual in the developed world: pensions.

While pensions have changed much since the 19th century, Bismarck, master of bureaucracy that he was, would love the endless pages of rules and regulations for administering them as we have in this country today. I dare say he’d also be fan of just how much control pensions grant the state over its citizens’ lives.

The grand size of the retiring baby boomer population make pensions (both taxpayer-funded and private) an enormous “elephant” in the political “room”. If you were seeking election, you wouldn’t want to overtly damage them – yet as Nickolai Hubble describes in today’s note, the cost that accompanies them is becoming harder and harder to ignore…

Some pension funds are now so enormous that they move markets with their trades. And you can use that knowledge to your advantage – buying the market when they’re about to wade in, and staying out when they’re sitting tight. That’s what one of our editors here at Southbank Investment Research has figured out, and you can find out more about it tomorrow – stay tuned.

Your retirement is just a political promise. Do you believe in it?

By Nickolai Hubble for Fortune & Freedom

Do you believe politicians? Do you rely on their political promises? So, when they tell you that by contributing money to a pension fund each paycheque, which gets invested in financial markets, which generate a wonderful return, and will one day leave you with a pot of gold at the end of the rainbow to fund your retirement, do you believe them?

Or do you take matters into your own hands? Do you take stock of the state of your finances, ponder how far they’ll get you, and what you need to do to get the retirement you actually want?

Of course it’s easier to fob responsibility for your retirement off to politicians, fund managers and CEOs. You’ll be safe in the crowd then, right?

Political promises are designed to do just that – to make you believe in them by making life seem easier. They’re not designed to deliver on the promise, but give you an illusion you can buy into.

In this case, literally buy into, with your hard-earned money going into the funds, stocks and bonds of the fund managers, companies and government which are urging you to save and invest for your retirement. For your own good, of course.

But I believe the third failure of the political promise of retirement is drawing near. We had better start at the beginning though…

The concept of retirement is fairly new. That is especially true of the government-funded version. The Prussians came up with the idea in 1889.

Back then, Prince Otto von Bismarck offered Prussians over 70 a pension as a safety net in old age.

It is interesting how some modern governments are trying to roll back their pension promises to the original age levels from 130 years ago. Good old German fiscal responsibility is timeless.

Then again, life expectancy in Prussia at the time was 45… Should our pension age be around 105 today?

At some point in the last 130 years, governments around the world realised that they can’t afford their age pension promises. Even if the pension age rises, or is means tested, it puts a huge burden on the government. This is largely thanks to demographic change.

And so governments turned to corporations to fund the concept of retirement. A loyal employee who gave their working life to a corporation is entitled to be taken care of in old age, after all. At least, that sounds good. It wins you votes.

Whether this corporate welfare system is financially sustainable in the long run wasn’t taken into account by voters. Nor was the creative destruction of capitalism, which ensures that companies don’t dominate their industries for long. That is not to mention the tendency of employees to have many different employers in the modern economy.

With vast pension liabilities weighing down companies, the results weren’t great. Defined benefit pensions are now considered a bad idea and are being phased out. In the end, governments had to step in to guarantee corporate pensions from companies that had failed. So they didn’t really escape the burden.

That was the failure of the second political promise of retirement.

And so politicians came up with a third way. Instead of entrusting the political promise of retirement to future taxpayers or employers, why not entrust it to financial markets instead?

The idea was that people would contribute money to financial markets each paycheque and then, when they retire, there will be a huge pile of cash magically waiting for them. In financial-speak, we’d go from defined benefit corporate pensions to defined contribution pensions.

There are very many things wrong with this idea. In short, financial markets are not some sort of retirement manufacturing machine. You can’t just plug in money and expect a good retirement to come out the other end.

But the deeper problem is that nothing has changed in the underlying maths. If there weren’t enough taxpayers to fund retirements, there won’t be enough investment buyers either.

Just as there won’t be enough cash flowing into government coffers to cover the outflow of funding retirements, there won’t be enough cash flowing into financial markets to pay for the retirements of those trying to sell out.

You see, when financial markets are treated like retirement machines, then financial market returns are largely driven by demographics. Demand comes from young buyers paying into the retirement system by buying stocks and supply comes from retirees selling out to fund retirement. Supply and demand give you price, and thereby demographics drive stocks.

But demographics have rolled over. Just as they did in Japan in the 1980s, when the stock market peaked there too.

And that is why I expect the third retirement promise to fail too. Financial markets will fall short, just as government pensions and corporate pensions did.

God only knows what the politicians will come up with next…

The defined contribution system now so popular around the world has, however, created a rather intriguing opportunity to make money.

You see, because so many of us automatically allocate a chunk of our paycheque to buying investments, this has created a rhythm in the stock market. When people get paid, the market gets an influx of money.

Tomorrow, you’ll discover a way you could look to profit from it.

To hear more from Nickolai Hubble and to listen to his weekly podcasts with Nigel Farage, click here to get access to their free daily e-letter Fortune & Freedom.

All the best,

Boaz Shoshan
Editor, Capital & Conflict

Category: Economics

From time to time we may tell you about regulated products issued by Southbank Investment Research Limited. With these products your capital is at risk. You can lose some or all of your investment, so never risk more than you can afford to lose. Seek independent advice if you are unsure of the suitability of any investment. Southbank Investment Research Limited is authorised and regulated by the Financial Conduct Authority. FCA No 706697.

© 2021 Southbank Investment Research Ltd. Registered in England and Wales No 9539630. VAT No GB629 7287 94.
Registered Office: 2nd Floor, Crowne House, 56-58 Southwark Street, London, SE1 1UN.

Terms and conditions | Privacy Policy | Cookie Policy | FAQ | Contact Us | Top ↑