Sunday, 5 February 2012

Financial Advice 101 - Avoid CPP and CMHC at all costs

Because They're Being Driven Into the Ground With the Complicity of the Government!

Lacking Credentials is on hiatus, but even with my current media and headline avoidance strategy, the total BS swindle job that is taking place on the subjects of CPP and CMHC orchestrated by the media and the government is just too absurd not to address.

Suddenly its becoming apparent that our demographic gears are grinding to a halt. The facts are well known: CPP (the Canada Pension Plan) was created when life expectancy was 72, now its 81, CPP was created when the worker retiree ratio was 4:1, now its 2.5:1 heading towards 2:1, the retirement age of 65 was chosen in 1934 in USA/1965 in Canada – when fewer people lived that long.

So our country's powers that be will follow every other developed country and raise the retirement age by two years. In other words, instead of driving straight off the cliff they will drive to the edge, turn right or left, drive on the edge for a little while, and then take the car off the cliff. This is the political strategy very in vogue in Western countries right now known as “kicking the can down the road.”

Stephen Harper brushed off concerns about the reform of CPP at Davos with one of his usual dismissive, paternalistic, economic jargon-BS filled quotes, which I’m sure will be an infamous example of ‘the third Reich will last a thousand years” -like hubris sometime down the road. In case you haven’t heard it yet, I am referring to this Jan 27 statement: “The Canadian Pension Plan (CPP) is fully funded, actuarially sound, and does not need to be changed.” This is a bold proclamation. Let’s do some laypeople calculations and use some really liberal numbers to test its validity. Say 12 million Canadians out of 35 million are headed for retirement in the next 5-10 years collecting the CPP max of about $8500 per year for an average of 15 years till death (67 +15=82 years old)

Wow!That equals about 1.4 trillion dollars, which means the CPP is underfunded by almost 50% of its future liabilities even after this “tinkering” proposed reform. So instead of brushing us off with bromides, why doesn’t the government unveil the complex and opaque formula it uses to calculate people’s CPP payments? Why don’t I have any power as an investor, who put $66.21 into this damn Ponzi scheme on his last pay cheque through no choice of his own, to know what the CPP Investment Board invests the 950$ billion fund in and to decline to contribute when they invest in a chain of plastic crap dollar stores in the US Southwest (which it really did last year). I’m also sure a dangerously high proportion is invested in energy/oil sector companies – how do you guarantee the stability/sustainability of that? Well, you don’t, because as John Michael Greer pointed out in his excellent Archdruid report yesterday, oil scarcity is not a “problem” to “solve”, it is a “predicament” to be “dealt with”. I don’t care how “savvy” or “experienced” the investors on the CPP investment board are, the way to dial down the expectations of this ridiculous program is to admit the numbers have been totally fudged for awhile and pay everyone not yet retired back the sum they paid in. Sure it would cause an uproar, but your full principal returned interest-free sure beats losses that will have your pension paying you back 5 cents on the dollar.

Everyone has a notion “they paid into this program” and are therefore entitled to it in its current form, and its simply no longer true. It is true that you've paid into it, but if you were hoping for an income stream, you better try beat the market yourself, cause these guys aren't going to do it for you.

My intention today is not to undertake a complex discussion on the intricacies of pension reform, but to show the ineptitude of Canadian governments' administration of Canadian financial institutions. Exhibit B is the recent discovery that the big 5 banks have been purchasing additional mortgage insurance from CMHC and selling the insured mortgages as securities. What does that mean? When you buy a home and have less than 20% of the purchase price to put down, you must purchase, for several thousand dollars, insurance on the mortgage from the Canadian Mortgage and Housing Corporation which is a government bureaucracy that covers you if you default because you're considered high risk. Makes sense, right? Its different from the US government mortgage insurance beasts Fannie Mae and Freddie Mac which have now effectively backstopped the entire US housing market on the fake dollars IV drip they get from Bernanke over at the Fed. No, the Canadian system seems like a reasonable regulatory precaution to reduce risks to our cartel of big banks who are supposed to be ethical and well regulated and the envy of the world, etc.

But here's the rub. CMHC has a $600 billion cap on the exposure its allowed to the Canadian housing market. It was previously 450 but they lifted during the 2008 financial crisis. Now its getting close to the cap again (I think its around 520), except the amount is not going out from buyers taking out insurance who need it (who are actually required by law to have it), its from banks double-backstopping existing low-risk mortgages with the taxpayer's credit (because despite its fancy name, that's who CMHC represents) and then selling those securities as ironclad, AAA investments.

It's not like this bombshell disillusions me (you only need to research the term "fractional reserve banking system" if you still are under the impression that banks actually have any money), it's that banks making record profits are compromising people's ability to get into an extremely over-inflated housing market (which the banks pushed). The bank can demand you take CMHC under all sorts of pretexts, even if you have the 20%. So how will they defend declining people when it was they themselves who caused the insolvency of CMHC by abusing the taxpayer-funded bureaucracy for purposes for which it was not intended. In Canada companies think because they employ lots of people in their customer service departments they can get away with abusing their cartel priveleges - see Rogers and Bell, billing for internet data usage when you streaming youtube costs them exactly nil. Except this is like them requiring you to take insurance for going over your usage which is a system based on fraud anyway then selling it to somebody else as an asset.

Want financial advice? Own your home and manage your assets as soon as you can, so you can get the hell away from these conniving financial institutions and their enablers in government who are unable or unwilling to put a stop to the serial corporate defrauding of Canadians.

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