Monday, May 21, 2012

Soundtrack to the Global Financial Crisis

And now for something a little different :)

A recent comment from obakesan got me thinking... if I could pick a song per year for the last several to form a soundtrack (backdrop to the major events in each year), what would they be? I came up with the below:

2006: Lilly Allen - The Fear

The US housing market was already seeing volumes drop in early 2006, however the peak national price was achieved in mid 2006. Consumers were spending their new found wealth by drawing equity out of their homes and putting everything on plastic. This level of spending was not sustainable, although few realised it at the time.

Lilly Allen catches some of that consumerist attitude in her song "The Fear":
Life's about film stars and less about mothers
It's all about fast cars and cussing each other
But it doesn't matter cause I'm packing plastic
And that's what makes my life so fucking fantastic
And I am a weapon of massive consumption
And its not my fault it's how I'm programmed to function
I'll look at the sun and I'll look in the mirror
I'm on the right track, yeah we're on to a winner

2007: Freestylers feat. Belle Humble - Cracks

In 2007 the cracks really started to show in the US subprime market. Ben Bernanke famously said in March 2007: "At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained". How wrong he was.

The lyrics from this Freestylers song "Cracks" could almost be a reference to the subprime borrowers, forced to leave their past behind, handing back the keys to the house they couldn't afford and just walking away (following which we saw cracks appear in subprime and the western debt bubble).
Leave the past behind
Just walk away
When it's over
And my heart breaks
And the cracks begin to show

2008: Basement Jaxx - Red Alert

We saw the financial crisis reach it's darkest moments in late 2008 as some of the largest US banks were allowed to fail, while others were gobbled up by larger competitors. The markets started to crash and we may never know just how close we came to a complete financial system meltdown.

The simple lyrics in this track "Red Alert" by Basement Jaxx perhaps sum up the fear seen in the markets at this time:
Red alert! Red alert!
It's a catastrophe
Don't worry.....Don't panic
Ain't nothin' goin' on but history, yeah
But it's alright, don't panic

2009: Hayek vs. Keynes - Fear the Boom and Bust

This song could be considered a bit of a cheat entry, given that it's worded specifically around some of the actions taken by central banks over late 2008 and 2009 to combat the financial crisis, dropping their rates, increasing their spending/stimulus... it's all here in this tune.

Here are some lyrics from the rap:
You see it’s all about spending, hear the register cha-ching
Circular flow, the dough is everything
So if that flow is getting low, doesn’t matter the reason
We need more government spending, now it’s stimulus season

2010: Muse - Uprising

Riots in Tunisia started during December 2010 and were in part fueled by high food inflation, many would argue this was a direct result of Fed stimulus (but this was denied by Bernanke). The revolution spread to Egypt, Libya, Yemen, Bahrain and elsewhere over 2011 and became known as "Arab Spring".

The Muse song "Uprising" works well with this video of Egyptians at a battle over the Nile:
Rise up and take the power back, it's time that
The fat cats had a heart attack, you know that
Their time is coming to an end, we have to
Unify and watch our flag ascend, so come on
They will not force us
They will stop degrading us
They will not control us
We will be victorious, so come on

2011: Spandau Ballet - Gold

2011 was an exciting year for Gold and Silver. Silver seeing it's peak early in the year, putting in a top around the same level as the January 1980 peak (US$50).

Later in the year Gold had a strong rally and peaked over US$1900. There's probably a better song to capture the metals performance in 2011, but for now "Gold" from Spandau Ballet will have to do:
Gold (gold)
Always believe in your soul
You've got the power to know
You're indestructible
Always believe in, that you are
Gold (gold)
Glad that you're bound to return
There's something I could have learned
You're indestructible, always believe in...

2012: Open to suggestions?

We're not even half way into what has already been a turbulent year for the markets. The debt crisis in the Eurozone is already underrepresented in the above themes, perhaps something from Rage Against the Machine "Killing in the name" or "Township Rebellion" in reference to the rebellion against austerity measures? I'm open to any ideas...

Perhaps you have your own version of a soundtrack to the GFC, if so feel free to share!

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Monday, May 14, 2012

Tax free threshold allows tax free golden retirement

Note: I’m not a licensed financial advisor, taxation specialist or an accountant, so this information should be considered as an FYI only (NOT FINANCIAL ADVICE).

It’s been known for sometime that significant changes are coming to the tax free threshold for Australians in 2012 and it was confirmed again the other night in Swan’s budget.

From July 1st 2012 the tax free threshold will be increased to $18,200 (up from $6000 for the financial year 2011/2012) and will be bumped up to $19,400 by 2015-2016.

One of the biggest concerns for those saving for retirement in physical Gold is the potential for large amounts of capital gains tax to be payable in the likely event they sell at much higher nominal prices than today, even if the real value has simply kept pace with rising costs.

A high tax free threshold (coupled with the existing 50% capital gains tax discount for assets held longer than 12 months) opens up the potential for those saving for retirement using Gold to deplete their Gold savings during retirement sans tax.

Take the example of someone (let’s call him John) who has been saving in Gold for retirement since 1990 and has purchased Gold every month in equal quantities since that point in time. John’s dollar cost average is around $690 (AUD). With Gold currently trading around AUD $1600 each of John's ounces of Gold are sitting on $910 profit (average).

How does he avoid paying tax on the profit during retirement while keeping within the bounds of the law?

To calculate the maximum which John could liquidate in 2012/2013 for retirement we take his profit per ounce ($910) divide it into the tax free threshold ($18,200) which equals 20 ounces, we then double the ounces as tax is only paid on half of the capital gain (due to 50% CGT discount), so John could potentially liquidate 40 ounces for $64,000 and pay no tax on the proceeds.

Further explanation: Of the $64,000 funded by the sale of 20oz of Gold, $36,400 is profit, but he only needs to pay tax on half the profit ($18,200) and because this is below the tax free threshold he pays no tax.

It wouldn’t matter if he’d purchased the Gold at $1 an ounce and sold it at $1600 for $1599 profit…. as long as John:

- Holds the Gold longer than 12 months allowing 50% CGT discount
- Is comfortable retiring on double the tax free threshold (max)

Based on a $1 purchase price for Gold and $1600 liquidation price John could sell up to $36,400 worth of Gold and avoid tax using the same method. So for those worried about how high Gold might get in the future and the tax payable, as long as you can live comfortably from double the tax free threshold (whatever it is at the time of Gold liquidation) then you can avoid paying tax.

Warren Buffet once said “If you own one ounce of gold for an eternity, you will still own one ounce at its end”. Funnily enough this was in an argument to suggest reasons not to hold Gold, but those who save in Gold are often doing so for this very reason, to preserve purchasing power, with the expectation that over the long term Gold will be able to fulfill this need.

How much Gold would you need to save in order to retire? A little while ago I looked at the average weekly wage (before tax) priced in Gold ounces, here is the chart:
Average Weekly Wage Priced in Gold Ounces (Click Image to Enlarge)
Basically an average weeks wage has fluctuated between ½ and 2 ounces of Gold even dating back over 100 years. This example from the previous article, showing the ratio was .51 (number of Gold ounces the average weekly wage would buy) in 1901:
In 1901, the average weekly wage for an adult male was about $4.35 for a working week of almost 50 hours, which after inflation equates to $217.50. However, wages have grown much faster than inflation, with the average weekly ordinary time earnings for adult males in May 2000 being about $830.00 for around 37 hours work, in far better conditions.
The price of gold has often been used as a measure of inflation. At Federation, the price of gold was $8.50 an ounce, or $425.00 in today's money. The actual price of gold in 1999-2000 averaged about $460.00 an ounce, showing that it has generally maintained pace with inflation. ABS
If we take the midpoint (1.25oz), minus tax we would have paid on the equivalent income (-30%) and multiply it by .7 (as we will assume John has a freehold home resulting in lower living expenses) and we get around .6125oz per week required x 52 (31.85oz Gold per annum) x 15 years of retirement = 477.75oz Gold required to fund John's retirement. Your figures may vary depending on inputs.

I wouldn’t advocate relying on a single asset class to fund retirement. Personally I will be looking to build a portfolio of income producing assets (which also rise in value), but it’s an interesting exercise nonetheless.

Of course there are any number of risks that could void tax free retirement working in this way such as Gold confiscation, a windfall tax being applied to Gold, changes to the tax free threshold, changes to the 50% CGT discount. Or perhaps Gold doesn't retain a similar value against Australian wages/goods/services as it has over the last 100 years. Anything is possible and the turbulent times we have ahead are likely to result in significant changes to the way we live today...

This above post was inspired by the following from projack on Silver Stackers:
If you buy gold for retirement you do not have to worry much about CGT as an average person. Selling $40,000 value gold a year for your lifestyle for example even if the original purchase price was only $10,000 means $30,000 "profit" and only half of that amount is counted as CGT and used as assessable income, and that is 15,000. With the new $18,200 tax fee limit from the 2012/2013 financial year (and will go up further) this is no problem and you do not have to pay any CGT.
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