http://kheper.net/essays/Transfinancial_Economics.html

R.S.

Re your comments on Capital Secure, UniSuper actually calls it Capital Stable and it contains, in addition to bonds “some growth assets such as shares and property investments”. In my current ‘tin foil hat’ phase, I’m staying well away from any exposure to shares.

More generally, I appreciate the work that you put into this site - so thanks too for that.

First off, this is a comment, not financial advice–you may know that giving fniancial advice is regulated and one must have an industry qualification to give it (selling credit however is not–hence some of the cowboys who’ve got involved there!).

Secondly, if you are worried, there is always the “capital secure” option, which as it happens is where I have my discretionary Unisuper funds (most of mine is in a defined benefit scheme). That gives a lower return to cash unless interest rates fall–which I expect will happen once the debt burden causes the economy to stall (if my analysis is correct).

That answer from Unisuper does imply that some of their money is in RMBSs, though not in RMBSs to US subprime borrowers. To use the market jargon, I expect the returns on these assets to ultimately “disappoint”–the level of defaults will be far higher than estmiated when the mortgages were packaged into bonds. I don’t however know enough about how they are structured to comment on whether they will turn as toxic as the subprime bonds in the USA have.

At some point–god knows when I’ll have the time though–I’ll take a detailed look at some of these bonds to see how they were actually designed. My guess is they’re effectively “selling probability” when the actual pattern of defaults falls well outside the parameters of the probability distribution underlying the asset class.

Anyway, to reiterate, I can’t be definitive on your question, but if you are concerned then do ask about the Capital Secure option Unisuper offers.

At the start of this crisis developing in the States I changed my UniSuper option from shares only to cash. Then I found your site and began to wonder if we are going to face our own sub-prime-like defaults. So I wrote to UniSuper to ask what they were holding. After some considerable time this was their reply :

“Thank you for your email, please accept my apologies for the delay in replying. The following information has been provided by UniSuper’s Investment Dept.with regard to the recent performance of the Cash strategy. Your UniSuper account is currently fully invested in the Cash strategy.

The Cash option is invested in a diversified portfolio of money market securities, including bank bills, promissory notes, floating rate mortgage securities and short-term fixed interest securities, it has no direct exposure to the US Sub-prime market. Thus the option is invested in cash-like investments but some of which are high credit rated securities designed to add a small amount of extra return above bank bills.

The Cash option’s benchmark is the Bank Bill Index and over time the cash option has outperformed the benchmark (by 0.37% for the year to July and 0.26% p.a. over the last 4 years) but there is a limited risk that the option will return slightly less than the benchmark. In times of uncertainty in financial markets, such as we have seen lately, the non-bank bill securities can underperform bank bills.

In current market conditions, these credit exposed securities have underperformed bank bills but the option should still continue to deliver very close to bank bill returns. While there are no guarantees UniSuper anticipates that once this short-term uncertainty has dissipated these securities should not have any long term impact for the Cash option.

Once again please accept UniSuper’s apologies for not replying earlier.

Yours sincerely
Robert Ranclaud
Member Services Consultant

My question to you is : should I worry about this exposure ?

Seems business has been slow to jump on the debt wagon, but now is catching up quick - even business debt as a % of total debt is increasing.

Should this get a mention in future debt watch as in the past business debt has been seen as very low and ‘in control’.

Of course, I know that it will take a severe crisis to get such changes introduced–and even then, many years before you could hope for change. But recommendations like that will frame the more palatable stuff, because we can’t afford to let this slip through the agenda via short-termism once more.

However, I’m not sure that limiting lending multiples is the way to fix the problem - it sounds like electoral suicide to me - I think people would perceive this as very “big brother” and limiting their “freedom” to sacrifice their lifestyle for that lovely big new house.

One way that might work over the medium term and may be more palatable for pollies would be to make it relatively more attractive for “investors” to invest in new build property rather “invest” in existing stock - as they used to do. This could perhaps be done by manipulating the negative gearing rules.