Equity-Indexing: The Next Meltdown

Since it's the weekend, I'll keep this post short and to the point. Next weeks series will continue to exam the asset forfeiture of real assets to the Central Banks through the International Pension System, as well as an explanation of the coming Equity Indexing catastrophe. To establish a little background, here Equity Indexing is a mechanism by which interest credit rates are inflated within 1B CSV asset classes. Here is how it works:

Three indexes are chosen from among the many, for the purposes of this example we'll choose:

S&P 500 1000
Hang Seng 1000
FTSE 100 1000

Now let's presuppose that they all start at a 1000 pt. level. This is for simplicity of mathematics, not realism. So, on 1/1/07 let's say that all three indexes stood at 1000 pts. Now let's assume different growth rates among all three over the course of a calendar year:

S&P 500 1437.23
Hang Seng 2246
FTSE 100 863

Now lets, see what the growth rates were:

S&P 500: 43.7%
Hang Seng: 124.6%
FTSE 100: -15.7%

Now, the 1B asset CSV will compute the crediting formula by weighing the top rate at 2/3rds and 2nd by 1/3rd while dropping out the lowest. PROBLEM: the asset is actually invested in an asset which took a loss! How do you drop out the lowest class? We'll come back to that. The weighted rate is computed and multipled by a participation rate by 55%. So with our example we have a credited rate of 96%. So the asset is credited 96 points. The real rate is of return earned by the invested assets is roughly 88 points. So we have an 8 point differential. This differential compounds year over year until magically, in the 12th to 14th year, the weight becomes unbearable and somehow the CSV within the asset reaches 0. Shock, an asset which I had watched grow at an incredible rate now needs more cash to sustain itself...it needs to be bailed out. In exchange for what? Stayed tuned this week to find out how 1B assets are being ripped right out of the hands of their owners with this mechanism.