My associate, Kimber, frequently points out that my bookshelves contain a number of real “downer” books on death. She’s not wrong: I have an abiding interest in what it means to grow old and how we die. My bookshelves creak under the weight of Greek and Roman philosophy texts, medical studies about aging, and financial guides for estate planning and preparing heirs. This interest goes back years for me, as part of a philosophical question about what it means to not just live, but also die well.
I’m not alone in this seemingly macabre fascination. Many others, including other philosophically minded people, ask similar questions regarding the difference between being rich and being wealthy. In simple terms, being rich is relatively easy (okay, maybe not easy – but certainly easier to define) while being wealthy asks us to consider what it is that makes us happy beyond material acquisition.
In one respect, this has been the great achievement of Western societies. By enshrining a key number of rights and making them central to our society, we have removed barriers to free association, free movement, freedom of religion and freedom from oppressive institutions. To get up every morning and know that the government isn’t going to seize your lands, punish you for your beliefs or race, or force you to pick up and flee your home in the night is the path towards building wealth. It’s possible to be rich in China, but it is not possible to be wealthy in the same way.
Being wealthy in life also grants the possibility of being wealthy in death. To know that your affairs are in order, to choose what happens to your physical remains, to be able to bequeath in confidence your assets to another generation and even help your children or grandchildren are all things that, until relatively recently, did not always reside in one’s control.
When we were choosing our new trade name, I briefly toyed with the name Walker FINANCIAL Management. But given our 25 year history, the things we’ve helped people do or try to do, limiting our scope to merely the finances of our clients seemed narrow and imprecise. While its true that my role in people’s lives is to help accumulate and save, my job is to help people save for things. I manage money so that children can get an education without leaving school encumbered by massive debt;to help people buy homes and pay down mortgages faster; to help families travel; to help retirees enjoy their time free from worry; and even to facilitate one generation helping another. We’re in the wealth business, not the financial business.
Which brings me back to my abiding interest in dying. I periodically like to point out that we, as a society, are getting older. Demographically, we will feel the effects of a population age across multiple aspects of our society. From health care to real estate, our greying society will challenge us in unique and surprising ways. How we face those challenges will determine how well we preserve our wealth, and it will mean tackling tough questions around independence, lifestyle, and even death.
So, while Kimber looks at my bookshelf and thinks I’m a bit of a downer, I look at it as the next big stage in building and preserving wealth. That’s why we’re Walker Wealth Management of ACPI.
If you have questions about wealth and aging, please give us a call! We can provide retirement planning, help you to find good solutions for Wills, Trusts, and Estates, and walk you through the different questions you should consider when considering passing on assets to heirs.
I wish to inform you about an exciting new profession, currently accepting applicants. Accurate recession prognostication and divination is an up and coming new business that is surging in these turbulent economic times! And now is your chance to get in on the ground floor of this amazing opportunity!
I am of course being facetious, but my satire is not without precedent. As 2018 has devolved into global market chaos, finally losing the US markets in October, experts have been marshalled to tell investors why they are wrong about markets and why they should be more bullish.
Specifically analysts and various other media friendly talking heads have been trying to convey to the general public that the negative market sentiment that has driven returns down is misplaced, and have pointed to various computer screens and certain charts as proof that the economy is quite healthy and that in this moment we are not facing an imminent recession. Market returns through the final quarter of 2018 indicate this message has yet to find fertile ground among the wider public.
While these experts, analysts and financial reporter types may not be wrong, indeed the data they point to has some real merit, I don’t think that investors are wrong to heavily discount their advice. For the wider investing audience, being right 100% of the time is not a useful benchmark to strive towards with investments ear-marked for retirement. Instead a smarter approach is to be mindful about risks that can be ill-afforded. Investment specific risk, like that of an individual stock may be up to an investor (how much do I wish to potentially lose?). On the other hand, a global recession that is indiscriminate in the assets that suffer may be more risk than an investor can stomach.
The experts have therefore made two critical errors. The first is assuming that what is undermining investor confidence is an insufficient understanding of economic data. The second is that there is a history, any history, of market analysts, economists and journalists making accurate predictions of recessions before they happen.
This last point is of particular importance. While I began this article with some weak humor on prognostication and divination, it’s worth noting that predicting recessions has a failure rate slightly higher than your local psychic and lottery numbers. That so many people can be brought forth on such short notice to offer confident predictions about the state of world with no shame is possibly the worst element of modern investment culture that has not been reformed by the events of 2008.
This doesn’t mean that investors should automatically flee the market, listen to their first doubt or react to their gut instincts. Instead this is a reminder that for the media to be useful it must think about what investors need (guidance and smart advice) and not more promotion of headline grabbing prognostication. The markets ARE down, and this reflects many realities, including economic concerns, geopolitical concerns and a host of other factors outside of an individual’s control. It is not a question of whether markets are right or wrong in this assessment, but whether good paths remain open to those depending on market returns.
One of the challenges of being a financial advisor is finding ways to convey complex financial issues in simple ways to my clients and readers. I believe I do this to varying degrees of success, and I am informed of my failures by my wife who doesn’t hesitate to point out when I’ve written something boring or too convoluted.
One such subject where I feel I’ve yet to properly distill the essential material is around the housing market. While I’ve written a fair amount about the Canadian housing market, I feel I’ve been less successful in explaining why the current housing situation is eating the middle class.
In case you’re wondering, my thesis rests on three ideas:
1. The middle class as we know it has come about as a result of not simply rising wages but on sustained drops in the price of necessities.
2. The rise of the middle class was greatly accelerated by the unique historical situation at the end of the Second World War, which split the world into competing ideological factions but left the most productive countries with the highest output and technological innovation to flourish.
3. A global trend towards urbanization and a plateauing of middle-class growth has started reversing some of those economic gains, raising the cost of basic living expenses while reducing the average income.
The combination of these three trends has helped morph housing from an essential matter of accommodation into a major pillar of people’s investment portfolios and part of their retirement plan. The result is that homeowners are both far more willing to pay higher prices for a home in the belief that it will continue to appreciate into the future, while also attempting to undercut increases in density within neighborhoods over fears that such a change will negatively impact the value of the homes. In short, stabilizing the housing market is getting harder, while Canadians are paying too much of their income to pay for existing homes. All of this serves to make the Canadian middle class extremely vulnerable.
Proving some of this is can be challenging, but there are some things we know. For instance, we know that Canadians are far more in debt than they’ve ever been before and the bulk of that debt is in mortgages and home equity lines of credit (HELOC), which means much of that debt is long-term and sensitive to hikes in interest rates. We also have abundant evidence that zoning restrictions and neighborhood associations have diligently fought against “density creep”. But to tie it all together we need the help of HSBC’s Global Research division and a recent article from the Financial Times.
Last week, HSBC issued a research paper on global leverage. Providing more proof that since 2008 the world has not deleveraged one bit. In fact, global debt has settled just over 300% of global GDP, something that I wrote about in 2016. An interesting bit of information though came in terms of the country’s sensitivity to increasing interest rates. Charting a number of countries, including Canada, the report highlights that Canadians (on average) pay 12.5% of their income to service debt. A 1% increase in the lending rate would push that up over 13%. For a country already heavily in debt, a future of rising rates looks very expensive indeed.
It would be wrong to say that fixing our housing market will put things right. There is no silver bullet and to suggest otherwise is to reduce a complex issue to little more than a TED Talk. But the reality is that our housing market forms a major foundation of our current woes. A sustained campaign to grow our cities and reduce regulatory hurdles will do more to temper large debts that eat at middle-class security than anything I could name.
*At the time that I wrote this markets had just finished several positive sessions, however by the time it was ready markets had once again changed directions!
I’m going to potentially embarrass myself and go on the record as saying we shouldn’t place too much trust in the current market rally, though the upturn is welcomed.
Rallies present opportunities for potential short-term gain, and with markets having shed roughly 10% over the month of October, there is certainly money to be made if you’re feeling sufficiently opportunistic and have a plan. For the rest of us, the rally is a welcome break the punishment the market has been delivering, and an opportunity to see portfolios stabilize and regain some ground.
The long-term viability of a rally, its ability to transition from opportunistic buying to sustained growth, very much depends on the fundamentals of that rally. Are markets sound, but oversold? Or are fundamentals deteriorating and represents more hopefulness than anything else?
Readers of this blog will not be surprised to find out I have no set answer to this question. As always, “it depends”. But as I look over the news that has supposedly rekindled the fire in the markets much of it seems at best temporary, perhaps even fanciful. Up against the wall of risk that investors are currently starring down, the best news currently available is that Trump had a phone call with Xi Jinping and has asked for a draft to be prepared to settle the trade disputes between the two countries.
I’m of the opinion that a recession isn’t imminent, but it should be obvious that recessions happen and the longer we go without one, the more likely one becomes. That seems especially true in a world that is undergoing a seminal shift when it comes to international trade and multilateral deals. To take one example, in the last year U.S. soybean exports to China have dropped by 97%, with no exports for the last quarter. This is a trade war still in its infancy. Other market data is mixed. Even as job growth exceeds expectations it will also keep the Fed raising rates. Housing starts have dropped significantly below expectations, driven in part by rising costs.
All this is to say that market rallies like the one we’ve just seen should be treated with trepidation. Investors should be cautious that a bottom has been reached and that this is a good time to rush into the market looking for deals, and we should keep an eye on the fundamentals. Rallies falter precisely because they can be based more on hope than on reality.
So what should investors do if they want to invest but are unsure about when to get into the markets? Come talk to us! Give us a call and help get a plan together that makes sense for your needs! Check out our new website: www.walkerwealthmgmt.com or give us a call at 416-960-5995!
This past week markets had a sudden and sustained sell off that lasted for two days, and though they bounced back a little on Friday, US markets had several negative sessions. The selloff in US markets, which began on Wednesday and extended into Thursday, roiled global markets as well, with extensive selling through Asia and Europe on Wednesday evening/Thursday morning. At the end of the week Asian, European and Emerging markets looked worse than they already were for the year, and US markets had been badly rattled. This week has seen an extension of that volatility.
Explanations for sudden downturns bloom like flowers in the sun. Investors and business journalists are quick to latch onto an explanation that grounds the unexpected and shocking in rational sensibility. In this instance blame was handed to the Federal Reserve, where members had been quoted recently talking about higher than expected inflation forcing up lending rates at an accelerated pace. This account was so widely accepted that Donald Trump was quoted as saying that “The Fed has gone crazy”, a less than surprising outburst.
I tend to discount such explanations about market volatility. For one, it seeks to neuter the truth of markets as large complex institutions that are subject to multiple forces of which many are simply invisible. Second, by pretending that the risk in markets is far more understandable than it really is, investors are encouraged to take up riskier positions and strategies than they rightly should and ignore advice that has proven effective in managing risk. Finally, I have a personal dislike for the façade of “all-knowingness” that comes along after the fact by people who have parlayed luck into “expertise”. Markets are risky and complex, and it would be better if we treated them like a vicious animal that’s only partially domesticated.
In fact, as markets continue to grow with technology and various new products, complexity continues to expand. At any given time markets are subject to small investors, professional brokers, pension funds, algorithm driven trading programs, mutual fund managers, exchange traded funds and even governments, all of whom are trying to derive profits.
So what does that tell us about markets, and what should we take from the recent spike in volatility? One way to think about markets is that they operate on two levels, a tangible level based on real data and expectations set by analysts, and another that trades on sentiment. On the first level we tend to find people who advocate for “bottom up investing”, or the idea that corporate fundamentals should be the sole governor of stock’s price. If you’ve ever heard someone discuss a stock that’s “under-performing,” “undervalued,” “out of favor,” or that they are investing on the “principles of value” this is what they are referring to. People who invest like this believe that the market will eventually come around to realizing that a company hasn’t been priced correctly and tend to set valuations that tell them when to buy and sell.
The second level of investing is based on sentiment, informed by the daily influx of headlines, rumour and conspiracy that clogs our news, email inboxes and youtube videos. This is where most investors tend to hang their hat because its where the world they know meets their investments. Most people aren’t analyzing a specific bank, but they may be worried a housing bubble in Canada, or the state of car loans, or the benefits of a recent tax cut or trade war. The sentiment might be best thought of as the fight between good and bad news informing optimism and pessimism. If a bottom up investor cares about a company they may ignore general worry that might overwhelm a sector. So if there is a change in in the price of oil, a value investor may continue to own a stock while the universe of sentiment sees a widespread selling of oil futures, oil companies, refining firms and downstream products.
As you are reading this you may believe you’ve heard it before. Indeed you have, as our advice has remained consistent over the years. Diversification protects investors and retirement nest eggs better than advice that seeks to “beat the market” or chases returns. However, it seems to me that the market sentiment is undoubtedly a stronger force now than its ever been before. As more investors come to participate in the market and passive investments have grown faster than other more value focused products, sentiment easily trumps valuations. Since we’re always sitting atop a mountain of conflicting information, some good and some bad, whichever news happens to dominate quickly sets the sentiment of the markets.
You don’t have to take my word for it either. There is some very interesting data to back this up. Value investing, arguably the earliest form of standardized profit seeking from the market, has remained out of favor for more than a decade. Meanwhile the growth of ETFs has continued to pump money into the fastest growing parts of the market, boosting their returns and attracting more ETF dollars. When the market suddenly changed direction on Wednesday, the largest ETF very quickly went from taking in new dollars to a mass exodus of money, pushing down its value and the value of the underlying assets. At the same time some of the worst performing companies went to being some of the best performing in a day.
So what’s been going on? The markets have turned negative and become much more volatile because there is a lot of negative news at play, not because interest rates are set to go up too quickly. Sentiment, that had been positive on tech stocks like Amazon and Google gave way to concern about valuations, and with it opened the flood gates to all the other negative news that was being suppressed. Brexit, the Italian election, the rise of populism, currency problems in Turkey, a trade war with China and rising costs everywhere came to define that sentiment. As investors begin to feel that no where was safe, markets reflected that view.
Our advice remains steadfast. Smart investing is less about picking the best winner than it is about having the smartest diversification. A range of solutions across different sectors and styles will weather a storm better, and investors should be wary of simplistic answers to market volatility. Markets always have the potential to be volatile, and investors should always be prepared.
Donald Trump’s presidency is most generously described as a mixed bag. To his supporters he is the most accomplished president since Regan, maybe ever. To his detractors he is a dangerous demagogue whose flouting of democratic norms and curiously close connections to Russia (which predate his run for the presidency) threaten multiple constitutional crises. Undeniable is that his pursuit of electoral victory has meant that he’s been more than willing to entertain the support of racists and neo-nazis, and even his champions admit he seems oblivious to the importance of the traditional alliances that support the world order. Economists bemoan his understanding of economics, which seems especially dubious when it comes to international trade and tariffs. We’ve yet to discuss his own personal vulgarities.
Having said all of this, we must address the paradox of Donald Trump, and that is his ability to pursue change, and find success on issues that are seemingly set in stone. His NAFTA talks, which have ended in a deal, have brought only minor concessions from Canada and Mexico. However it should be noted they are concessions slightly greater than previously negotiated under the TPP which the US declined to be part of. His chaotic approach to governing seems to endanger many of his own goals, and when he is stymied in his objectives he is typically the source of his own sorrows. But that doesn’t mean that he doesn’t have some method to his madness.
The world order that has existed since the end of the WW II, and which went into overdrive following the collapse of the Soviet Union, has succeeded in enriching the world in ways that might be considered unimaginable by previous generations. In 2018 more free nations exist, fewer people live in poverty while crime and war are at all time lows. This is all part of a trend known as the great convergence, the catching up of developing economies to developed ones and the benefits a post scarcity society brings. This change, which is helping wipe out extreme poverty and improve the lives of billions brings with it a global shift in power. Europe and the United States, though still the largest economies, are no longer alone on the world stage and the idea of a unipolar world is no longer viable. Regional powers are reasserting themselves and that includes China whose rise has been considered inevitable by most Western nations.
But China’s ascendance is coming with a high cost. China refuses to respect international rules around intellectual property; as an economic power it’s trade practices can destabilize markets; as an international power it is busy buying access to foreign countries with large scale infrastructure projects; as a military power it is in a belligerent fight to take control of the major trade routes through the South China Sea; and in the fields of espionage it is engaged (like Russia) in extensive cyber activities. Left unchecked China represents an opposite pole in the globe that (like Russia) promotes a global order that isn’t interested in law, international agreements and global norms, but aims instead towards regional autonomy free from such restrictions.
Whether Trump believes in the “global liberal order” isn’t clear, but he seems to see that America is involved in a fight with China, one that it may not have an opportunity to fight again under terms this favorable. This is part of the paradox of Donald Trump. As political theorist Ian Bremmer has pointed out, much of Trump’s insights are not bad but the way he puts them into practice undermines his own ambitions, and hurts the alliances that are needed to sustain his goals and the liberal order. Thus, he’s as likely to upset his allies as he is to rattle America’s foes. In this respect Trump is more similar to Vladimir Putin or Xi Jingpin, who see that national interests should supersede international ones (and where national interests never conflict with the leader’s interests).
Last week I wrote an article about how Canada could lose NAFTA, only to have a new deal come into place on Sunday. I scrapped that piece, but my view remains that Trump’s only sacred cow is his own instincts and that investors shouldn’t assume that that things will work out simply because there might be some political or popular resistance. The success of the status quo is not a guarantee that things will fall back into place and history reminds us that the assumption of inevitability is folly. Things can change, sometimes irrevocably so.
Donald Trump remains a paradox, a leader who touches on good ideas but is unsure how to implement them. The head of the free world who seems far more comfortable in the company of strong men and dictators. An anti-war candidate that may be in a Thucydidean trap with China. An elitist billionaire who seems to have better understood the frustrations of the common citizen. A self-described “great negotiator” whose skill nets only small gains. Investors, take note.
I recognize that writing about politics runs the risk of upsetting or offending readers. Some may regard criticism of a political person or view as an indirect criticism of themselves. This could not be farther from the truth, and we recognize that Trump would not be elected if he didn’t understand something true about the world. We write to help explain our world view and how we believe we should approach investing opportunities and risks. If you are curious about what has informed this view we recommend the following books:
An essential part of the business of investing involves figuring out how well you are doing. In some respects, the best benchmark for how well you are doing should be personalized to you. How conservative are you? What kind of income needs do you have? How old are you? While the case remains strong for everyone to have a personal benchmark to compare against their investment portfolios, in practice many people simply default to market indexes.
I’ve talked a little about market indexes before. They are poorly understood products, designed to give an impression about the overall health and direction of the economy and can serve as a guide to investment decisions. Large benchmarks, like the S&P 500, the TSX, or the FTSE 100, can tell us a great deal about the sentiment of investors (large and small) and what the expected direction of an economy may be.
But because these tools are usually poorly understood, they can contribute to as much confusion as they do clarity. For instance, the Dow Jones uses a highly confusing set of maths to determine performance. Last year General Electric lost about 50% of its market capitalization, while at the same time Boeing increased its market capitalization by 50%, but their impact on the Dow Jones was dramatically different. Boeing had an outsized positive contribution while General Electric had a much smaller negative impact.
The S&P 500 currently is one of the best preforming markets in 2018. Compared to most global indexes, the S&P 500 is ahead of Germany’s DAX, Britain’s FTSE 100 and FTSE 250, Japan’s Nikkei and Canada’s TSX. Yet if you are looking at your US focused investments, you might be surprised to see your own mutual funds lagging the index this year. If you were to ask an ETF provider or discount financial advisor why that is they would likely default to the answer “fees”, but they’d be wrong.
This year is an excellent example of the old joke about Bill Gates walking into a bar and making each patron, on average, a millionaire. While the overall index has been performing quite well, the deeper story is about how a handful of companies are actually driving those returns, while the broader market has begun to languish. Of the 11 sectors in the S&P 500, only two are up, technology and consumer discretionary, while a further 6 were down for the year. In fact the companies driving most of the gains are: Facebook, Amazon, Apple, Alphabet (Google), Netflix and Microsoft. The 80 stocks in the consumer discretionary space not in that list have done almost nothing at all.
What does this portend for the future? There is a lot to be concerned about. The narrowing of market returns is not a good sign (although there have been some good results in terms of earnings), and it tends to warp investment goals. Investors demand that mutual fund returns keep up with their index, often forcing portfolio managers to buy more of a stock that they may not wish to have. In the world of Exchange Traded Funds (or ETFs), they participate in a positive feedback loop, pulling in money and buying more of the same stocks that are already driving the performance.
In all, indexes remain a useful tool to gage relative performance, but like with all things a little knowledge can be deceptive. The S&P 500 remains a strong performing index this year, but its health isn’t good. Healthy markets need broad based growth, and investors would be wise to know the details behind the stories of market growth before they excitedly commit money to superficially good performance.
Did that make you worried? Don’t be scared, call us to set up a review of your portfolio to better understand the risks!