Last August I wrote that Donald Trump was my pick for the Republican nominee, despite his incessant self-aggrandizing style and boorish behavior. I wrote that article because I saw something in Trump that reminded me of Rob Ford, a call back to an angry populism that favours the loud and obnoxious precisely because they are loud and obnoxious. Trump’s style of bombast is a snub to a political elite that adopt a façade of manners that suggest cordial rivalry, even while private donations and Super PACs flood the airways with crude, misleading and sometimes plain false advertising.
Despite a continued and coordinated assault on Trump by the core Republican establishment, Trump went from an outside contender to the leader of the pack. In fact the more that it seemed like the establishment was aligned against him the more support coalesced around him. And last night it seemed that enough of that support had come together to make him the presumptive nominee.
With Ted Cruz and John Kaisch now mathematically eliminated from any chance of a first round win, and the likelihood of a contested convention becoming more dubious as Trump narrows in on his needed delegates, it might be time for people to move past the look of Trump’s rhetoric and into what he’s actually saying. Because this election doesn’t bode well for anyone, but it is very much in keeping with the times.
The times, in case you’ve been hiding under a rock, are not being kind to the neoliberal world that has defined much of the 1990s and early 2000s. America’s foreign influence is waning, the middle class is shrinking, economies are floundering and the European Union is struggling to hold it all together. From a resurgent Russia to a migrant crises and angry middle class voters, this year is testing the resolve of political organizations and global partnerships to continue to do what they do; knock down borders, free up trade and move people across the planet. Citizens across much of the West now doubt many of the promises that have been made to them, notably that more free trade would make us all rich and that people from far flung lands are just like us with similar values.
That doubt about the modern world has been fueling the campaigns of both Bernie Sanders and Donald Trump, and a close look at their platforms shows some important overlap. But with Bernie Sanders also likely eliminated from any chance of the nomination the general election may come down to an establishment candidate in Hillary Clinton and the now (kind of) anti-establishment Donald Trump.
Donald Trump’s rhetoric is decidedly conservative in an old-school kind of way. His commitment to building a wall across the border with Mexico, to ignoring much of the Middle East and backing away from trade deals with China is reminiscent of a 1940s style conservativism and is a direct challenge to the current establishment view on all of these issues. I’m not convinced that Hillary Clinton, dragging her own varied and damning baggage with her, will be up to the challenge of convincing the voting public to continue to support the neoliberalism that she is so closely tied with. It seems even more unlikely that she could become the credible liberal standard bearer for an anti neoliberal platform at all.
I had initially said that Trump was my pick for nominee because the Republicans had become a tired shell of their former selves, squandering elections by ostracizing women, minorities and urban voters in favour of curmudgeonly racists, the science skeptics and the frighteningly devout. The election cycle, spent pandering to this shrinking group of largely social conservatives, was handing the democrats election after election. As I said in the summer, one party shouldn’t be electable and the other crazy. This election may indeed offer some real alternatives about the kind of world that Americans may want to live in.
So rather than wring our hands at a Trump election has the end of all things, let’s cast this election to something akin to Brexit, another insurgency by an increasingly unhappy and dissatisfied middle class that has come to suspect that their leaders no longer work for them, but for larger more self-interested groups that tend to congregate in Swiss towns and busy themselves with networking and back patting. If Trump is successful in his Whitehouse bid we may be surprised at the kind of world that is ushered in to being; one that is increasingly isolated, protectionist and introverted. If that isn’t a wakeup call to TED Talk speaker’s circuit, I don’t know what will be.
*** I’ve taken some time off of writing our articles to focus on work and family, but I’m feeling rejuvenated now and will be back with our weekly outlook on the world. Sorry if you’ve missed us!***
Markets have reached six or seven week highs, (HIGHS I say!) and questions are arising as to whether this represents a sustained recovery.
The crystal ball is decidedly opaque on that question, not simply because there is an abundance of conflicting data, but because more of it is produced everyday. Add to that the fact that the “mood” often dictates much of the day’s trading, plus the often counter-intuitive reality that sometimes sufficiently bad news is considered good news in its own right.
Take for example China’s financial woes. China’s economy is definitely slowing, and the tools used in the past to spur Chinese growth are no longer useful in the same way. To summarize, the Chinese economy got big by building big things; cities, ports, factories, and other big infrastructure to facilitate its role as a manufacturer to the world. In turn the world sold China many of the resources needed to do that. Now the Chinese are up their eyeballs in highways and empty cities they must “transition” to a service economy, essentially an economy that now serves its people rather than the rest of the planet.
Such a transition is no easy thing, and to the best of my knowledge there is no law that says the Chinese government is somehow more adept at managing such a transition. But every bit of bad news may either make investors nervous, or give them hope that the Chinese government may be encouraged to do more economic stimulus. Moody’s, the ratings agency, recently downgraded their outlook on Chinese debt from stable to negative, and downgraded their credit rating. The market’s response?
That big jump is after they received the downgrade! We see similar patterns out of Europe and the United States. Raising US interest rates has been widely decried by various financial types and talking heads, urging the Federal reserve chairman Janet Yellen to either reverse, stop or even consider negative rates to help the economy. Why such panicked response? Because it has become a common thought that raising rates is now more damaging that the requirement of lowering them!
This has less to do though with distortions in the market and more to do with people trying to accurately read and project from various data points, even when many of those reports conflict. In the short term the abundance of conflicting news creates a blind men and the elephant relationship between investors and economies. Everybody is feeling their way around but all coming back with wildly different descriptions of what is happening.
What we do know is that there are some big problems in the markets and economies, and the threat of a global recession is very real. What day traders and analysts are looking for is confirmation on whether this threat is easing or not. So, if we suddenly read that managers see a contraction in oil production we might see a sudden rise in the value of crude oil. That news has to be weighed against that fact that global oil supply is still growing, and whether it still makes sense to price oil by its available supply, or against its expected future reduced production.
And that is the challenge. Big problems take time to sort out, and in the intervening period as they are addressed the blind men of the markets make lots of little moves trying to bet on early outcomes, attempting to assess the correct value of a thing often before a clear picture is actually there. For investors the message is to be cautious, both in making large bets or by trying to avoid risk all together. It is a mantra here in our office on the benefits of diversification and risk management, precisely because it reminds us to hold positions even when the mood has soured greatly, and shy away from investments that have become too popular. The goal of investors should to not be one of the blind men, guessing about what they touch, but to make irrelevant that shape of the markets altogether.
Yesterday a disturbing article came across my desk. From Bloomberg, it was titled “It Just Got Even Harder to Trust Financial Advisors” and is a brief summary of a new report out of the United States that suggests that there is wide spread misconduct within financial services. Far from being an isolated number of financial advisors, the scale of the disciplinary actions is extensive and has encompassed some of the largest banking institutions in the United States (for those mistrustful of the Wall Street crowd that may not be a big shock) including some well known names like Wells Fargo and UBS.
Being disciplined within the world of financial services is controversial and being reprimanded does not necessarily denote contrition from advisors. The two chief complaints from investors, both in Canada and the United States, revolves around suitability of investments and subsequent fees. Those might seem like straight forward complaints to have, but many investors have a difficult time wrapping their heads around “risk”, showing great comfort in investments that can rapidly rise, while expressing dismay when they fall just as rapidly back to earth. Thus investors and advisors can mistakenly assume that they are on the same page with each other, only to find that at a later point that they have badly misunderstood one another.
Regulators have correctly understood that the problem is a misalignment of education and comfort. If investors knew more about investing they would be better at understanding risk. If that were the case though investors would be unlikely to need the services of financial advisors. Thus financial advisors are expected to treat their clients as though they know little, and should be expected to challenge investors, even reject investor requests if the investment is deemed too risky by the advisor.
What regulators want is for advisors to understand their role now as “risk managers” rather than product floggers and order takers. In an industry where the average age is north of 55, most advisors got their start and built their business around exactly that, selling interesting and exciting ideas. The transition from that to telling investors that they can’t do what they want with their money (it’s their money after-all) has not been simple.
One move, cited in the article, is to move to a fiduciary model to rectify outstanding issues around fees in particular. There is a persistent fear that advisors might choose high fee-low returning investments when cheaper and better performing options exist. Curiously, in Canada at least, there is not much evidence to suggest that this happens. But even if this avenue resolves such a problem many within the industry fear that “high fee/low return” will not be apparent until well after the fact, opening up practitioners to hindsight litigation.
The simple fact is though that regardless of the nuances and difficulties that surround properly managing and regulating the financial services industry, no good can come from a growing sense of mistrust in an industry that has become so essential to the retirement plans of so many. So what should investors know that will protect them from bad decisions or unfair fees?
First, be familiar with the nature of fees:
- There is a tendency to assume that the best fee is the lowest, but costs frequently correspond to the complexity of the investments, the size of the assets under management and the support around the product. Be sure to find out what the MER (management expense ratio) is and find out whether it is comparable to other similar products. It’s fair to have questions about what products cost and whether those costs make sense.
Second, be more than a number:
- The article contains one of those slights of hand when people try and diffuse blame, pointing out that it isn’t “just small dealers” that have been guilty of misconduct. This suggestion that small is typically the problem seems challenged by evidence. Big problems require scale, and it isn’t uncommon for some brokers in the banks to have thousands of clients. Brokers aren’t happy with that arrangement and neither are investors, but it is very common. It shouldn’t be surprising that misconduct can come from large banks seeking easy solutions with proprietary product.
Third, independent options are better than proprietary ones:
- A frequent issue I come across are investors who have been sold a proprietary product when other better options exist. It strikes me that there are real conflicts of interest in companies that both manage people’s assets and sell investments for that purpose. Most brokers I know have all felt better knowing that their responsibility is to a client sole, without having to hit bottom line targets for other interests. A wide range of product offerings doesn’t guarantee you’ll get the best product, but does remove the threat someone will deliberately sell you the wrong one.
Fourth, be Canadian:
- The concerns of America and Canadian regulators are very similar, but the good news is that Canadians have a better system. Despite complaining Canadians have some clear advantages. First, performance disclosure rules favour investors here. Rather than show returns with costs yet to be deducted, returns in Canada are shown net of all costs, meaning you see accurate performance. Second, the use of commissions and deferred sales charges, the source of ire for regulators and critics, have been dropping for years. Many financial advisors now rely on exclusively trailers or disclosed fees. Third, even trailers aren’t that bad. Where as there has been an outstanding concern is that embedded trail fees could unduly influence advisors to make poor choices. But while there is some truth to this statement, the vast bulk of investments within Canada have standardized their fees, with companies paying bigger payouts to entice sales having become the outlier.
Fifth, be with us:
- As part of a small and independent firm one of the things we pride ourselves most on is to be in the right place to help Canadians. An open shop, we have both the luxury of picking the best investments from across the industry while offering investors competitive fees. But most importantly, we value transparency and clarity in managing your retirement savings.
As a family business that has been around for nearly a quarter of a century, the essential difference between being a number and receiving personal care is whether you have someone to work with that doesn’t just know your name, but comes to know you as well.
Also they should have a blog.
Give us a call if you are looking for some personal guidance in dealing with difficult markets or have questions about protecting your accounts.
Markets have begun to rally around the globe, perhaps signalling an end to the volatile beginning of the year. The mood has definitely lightened and there seems to be some broad support for a return of some positive numbers across the board.
But if we stop to ask ourselves why, we may be left scratching our heads at the answer. The current list of issues affecting the global economy is pretty long. China’s slowdown, the demand destruction for oil, problems across multiple oil and commodity producing nations, financial instability and an almost unbelievable amount of debt. In fact the the market turmoil has a lot of justification, far more than some of the previous sudden corrections over the last two years.
So what’s changed? Three things. First, central bankers have recommitted themselves to doing whatever it takes to put the economy back on a path to growth. Second, a deal has been announced with Russia and Saudi Arabia to cap oil production. Third, a growing concern about the financial assets of Deutsche Bank have been “put to rest” as it were by the German government.
As a list of reasons to be excited, I’m left somewhat underwhelmed. Take the deal between Russia and Saudi Arabia. The larger promise of this deal is that is spells out potential future moves to get oil prices back to a level of sustainability. For right now it simply outlines capping oil production at January levels, but will be largely meaningless if Iraq and Iran can’t be brought into the deal. Iraq and Iran for their part aren’t really interested. Iran, who isn’t exactly friendly with Saudi Arabia, has just got back into the global oil market and is looking to ramp up production. Iraq is also increasing it’s oil production, helping bring much needed funds to a country that is still looking to stabiles and legitimize itself. Neither are particularly interested in following Saudi Arabia’s lead.
It would at least mean more however if the January production numbers reflected some kind of wide ranging reduction in oil output, but among OPEC nations, as well as the United States and even Canada, oil production has continued to increase despite the price drop.
What about the central bankers promising to use all their muscle (and some that we didn’t know they had) to save the economies of the planet and return economic growth? Having spent the last eight years with emergency level key interest rates and very little to show for it the only solution is to go to a negative interest rate. Earlier in 2015, Stephen Poloz suggested that negative interest rates were a possibility for Canada. Much of Europe already has negative interest rates. Japan surprised markets a few weeks ago by making their key interest rate negative. Last week Janet Yellen, head of the Federal Reserve, also said that negative rates were not “off the table.” Disturbingly, having interest rates as close to zero as possible hasn’t encouraged wide ranging inflation across developed economies. Obviously the only solution is more of the same but SAID LOUDER AND MORE CLEARLY.
Here is Christian Bale yelling at you to spend some of your money!
But possibly the least exciting of the exciting news is surrounding Deutsche Bank. Last week Deutsche Bank seemed to be cruising towards the unenviable title of “the next Lehman Brothers”, before the German government “encouraged” the the market with some supportive words around the stability of the bank; a coded signal that Deutsche Bank is both “too big to fail” and that the German taxpayer would be on the hook.
Deutsche Bank’s problems have been extensively catalogued. Between massive fines, massive losses, massive layoffs, and a massive derivative position currently in excess of $50 Trillion (yes, with a “t”) the potential for the world’s fourth biggest bank to implode and set of some kind of financial (and given it’s position within Europe, political) cascade effect is very real, even if they do get a bailout.
On top of all that is the regular bad news that we haven’t addressed. China’s liability is still unknown, and as it hemorrhages foreign currency reserves threatens yet another line of attack against markets. Venezuela may, or may not, default on it’s debt. Here at home provinces like Ontario would have at least been hoped that a combined falling dollar and oil price would start bringing new manufacturing within our borders, instead they must brace for the disappointing news that of three new auto plants for North America, we will get none.
Some people may be excited about the most recent rally, but I’m afraid I’m not one of them.
I‘ve just had a chance to watch the movie The Big Short, based on the book of the same name by Michael Lewis. Michael Lewis has made a name for himself as a writer for being able to explain complex issues, often involving sophisticated math that befuddles the general population but is responsible for much of the financial chaos that has defined the last decade.
The principle of our story is Dr. Michael Burry, a shrewd investor whose unique personal qualities gives him the patience to tear apart one of the most complicated financial structures in modern finance. Having done that he creates a new market for a few people who had the foresight to see the US housing bubble and how far the crash might reach. The story is captivating and the tension builds to what we know is the inevitable conclusion of the worlds biggest crash, but there is a problem with the story.
No matter what they do in the movie, we know how it all ends. That hindsight undercuts the real tension in the film, the risk that these few traders and hedge fund managers took with other people’s money to bet against what were largely considered to be safe investments. In some ways, the US housing crash is unique because of how much institutionalized corruption had seeped into the system. The ratings agencies who sold their AAA ratings for the business, the mortgage brokers who pushed through unfit candidates into subprime adjustable rate mortgages, the analysts and financial specialists that repackaged low grade mortgages into AAA rated bonds; it took all of them and more to create the biggest market bubble since the South Sea.
Their smart move seems like lock, but if you look past the drama the heroic brokers of our story were taking a huge gamble with other people’s money. From Dr. Michael Burry down through the rest of the characters, hundreds of millions, billions even, were tied up in investments that few understood but carried incredible potential for losses. The confidence that our heroes show in demanding “half a billion more” as they come to understand the scope of the problem seem smart in hindsight, but they were making big bets. Bets that could have easily ruined people’s lives and finances.
This is the true nature of risk. Things are only certain in hindsight. At the moment we need to make decisions rarely do we possess the kind of clarity that we believe we should have when dealing with markets. If we look to current markets what can we honestly say we know about tomorrow? Markets are chaotic, oil prices are in the tank, central bankers are talking about negative interest rates (while some have gone and done it), and then we will have 2 or 3 days of market rallies. What picture should we draw from this? What certainty do we have about tomorrow’s performance?
Our problem is that when we are inclined towards certainty we are also inclined towards fantastic risk. In fact we won’t even believe there is risk if we are certain of an outcome. And we are prone to lionizing people who risk it all and are proved to be right, while forgetting all those people who made similar gambles and lost everything, leading us to repeat a mistake that has undone many.
The story we need isn’t the one about the people who bet big and won. We need the story about the people who bet smart and navigated confusing and risky markets and came out fine. That story sadly won’t have the kind of impact or drama that we long for in a movie, but it’s the story that each and every investor should want to be part of.
This week a curious thing happened. A bank said that Canadians were hoarding too much cash.
Being chastised for having too much money on the sidelines and not invested is one of those things that raises suspicions about whether the financial talking heads really do have our best interests at heart. After all, hasn’t this been the worst beginning to a market in memory? Aren’t there countless problems across multiple markets right now? Are we not worried about the global economy? Have we not just ended a dismal 2015?
In fairness to CIBC and it’s chief economist, it is understandable why they are concerned about the reported $75 billion sitting on the sidelines. Cash doesn’t grown and historically market timing works out badly for most practicing it. People sell when the market is down and neglect to get back in as it goes up, crystallizing losses and missing out on the gains. Smart investing means riding through the markets, rebalancing and being patient. That’s the Warren Buffet way.
Except people aren’t Warren Buffet. RRSPs and TFSAs and other investment accounts are not here to fulfill the larger ambitions of Berkshire Hathaway. They are here to facilitate people’s retirement, a date the looms much larger for more people than ever before. Just consider that if you were 37 in 1990, you were 48 when the market had its first big drop in the early 2000s. You were 55 in 2008, and today you’d be 63. You’re tolerance for risk has decreased significantly in that time as you hurdle towards the date that you will have earned the last dollar you’ll ever make. Under those circumstances taking money to the sidelines may be as much an act of self preservation as it is investment heresy.
I could end this article here, but what is so interesting about the $75 billion number is who is actually hoarding that money and what it may actually be telling us about Canadian finances, because it’s not what you think.
Above is the cash position compared with the historic trend line dating back to 1992. In keeping with both the aging population and the ongoing volatility in the markets growth in the cash positions is understandable, if not always desirable. But look what happens when we look at who is hoarding cash.
Bizarrely it is people under the age of 35 who have the largest percentage of wealth in cash, close to 35% of their available money. Now, if you are over the age of 45 the average cash position is 15% (roughly) which would account for the vast bulk of the derided $75 billion. But even if the under 35 set have less money, why are they holding onto so much of it?
The answer I suspect is both disheartening and concerning, a blend of uncertain finances, savings for down payments on property and the result of bad financial advice. The first two are well documented, both the challenges of making ends meet and the unfavourable housing market towards first time buyers. But the last issue should make us all perk up our heads, for it represents a failure of the financial community to help young investors get good advice.
How does the millennial generation do things? On their phones mostly. Cue the eye roll from anyone under 30 at this gross simplification, but it holds up. The rise of smart phones as a staple of doing things has provided a veneer of knowledge on numerous issues, while encouraging a culture of DIY so long as there is an app to facilitate it. This shift is so profound that back in 2011 Rogers Media applied to start its own bank (which came to fruition in 2013). Why? Well what else do you do in an age where everyone is looking for the cheapest credit cards and the best loyalty program when you control just over 30% of the wireless market in Canada? If you can pay for things with your phones, why couldn’t you also manage your retirement with your smart phone too?
Young people also don’t have that much money, which has created an indifference from much of the financial community. Rather than cultivate young investors they have been relegated to the sidelines, encouraged to do business with one of the rotating in-store financial advisors, or have been asked at the counter to make a spur of the moment investment decision. Some may have given tried to use the “robot-advisor”, while some will try and do it themselves and many more will do nothing at all.
Profitability drives much of the indifference from the business community, while societally there hasn’t been much for young people to look forward to in the investing world. Far from the heady days of the 1980s and 1990s, the 2000s have been tumultuous and filled with cynicism. The crash of 2008 may have left many investors shaken but it’s also likely put off a number of young people who see no value in it and assume (if the popularity of Bernie Sanders is proof of anything) that the game is rigged against them.
I’m already of the opinion that much of our society is too geared towards helping out the “senior” demographic, but this isn’t a competition between generations. Instead it’s about making sure that we aren’t just looking to satisfying immediate needs but managing to the needs of the future as well. The lessons for a younger generation if they are ignored by financial professionals will not be the ones we want. The help and hands on guidance that has been a cornerstone of sound management for the past thirty years in Canada is not some natural order set in stone. It is the product of outreach and continued effort to develop good habits in both saving and investing. Ignoring a generation will be at our peril and theirs.
You don’t need lots of money to begin saving to have lots of money. We’re taking on young investors. Give us a call and benefit from our personalized and dedicated approach that has defined us for 22 years!
When economists get things wrong their missteps are practically jaw dropping. Despite making themselves the presumed source of useful information about economies, interest rates and economic management, often it seems that the economists are learning with the rest of us, testing ideas under the guise of sage and knowledgable advice. Their bias is almost always positive and the choices they make can be confounding.
As an example, let us consider the case of the Bank of Canada (BoC).
If there are perennial optimists in this world they must be employed at the BoC, for no one else has ever stared more danger in the face and assumed that everything will be fine.
For those not in the know, the BoC publishes a regular document called the Financial System Review, a bi-annual breakdown of the largest threats that could undo the Canadian economy and destabilize our financial system. Because they are the biggest problems we tend to live with them over a long time and thanks to the Financial System Review we can see how these dangers are presumed to ebb and flow over time.
For instance, two years ago the four biggest dangers according to the BoC were:
- A sharp correction in house prices
- A sharp increase in long-term interest rates.
- Stress emanating from China and other Emerging Markets
- Financial stress from the euro area.
Helpfully the BoC doesn’t just list these problems but also provides the presumed severity and likelihood of them coming to pass and places them in a useful chart.
Here is what that chart looked like in June of 2014:
The worst risk? A Canadian housing price correction. The likelihood of that happening? very low. Meanwhile stress from the Euro area and China rate higher in terms of possibility but lower in terms of impact.
By the end of 2014 the chart looked like this:
Interestingly the view from the BoC was that there was no perceivable difference in the risks to the Canadian market. Despite a Russian invasion of the Ukraine, the sudden collapse in the price of oil and the continued growth of Canadian debt, the primary threats to Canada’s economy remained unmoved.
So what changed by the time we got to mid 2015?
The June 2105 FSR helpfully let Canadians know that, presumably, threats to Canada’s economy had actually decreased, at least with regards to problems from the euro area. This is curious because at that particular moment Greece was engaged in a game of brinkmanship with Germany, the IMF and the European Bank. Though Greece would go on to technically default and then get another bailout only further kicking the can down the road, the view from the BoC was that things were better.
Interestingly the price of oil had also continued to decline in that period, and the BoC had been forced to make a surprise rate cut at the beginning of the year. Debt levels were still piling up, and there was a worrying uptick in the use of non-regulated private lenders to help get mortgages.
None of that, according to the analysts at the Bank of Canada, apparently mattered. At least not enough to move the needle.
The December 2015 FSR is now out, and if we are to take a retrospective on the year we might point to a few significant events. To begin, the economy was doing so poorly in the summer that the BoC did a second rate cut, which was followed by further news that the country had technically entered a recession (but nobody cared). Europe’s migrant crisis reached a tipping point, costing money and the risking the stability of the EU. Germany’s largest auto maker is under investigation for a serious breach in ethics and falsifying test results. China’s stock market began falling in July, and the Chinese government was forced to cut interest rates 5 times in the past year. The United States did their first rate hike, a paltry 25 bps, but even that has helped spur a big jump in the value of the US dollar. Meanwhile the Canadian dollar fell by nearly 20% by the end of 2015.
And the Bank of Canada says:
Things are better? Or not as severe?
In two years of producing these charts, despite continued worsening of the financial pictures for Canada, China, the EU and even the United States, the BoC’s view is still pretty rosy. What would it take to change any of this?
Whether they are right or not isn’t at issue. It’s the future and it is unknowable. What is at issue is how we perceive risk and how ideas about risk are communicated by the people and institutions who we trust to provide that guidance. This information is meaningless if we can’t understand its parameters and confusing if a worsening situation seems to change nothing about underlying risk.
As you read this I expect the Chinese and global markets to be performing better this morning on reassuring news about Chinese GDP. But I would ask you, has the risk dissipated or is it still there, just buried under positive news and investor relief? It’s a good question and exactly the kind that could use an honest answer from an economist.
The first (and so far only) good day in the markets for 2016 shouldn’t go by without instilling some hope in us investors. The latter half of 2015 and the first weeks of 2016 have many convinced that the market bull is thoroughly dead, having exited stage left pursued by a bear (appropriate for January). The toll taken by worsening news out of China, falling oil, and the rising US dollar have left markets totally exhausted and despondent. But is the bull dead, or just mostly dead? Because there’s a big difference between all dead and mostly dead. In other words, is there a case to be made for a resurgence?
I am, by nature, a contrarian. I have an aversion to large groups of people sharing the same opinion. It strikes me as lazy, and inevitably many of the adherents don’t ultimately know why they hold the views that they do. They’ve just gotten swept up in the zeitgeist and now swear their intellectual loyalty to some idea because everyone else has. And when I look at the market today, I do think there is a contrarian case for a market recovery. Not yet, it’s too early, but there are reasons to be hopeful.
First, let’s consider the reasons we have for driving down the value of most shares. Oil prices. The price of oil has come to seemingly dictate much of the mood. Oil’s continued weakness speaks to deflation concerns, and stands in for China. It’s price is undermining the economies of many countries, not least of which is Canada. It’s eating into the profits of some of the biggest companies around. It’s precipitous fall has lent credence to otherwise outlandish predictions about the future value. Yet this laser like focus on oil has eclipsed anything else that could turn the tide in the market. Other news no longer matters, as the oil price comes to speak for wider concerns about China and growth prospects for the rest of the world. In the price of oil people now see the fate of the world.
That’s foolish, and precisely the kind of narrow mindset that leads to indiscriminate overselling. The very definition of babies and bathwater. And negativity begets more negativity. The more investors fear the worse the sentiment gets, leading to ever greater sell-offs. Better than expected news out of China, continued employment growth from the US, and the fundamental global benefit of cheap energy are being discounted by markets today, but still represent fundamental truths about economies that will bring life to our mostly dead bull tomorrow.
Don’t mistake me, I’m not trying to downplay the fundamental challenges that markets and economies are facing. Canada has real financial issues. They are not driven by sentiment, they are tangible and measurable. But they are also fixable, and they do not and will not affect every company equally. The same is true for China, just as it is true for the various oil producers the world over. What we should be wary of is letting the negative sentiment in the markets harden into an accepted wisdom that we hold too dear.
Put another way, are the issues we are facing today as bad or worse than 2011, or even 2008? I’d argue not, and becoming too transfixed by the current market sentiment, the panicked selling and the ridiculous declarations by some market analysts only plays into bad financial management and will blind you to the opportunities the markets will present when a bottom is hit and numbers improve.
So is the bull dead? No. He is only mostly dead and there is a big difference between mostly dead and all dead. We will navigate this downturn, being mindful of both the bad news and the good news. Investors should seek appropriate financial advice from their financial advisors and remember that being too negative is just another form of complacency, a casual acceptance of the world as it currently appears, but may not actually be.
Remember, the bull is slightly alive and there’s still lots to live for.
For over 20 years we have been helping Canadians navigate difficult markets like this, by meeting in their homes and discussing their personal situations around the kitchen table. If you are looking for help, would like a complimentary review of your portfolio, or simply want to chat about your finances, please contact us today.
Walking into my office this morning I was bracing for yet another day of significant losses on global markets. It’s a tricky business being a financial advisor in good or bad markets. But seeking growth, balancing risk, and managing people towards a sustainable retirement (a deadline that looms nearer now with every passing year) only grows more challenging in terrible markets like the ones we are in.
In some ways it can seem like divining, working out which thread of thought is the most crucial in understanding the problems afflicting markets and panicking investors. Is the rising US dollar enough to throw off the (somewhat) resurgent American manufacturing sector? Has China actually successfully converted its economy, and is no longer requiring infrastructure projects to drive growth? Is oil oversold, and if so should we be buying it?
Aiding me in this endeavor is the seemingly boundless supply of news media. There is never a moment in my day where I do not have some new information coming my way providing “insight” into the markets. The Economist, the world’s only monthly magazine that comes weekly, begins my day with their “Economist Espresso” email I get every morning. No wake-up period is complete for me without glancing at the Financial Times quickly. My subscription to the Globe and Mail and the National Post never go unattended. Even facebook and Reddit can sometimes provide useful information from around the planet. After that is the independent data supplied by various financial institutions, including banks, mutual fund companies and analysts.
So what should you do when the Royal Bank of Scotland (RBS) screams across the internet “Sell Everything Before Market Crash”.
The answer is probably nothing, or at least pause before you hit the big red button. It’s not that they can’t be right, just that they haven’t exactly earned our trust. RBS, if you may recall, was virtually nationalized following losses in 2008, having 83% of the bank sold to the government. In 2010 despite a £1.1 billion loss, paid out nearly £1 billion in bonuses, of which nearly 100 went to senior executives worth over a £1 million each. In 2011 it was fined £28 million for anti-competitive practices. In short, RBS is a hot mess and I suppose it is in keeping with it’s erratic behavior that it should try and insight panic selling the world over with a media grabbing headline like this.
I may be unfair to RBS. I didn’t speak to the analyst personally. The analyst was reported in the Guardian, a newspaper in the UK whose views on capitalism might be best described as ‘Marxist’, and inclined to hyperbole. It’s not as though I am not equally pessimistic about the markets this year, nor am I alone in such an assessment. But it should seem strange to me that an organization whose credibility should still be highly in question, who undid the financial stability of a major bank should also be trusted when calling for mass panic and reckless selling.
The analyst responsible for this startling statement is named Andrew Roberts, and he has since followed up his argument with an article over at the Spectator (I also read that), outlining in his own words the thoughts behind his “sell everything” call, essentially spelling out much of we have said over the past few months in this blog. I find myself agreeing with much of what he has written, and yet can’t bring myself to begin large scale negation of sound financial planning in favour of apoplectic pronouncements that are designed as much to generate headlines and attention as they are to impart financial wisdom.
The point is not to be dismissive of calls for safety or warnings about dire circumstances. Instead we should be mindful in how we make sense of markets, and how investors should approach shocking headlines like “sell everything”. I am not a fan of passive investing, the somewhat in-vogue idea that you can simply choose your portfolio mix, lean back and check back in once every decade for a negligible cost. I advocate, and continue to advocate for ongoing maintenance in a portfolio. That investors must be vigilante and while they should not have to know all the details of global markets, they should understand how their portfolios seek downside protection. My advice, somewhat less shrill and brimstone-esque , is call your financial advisor, discuss your concerns and be clear on what worst case scenarios might mean to your portfolios and what options are available to you. If you don’t have a financial advisor, feel free to reach out to us too.
Concerned about the markets and need a second opinion? Please drop us a line and we will be in touch…
Since 2008 governments the world over have tried to fight the biggest banking collapse since the great depression with modest success. Eight years on and you would be loath to say that the world has turned a corner, ushering in a return of unrestrained economic growth.
Why this is the case is a question not just unanswered by the average layman, but by experts as well. Huge amounts of money have been printed, financial institutions have been patched and repaired, interest rates are at all time lows, what more can be done to fix the underlying problems?
It turns out that nobody is really sure, but as we begin 2016 global markets are reeling on the news that the Chinese economy has even greater problems than previously thought. Only a few days into the week and most markets are down in excess of 2-3%, giving rise to concerns that a Chinese led global recession could be on it’s way.
The difference between now and 2008 is that much of the resources used to try and stem the problems from nearly a decade ago have already been deployed, and there is little left in the tank for another round. Central bakers have been trying to get enough inflation into the system to raise interest rates up from “emergency” levels to something more “normal” but outside of the US this seems to have largely failed.
One of the saving graces after 2008 was that the Emerging Markets were seemingly unaffected. In fact, since 2008 the developing world has become more than 50% of global GDP but in that time the rot that often accompanies success has also set in. EM debt is now considerable, putting many countries that had once extremely healthy balance sheets heavily into the red. Borrowing by these nations has increasingly moved away from constructive economic development and more into topping up civil servants and passing on treats to voters.
For some, myself included, it has been encouraging that the Chinese have not proven to be the economic übermensch that some had feared. The rise of the state directed economy with boundless growth had many people concerned that China might represent an economic nadir for the planet. To see it every bit as bloated, foolish and corrupt may not be good for markets, but at least takes the bloom off the rose about Chinese economic supremacy.
Still, this all of this leads to a couple of frightening conclusions. One is that we have yet to come across any rapid comprehensive solution to a global financial crisis like 2008 that can undo the damage and return us to an expected economic prosperity. The second is that we may have been going down the wrong path to resolve the economic problems we face.
If debt was the driving force behind 2008, you couldn’t argue we’ve done much to alleviate the problem. At best we have merely shifted who holds it. In the United States, the US government took on billions of dollars of debt to stabilize the system. In Europe, despite attempts to reduce balance sheets across the continent, every country has taken on more debt as a result, regardless of whether they are having a strong market recovery, or a weak one. In Canada, arguably one of the worst offenders, private debt and public debt have ballooned at a frightening pace with little to show for it. Rate cuts and government spending are no match it seems for a plummeting oil price and a lack lustre manufacturing sector.
Having faced the problem of restrictive debt, putting much of the world’s financial markets in grave danger, our response has been to simply acquire more. Greece owes more, Canada owes more, and now the Emerging markets owe more. It was as though while trying to right the economic ship we forgot that we should keep bailing out the water.
None of this is to say that every decision since 2008 has been wrong. Following Keynesian policy saved countless jobs and businesses. But at some point we should have also expected to tighten our belts and dispose of some of the debt weighing us down. Instead central banks attempted to stimulate inflation by juicing the consumer economy with incredibly low interest rates. But as we have seen there is only so much that can be done. A combination of persistent deflation, an aging population and extensive debt have largely upended the best efforts to restart the economy on all cylinders.
This shouldn’t be a surprise. Debt makes us financially fragile. It is an obligation and burden on our future selves. But if we found ourselves drowning in debt eight years ago, it is curious we thought the solution would be to add rocks to our pockets and expect to make the swimming easier.