At the end of December we pointed out the themes of 2015 were unlikely to disappear into 2016. It’s just that in 2016 we would be more likely to think of those themes as established rather than new. And while that’s certainly the case I didn’t expect 2016 to so openly embraced that principle.
As we bring this year to a close, markets continue to frustrate. The US markets, along with most global markets and especially Canada, are all negative. Over the past few weeks Canada has dipped as low as -13% on it’s year-to-date (YTD) return. In speaking with some people within my industry, expectations to finish flat for the year will be sufficient for a pat on the back and considered solid performance.
Years are ultimately an arbitrary way of organizing time. January 1st will simply be another day from the standpoint of the earth and the sun. Neither China’s nor Canada’s problems will have solved themselves when markets reopen in 2016, but from the perspective of investors a new year gives us a chance to reframe and contextualize opportunities and risks in the markets. The surprises of 2015 will now be part of the fabric of 2016, new stories will come to dominate investor news and new narratives will popup to explain the terrain for Canadians.
So when we do get to our first trades in January, what kind of world will we be looking at? What opportunities and risks will we be considering?
The risks are very real. After a steep sell off in Canada we may be tempted to think that the Canadian market is cheap and ideal for investment. I’ve had more than one conversation with market analysts that suggests that things could change very quickly. Cheap oil, a cheap dollar and rising consumer spending to the south could all spell big opportunities for Canada.
But this argument has another side. Since 2007, despite lots of volatility, the TSX has barely moved. In February of 2007 the TSX was at 13083, and at close on Friday last week the market was 13024. The engines of Canada’s economic growth from the past few years have largely stalled. Commodity prices have fallen and may be depressed for some time, with exports of everything from timber to copper and iron being reduced significantly. Oil too, as we have previously said, is unlikely to bounce back quickly. Even if oil recovers to around $60, the growth of cheap shale energy will likely eclipse Canadian tar sands, and will not be enough to restart some previously canceled projects.
Similarly, the Emerging Markets have been badly beaten this year, driving down the MSCI EM Index to levels well below the early year highs. But those levels also reflect the ongoing and worrying trend. The MSCI EM Index (a useful tool to look at Emerging Markets) isn’t just lower than it’s previous year’s high, it’s lower than it was back in 2011, and in 2007. In other words we’ve yet to surpass any previous highs, and when faced with the reality that the United States will likely be raising rates for the next few years, the EM will likely continue to lose investments to safer and higher yielding returns in the United States.
In an ideal world a new year would be a chance to wipe the slate clean, mark the previous year’s failings as in the past and move forward. But what drives markets (in between bouts of panic selling and fevered buying) are the fundamentals of economies and the companies within them. So as celebrations of December 31st give way to a return of regular business hours, investors should temper any excitement they have about last year’s losers becoming the new year’s winners. The ground has shifted for the Canadian economy, as it has for much of the Emerging Markets. Weaknesses abound as debt levels are at some of their highest and global markets have largely slowed.
It is a core belief that investors should seek “discounts”. The old adage is buy low and sell high. That advice holds, but investors should be wary as they walk the tightrope between discounted opportunities, and realistic market danger. Faced with a world filled with worrying trends and negative news an even handed and traditional approach to investments should be at the top of every investor’s agenda for 2016.
Today could be a big day. Today the Federal Reserve might finally raise interest rates.
If it does it will be the first time it has done so since 2006. Interest rates, which are precisely nobody’s preferred choice of water cooler conversation, are now the subject of such intense focus it’s hard to know whether we are making too big a deal of them, or not enough of a big deal.
To review, interest rates are used to either stimulate spending or increase savings. If rates are low, we argue that borrowing is cheap and it makes sense to spend money. If rates are high and it costs more to borrow, then people and businesses are likely to save. By this process we can increase or decrease the “cost” of money. Interest rates are therefore considered important in moderating an economy. If the economy is overheating and inflation is rising, raising interest rates should put a damper on it. If the economy is worsening or in recession, lowering rates could inspire companies to spend rather than save and encourage large purchases.
During 2008, in addition to bailouts and massive stimulus packages to the economy, the Federal Reserve in the United States heavily relied on the key interest rates to help stem the problems of the housing and banking crisis. Interest rates went from 5.25% in 2006 to 0.25% in 2008. And they’ve stayed there ever since.
Officially the rate hasn’t moved up, although the Fed has “tightened” credit to the market. Slowing down its bond buying program and ending QE has helped nudge up long term borrowing costs. But eight years on the official interest rate is still near zero, effectively emergency levels, and the economy is (supposedly) vastly improved. So why hasn’t it moved before?
There is no simple answer to that question. Markets have been nervous, inflation expectations haven’t been met, the USD has risen too fast, unemployment has been too high, the global economy too weak; all of these reasons and more.
But in the background has been a looming fear. That interest rates can’t stay at zero forever. That borrowing can’t be cheap forever. That if the market tumbles again we will have little room to maneuver. That eventually we will have to face significant inflation (and therefore significant interest rates). Those fears seem to have finally won over the largely dove-ish Federal Reserve.
But I want to posit a different thought with our readers. That maybe rates don’t matter as much as we like. Economies are large and complicated things. We only measure what we think is important and traditionally we’ve had to go back and reassess what makes economies work, especially in the face of serious recessions. Where once the Gold Standard was thought to underpin a strong economy, not a single country today relies on it. Where economies were thought to need to correct and businesses fail to right a recession, today we encourage large government spending. Where as we once thought that interest rates shouldn’t be factored into recessions, they are now our first line of defence.
Across the world interest rates are at historic lows to stimulate spending. The BoC recently suggested that interest rates could go negative, a startling and worrying sign for the Canadian economy, especially after two rate cuts this year. But behind this there must be some recognition that the use of interest rates to spur on an economy is at best logarithmic. Like slamming your foot on the gas pedal of a car the most power is delivered early on, not as the pedal reaches the floor.
And so it can be said that perhaps interest rates, currently at all time lows maybe don’t matter that much at all. Maybe you can’t trick people into spending money. Maybe there are limits to what we can do to help an economy. Maybe we have yet to truly identify what ails our economies.
I am of the opinion (in case you haven’t noticed) that the rise of big data may not foretell a future where we can know everything. Far from it, the abundance of data is at best showing that there is still much we don’t know. If the Fed hikes rates today, moving the rates up by 1/4 of a percent, I doubt that there will be any significant change to the economy. It will take years before we approach anything close to “normal” rates at around 2% or higher. In short, a rising rate today will likely mean more symbolically than it does tangibly to the economy.
We’ve done a little video to try and explain why analysts now expect the price of oil to stay much lower for much longer. It’s a different format than our previous videos, but we think it offers an opportunity to be more informative with a greater impact than some of our other videos.
We’ll be playing around with this idea for a while, experimenting with ways to make it interesting and quick, so please send us your thoughts and any topics you’d like us to cover.
In other news, the Canadian and global markets have been taking a beating over the last couple of weeks. Much of this is tied to an expected Federal Reserve rate hike for the end of December. The rate hike will be unbelievably small, but markets have been selling off in anticipation of it’s arrival.
The “normalising” of interest rates is a hot topic for many. Some American manufacturers worry that rising rates will inflate the USD further than it already has this year. In Emerging Markets the rising USD has meant a collapse in investment while funds flow back to American shores. Proponents of the rise have argued (persuasively I believe) that seven years after a major financial crisis it makes no sense to have interest rates at emergency levels. Long term cheap credit can’t be allowed to continue.
Canada is also getting badly beaten by the continuing falling price of oil and the end of the commodity super cycle. The slowing down of China has meant that there is simply less need for the huge amount of raw materials we have been selling. Prices on iron ore and copper have all been falling with the price of oil.
Canada is also saddled with other problems. Debt to income just hit a new high, while government debt is expected to grow substantially over the coming years while the economy looks to be doing worse.
We’ve been extremely busy in the second half of this year, which has kept us from writing as much as we have in the past. But we will try and be back later in the week with some more analysis on the markets and economy.
If you are like me and frequently trying to battle the temptation to eat delicious fattening foods in large quantities, you may have ended up purchasing some of the latest wearable tech designed to “nudge” you into better behavior. Such fitness trackers, like the fitbit Charge or Jawbone UP, have become extremely common place. Thousands and thousands of Canadians are currently tracking their steps, exercise and caloric intake through their phones and wristbands.
There’s only one little problem. Many people don’t ultimately stick with their new healthy lifestyle.
The age of the internet has brought with it the age of big numbers, and the belief that human activity can be simply discerned with the right amount of information. Figure out the correct code and human behavior can be reduced to a matter of basic inputs. Such ideas have appealed in particular to economists, who for a long time have argued that humans are rational machines that pursue self interest. Despite overwhelming evidence that humans do lots of stupid and irrational things, much of it leaving them miserable, economists have argued that it really just means we don’t adequately understand the real motivating self interest at play. Big data promises to change all that.
Wearable technology, particularly around fitness, has aimed to make managing your health easy, and frequently fun. But most people abandon their trackers once the novelty has worn off. The people who continue to use them were the ones already inclined towards regular fitness and managing their health. In other words changing behaviour is considerably harder than just giving people a nudge.
The same is true for investing. The current focus in the investing world is on fees. Fees, it is argued, should always be lower and the primary concern of investors should be around those same fees. But focusing on fees as a solution to investing woes is like a fitness tracker managing your diet, it’s most useful when you already look after all the other aspects of your life. It’s not that fees aren’t important, but as a measure of your financial health it is really last on the list.
An anecdotal example of how little fees matter comes when I meet people who frequently have TFSAs at a bank. How did they get their TFSAs? One day a teller recommended they open one, and having heard that a TFSA was some kind of good idea they did it. What do they hold in that TFSA? When was the last time it was topped up? When did the person last hear about it’s performance? Who is encouraging them to continue saving? Has anyone reached out to discuss rebalancing or other investment strategies?
The answer to these questions frequently is a shoulder shrug. Yes, fees are important but they can’t make sensible planning happen, nor can cheap financial management encourage people to take a more active interest in investing. Worrying about fees in a world where many people either aren’t saving, aren’t saving enough, don’t know what they are saving in, and are unsure what their savings options are seems to be putting the cart before the horse, assuming incorrectly that one leads naturally to the other. In truth you can only be mindful of fees once all the other investing options have been taken care of.
In many respects the internet is increasingly giving us the impression of knowledge and control, but often times that only seems to be an illusion. As we increasingly migrate to low cost solutions provided through our phones and tablets we may not always realize that our best solutions are not always the lowest cost ones, but the ones that best suit our needs.
Within my business we have always strived to keep our costs down, and I have the comfort of knowing that our costs are competitive. But the reason that investors have chosen to work with us has little to do with cost. For my clients that we have helped steward into retirement, the young and new investors who have a chance to sit down and discuss their investment needs and learn about all their investing options our real value is not in cost, but in being accessible, providing clear advice and peace of mind. There is no fitbit for that.
Have you ever thought about how you might die? If you have you’ve probably hoped that it would be quick, painless and happen in your sleep. Though this might be the death we hope for, the reality is almost certainly going to be the opposite. Death typically provides great forewarning, can be lingering and cause great pain. Most all of us will die of non infectious diseases, starting with heart disease, including high blood pressure, heart attacks and general circulatory failure. After that comes cancer, and then a host of other diseases in various other likelihoods.
These are unpleasant truths, and not typically something we would like to dwell on. But as a clever pirate once said, “life is pain, and anyone who says otherwise is selling something.” Wise words, and a useful reminder that while we may be the heroes of our own life, it does not shield us from the most unfortunate outcomes the universe can through at us.But dying is perhaps not even the worst of what can befall us. While only 4.3% of people will die from dementia, it is currently estimated that 1/3 people who die of some other ailment will also have dementia at the same time. That’s a disturbing reality, suggesting that while we may still live a long life, we may not be in charge of all our faculties and could be left in an incapacitated state for an extended period of time.
I’m not going to delve into the morality of euthanasia and whether you should be allowed to choose assisted suicide. Instead I would like to shine a light on some common scenarios about what is likely to happen before we die, and why it’s important to have a Power of Attorney. A few months ago I wrote about the importance of young people having wills, to protect children, their assets and see to it that their families are cared for properly. But wills aren’t just for ensuring your wishes are carried out after you die, but before it as well.
A living will and a Power of Attorney as part of your estate planning could be counted as one of the most important aspects of sensible planning. Without it your wishes can not be carried out. If you get seriously sick, are in a terrible accident or lose your mental capacity due to illness, it is too late for “do not resuscitate” requests or to appoint someone you trust to manage your affairs. In fact, in Ontario, being rendered “mentally incapable” means that solely owned assets cannot be accessed by any other person, including your spouse. Instead you would be forcing your family to appeal to the Courts to appoint them a guardian. Outstanding bills, education funds and bank accounts may not be paid or accessed even if it’s your children’s future in the balance, and contrary to what you might think, the government does not make quick or speedy exceptions because you didn’t share bank accounts but have a joint credit card that needs payment.
Long lives are wonderful things, allowing us the privilege to see multiple generations grow-up and participate in so much more than any generation behind us. But a long life also opens us to the possibility of something bad happening to us, with greater potential for life threatening accidents and illness that maim but do not kill. Like insurance and long term financial planning, a living will and a power of attorney represents worse case scenario planning that we hope never to need. But while we may hope never to be left in a vegetative state, suffering from Alzheimer’s, or incapable of running our own lives, we should not be burdening our families and stretching financial resources due to poor planning.
Please don’t wait, if you would like to get your will in order please give us a call today!
In the Wizard of Oz we were told that to enter the Emerald City, everyone had to wear green tinted glasses to “protect their eyes” from the “brightness and glory” when in fact it was the method by which the city itself was made to appear green. The first great illusion of the Wizard in the book. Canadian housing feels much like this. The worse the situation gets the more we are assured that the “brightness and glory” of the housing market is unassailable or simply not an issue, and we are invited to don our own emerald glasses.
The latest installment challenging that gilded view of housing and mortgages come from the November Toronto Life. Titled “Mortgage Slaves” it is a depressing look into the world of shadow banking and sub-prime mortgages here in Toronto, which far from popular belief is a lively and growing business. Private lenders and shadow lending can turn the reasonable prospect of paying a mortgage into a spiralling mess of debt. The family they interview took a moderate second mortgage for renovations, and promptly found themselves in financial trouble. Seeking help they refinanced several times with private lenders, moving their borrowing rate up from a reasonable rate of interest to 12%. Ten years on and they owed more money than they had paid for their house and were poised to have their home sold from under them.
Possibly the most frightening thing is that Canadians borrow $10 billion a year for their down payments, meaning that the whole point of down payments is undone. And it is here that we see how problems arise. Housing has gone from being one of the most conservative practices to one of the most aggressive. Down payments are small, you still only need 5% to get a mortgage. The secondary banking business is growing, precisely in the area we don’t want with less credit worthy families. Housing prices are ballooning at rates far in excess of what would be deemed sustainable. The CMHC, the people insuring many of the mortgages and who will be on the hook for significant defaults, also believes that the housing market is vulnerable to a correction.
The response from political parties during the last election isn’t just underwhelming to these problems, it was counter productive. Harper had promised to raise the maximum you could borrow from your RRSP for the First Time Home Buyers Plan. Trudeau’s plan was arguably worse, allowing you to dip more than once into your RRSP. The best plan was from the NDP to cut taxes to build more rental units.
The IMF, the Bank of Canada, the CMHC and The Economist all believe that our housing market is over valued. The response from banks, private lenders and politicians is to shrug and tell us not to worry. There is complicity from home owners and realtors, who are enjoying seeing the rising home valuations and the flurry of activity that it brings. Economists don’t worry because despite the high level of debt, Canadians don’t owe all that debt at once but over decades. So what’s the concern?
But it should not take a MENSA level intellect to determine that nothing good can come from growth in the continued drop in quality of the banking system or in the quality of debt on issue. Politicians and citizens have to face a reality that high house prices are only good too a point, and that taming the housing market will pay greater dividends than the eventual fall disinterested parties are predicting. But most importantly, young Canadians should know that buying a house at any cost does not define financial success. But it could spell financial failure.
As a rule I dislike large majority governments. Far from believing that minority or coalition governments are unworkable, we have a good history of weak governments focusing on practical solutions that usually avoid the trappings of their respective ideological ends. Because the thing that worries me most about governments is not the promises they won’t keep, but the promises they will.
The resounding victory for the Liberal Party and Justin Trudeau means that the big worry for Canadians should be exactly this. Trudeau has promised rollback TFSA contributions, decreases in the planned rise of OAS, and add a new tax on people earning more than $200,000. Tax hikes haven’t been a popular part of political platforms over the past few decades, yet Trudeau’s platform was successful for precisely that, tackling perceived inequalities benefiting “millionaires” and a promised difference in governing style from the more insular and autocratic Harper.
While I may personally quibble over defining (and vilifying) “millionaires” as people earning more than $200,000, we must acknowledge that an upper tax rate of 33% on income over $200,000 isn’t so cumbersome that we should start panicking and freaking out. That is until you add in the provincial taxes.
Assuming that everything goes to plan, the top tax bracket in Ontario will be 54% sometime next year. That won’t even make Ontario unique. More than half of the provinces will have a top tax bracket in excess of 50%, with the highest being New Brunswick, clocking in at an impressive 59%. And what of the tax cut for earnings between $45,000 to $90,000? While it is estimated to put around $670 back into your pocket, it’s relief may be short lived in Ontario.
Hot on the heels of that cut will be the new ORPP, or Ontario Retirement Pension Plan, which will take about 1.9% of your salary by 2017, easily eating up whatever tax savings you were just given and then some.
It’s easy to lose perspective on taxes and become an annoyance at family dinners, complaining about your money being stolen by evil government officials. But that shouldn’t mean that we aren’t vigilante about how much we pay in taxes either. On the docket across the country tax hikes are poised in every corner. In Alberta the NDP has raised taxes on corporations, even as the economy weakens. In Ontario the Liberals have decided to allow each municipality to set their own land transfer tax, representing a likely hike for many cities. And of course federally, the ending of income splitting, the rolling back of TFSA contribution room and the aforementioned new tax bracket all represent new costs for citizens.
I have an open dislike of Trudeau’s use of the term “millionaires” and “the wealthy” to talk about people earning $200k, it seems like a semantic trick. Few of us, after all, can muster the courage to defend an income that many will never see. But as unsympathetic as we may be to the “1%”, we should be mindful that taxes go up to cover costs, and if the economy slows or debt balloons, we may find that the “millionaires” encompasses an increasing number of us.
A few weeks ago I wrote about the demographic deformation, how our aging population changes many factors about our society in everything from government services to investing. One of the government services that is likely to be affected is our health care, and that should have a profound impact on your investing and retirement plans.
It isn’t surprising that health care costs would rise as a population ages. Living longer doesn’t just mean a longer life, but one in which treatment costs rise in accordance with the number of treatable ailments. Typically this has meant that the older you get the more you cost the system. The picture is more complicated though. Costs rise as you get older because you get closer to death, and the most expensive and costly treatments correspond to end of life care. High cost users (HCU) account for only 5% of people treated by OHIP, but use 61% of hospital and home costs.
Being old though doesn’t automatically make you a HCU, but it does make it more likely. The most expensive HCUs are actually infants, but as a percentage only account for 3% of all infants that see doctors. By comparison of the people over the age of 80, 20% will be HCUs.
From the standpoint of the government, HCUs represent a serious challenge to managing the long term sustainability of public health care. If you are over the age of 65 and seeking medical treatment there is a good chance you will be costing the system a great deal, which is not a problem when the number of people over the age of 65 is small relative to the rest of the population. But look at the projected population for Ontario.
Our population is aging, and the costs to the system are expected to be enormous. Which is a problem, because the costs of the system are already enormous. Healthcare in Ontario is already 38.5% of the budget ($50.8B), the single greatest expense within the province, and is expected to grow at a rate of 1.2%. That’s not because that’s the natural rate of growth (nationally hospital spending averaged 6.7% annually between 1998-2008), but because the province is frantically looking to contain costs and reign in the ballooning debt we already face. Ontario today is now the world’s most indebted sub-sovereign borrower, double the size of California.
If you are in your 50s and planning your retirement and taking an honest look at these three factors: rising costs, aging population and ballooning debt, would it still be reasonable to expect that OHIP will cover all your costs when you are in your 70s? That you could simply dismiss the costs of your future healthcare as not being solely your responsibility?
Canadians today already expect that they will have out of pocket medical expenses in retirement, to the tune of about $5400 a year. That number doesn’t include the cost of either nursing homes or retirement homes which can vary wildly based on your needs. But according to Statistics Canada there is a 30% chance you will need long term care by the age of 65, and a 50% chance of needing it by 75. Imagine the costs of health care when there are more people in the country over the age of 65 than under the age of 14 (hint, that’s in the next 6 years).
I don’t like to fear monger, but retirement plans should include the need of long term medical costs and younger people today looking to retire in the next two to three decades should not assume that the healthcare system we have now will be in place in the way we have come to understand over the next twenty years. Even today it was announced that Ontario doctors are planning a charter challenge after having their fees were cut by 6.9% in the past year, an attempt by the government to cap doctor’s costs at $11.6 billion. Our health care costs are rising, and our health care service will be changing to match. Your retirement plans should be changing too.
It’s a good question; when kids go off to school we expect them to finish growing into adulthood but from the standpoint of financial institutions they are already adults, ready to take on all the burdens of credit and predatory loan rates. This is regardless of how experienced they are when it comes to accepting financial responsibility and no doubt contributes to the average indebtedness of students leaving Canadian universities.
Companies are busy grooming kids to be little economic engines, buying on impulse and spending when they should be saving. Whether you agree that it is right or not, children today either directly or influence economic activity to the tune of $1.2 trillion, so don’t assume that we’re likely to see a change in how we advertise to kids. The most effective counter to the tidal wave of advertising and commercial temptation is to make your children money-smart as soon as possible.
What is money-smart? Well, think of all the financial decisions you make on behalf of your kids, and then consider how many times you don’t include your children in those decisions. RESPs, RRSPs, credit cards and bank accounts all represent opportunities to not simply teach about money, but create habits and routines around money and how it is used.
For instance, did you know that so long as a fifteen year old has a social insurance number and files a tax return they can have an RRSP? Crazy right! And yet given that most 15 and 16 year olds work in the summer there is no reason that they can not be introduced into the basics of long term savings, even if it is merely an early step.
Allowances too can serve as a useful tool, not simply in terms of introducing basic money management but also in budgeting and even early credit. Parents shouldn’t simply hand over the money and walk away, instead be part of every step of the financial story, from planning big purchases to paying bills. Family budgets can be a useful addition to the allowance as well. Most parents buy clothes for their kids well into early adulthood. But given how much importance kids put on clothes, both as a fashion choice and as an expression of individuality why not set up a clothing budget, giving children the opportunity to choose what they want and find the outer limits of how far money will go?
Gail Vaz-Oxlade, the prominent and popular Canadian money guru, has a book about this exact subject, and it is a short and useful read for adults looking for ideas on how to introduce the concept of money to children in practical and fun ways. I can’t recommend it enough as a clever way to get your kids ready for good fiscal health.
But we can all chip in. I leave my clients and readers with this open invitation: If we manage your children’s RESPs then invite them to the table! On average we see clients between 3 and 4 times a year in person, and over the course of reviewing their financial picture not once has anyone invited their teenager to join a regular review of the savings they will be employing for their higher education. We view this as an easy learning opportunity for soon-to-be students to get a better understanding of the RESP tax credit, the reasons behind investing decisions and how their RESP will be applied to covering their university costs and what will happen to the money if they don’t use it. We are your resource for educating your children and you shouldn’t be afraid to use us!