Apple’s Watch and The End of Innovation

20130112_ldp001In early 2013 the Economist lamented that we may never produce something as innovative as the toilet. Certainly they were right in some ways, as some early innovations provided massive improvements in the standard of living with very little effort, where as new innovations did not add the same kind return for effort. It’s an interesting article and goes on to show that our understanding of innovation and whether we face a plateau in our technological progress is more nuanced and convoluted than we may be given to believe.

But industries do face innovation challenges. At some point all the easy refinements have been made and then starts the window dressing, attempts to “tart up” existing things that are little more than distractions from the initial great idea. The Apple Watch fits that criteria perfectly.

Apple Watch

To be clear, the Apple Watch does look to be all the things that Apple excels at; high quality, simple interface and good looks. But the point of the watch is somewhat unclear. You can answer phone calls, follow your heart rate, respond to messages and see your calendar. But these were all things that you can do now through your phone with a level of ease so surprising that you wonder what kind of person imagines that accessing this information is still too laborious.

The answer is likely marketers, who both see the trend towards wearable computers, and declining sales from other high priced items. Apple is a technology behemoth with a dedicated fan base of willing consumers. But even willing consumers have limits on their credit cards. High priced items like the iPad have cornered the tablet market, but they have also seen declining sales. Priced similarly like a phone, but lacking the phone contract subsidisation means that every iPad ends up costing between $500 – $1000. That’s pricey if every three years you are expected to buy a new one.


The Apple Watch then is likely trying to do several things. Boost the profitability of secondary devices beyond it’s iPhone division. Create a product with a lower entry point that people will be more willing to replace, while at the same time take a stab at a much smaller high end market with a Veblen good.

Ya, that's right. It says $22,000. Less useful than a phone, less gold than a Rolex and it needs to be charged every night.
Ya, that’s right. It says $22,000. Less useful than a phone, less gold than a Rolex and it needs to be charged every night.

But why own one? The first serious app for the apple watch is from Salesforce, the online CRM tool. Salesforce is already accessible from pretty much anywhere. You can log in from any computer and it has a very comprehensive app for all major smart phone platforms. So why would a wrist watch be the ideal place to offer notes, charts or contact information? Already people are wondering what the first “killer app” will be for the watch. I’m curious too.

What made the first iPhone great was that it made using the internet on a small device practical and easy. It was an innovative way to engage with a host of useful things that were previously outside of your reach when not in front of a computer. Apple opened a new market and ushered in a revolution. But eight years on and I am struggling to understand why you would sink any money into wearable tech, with its bad battery life, planned obsolescence and largely pointless existence.

Apple Stock

This should give investors pause. Apple and many of its competitors have done well by striving towards continuing improvements in the look and use of their products. But with each new iteration, we see less innovation and more refinement. The Apple Watch is an attempt to create something new that is actually made up of already existing technology. It doesn’t do anything better, and that should serve as a red flag to investors. As of yet there has been no truly successful wearable technology, neither in the form of glasses or watches. Apple hopes to change that with a more stylish and aspirational device. In the end however, it is a product likely to be crippled in three years by its own obsolescence. Whether that is an appealing device is up to consumers, but as an investor I wouldn’t want to make it a big bet in my portfolio.

How Imminent is the Next Market Crash?

image001This past week I received an article from a client regarding ideas about “wealth preservation” that made some good sense, and offered advice about calculating how much money you need for retirement. But while the premise was sound; that it makes sense to pursue investment strategies that protect your nest egg when your financial needs are already met, a one off comment about the future of the stock market caught my attention.

You can read the article HERE, but the issue I wanted to look at was the not so subtle implication that the US markets were now due for a correction. A serious one. Quoting the Wall Street Journal contributing writer William J. Berstein,

“In March, the current bull market will be six years old. It might run an additional six years—or end in April.”

This isn’t the first time I’ve heard this point before. It isn’t unique and sits on top of many other market predictioner’s tools, but its use of averages gives a veneer of knowledge the writer simply doesn’t possess.

Obviously we would all like to know when a market correction is due, and it would be great to know how to sidestep the kind of volatility that sets our retirement savings back. But despite mountains of data, some of the most sophisticated computers, university professors, mathematicians and portfolio managers have yet to crack any pattern or code that would reveal when a market correction or crash should be expected.

Which is why we still rely on rules of thumb like the one mentioned above. Is the age of a bull market a good indication of when we will have a correction? Probably not as good of one as the writer intends. Counting since 1871, the average duration of a bull market is around 4.5 years, making the current bull run old. But averages are misleading. For instance the bull markets that started in 1975, and 1988 (ending in 1987 and 2000 respectively) lasted for 153 months each, or just shy of 13 years. Those markets are outliers in the history of bull markets, but their inclusion in factoring the average duration of the bull markets extends the average by an additional year. Interestingly if you only count bull markets since the end of the second world war the average length is just over 8 years, but that would only matter if you think our modern economy has significant differences from an economy that relied on sailing vessels and horses.


The fact is that the average age of bull markets is only that, an average. It has little bearing on WHY a bull market comes to an end. There was nothing about the age of the bull market in the 2000s, when people had become convinced of some shaky ideas about internet companies that make no money, that had any bearing on its end. The bull market that ended in 2008 had more to do with some weird ideas people had about lending money to people who couldn’t pay it back than it did with a built in expiration date. Even more importantly, the market correction of 1987 (Black Monday) was an interruption in what was an otherwise quarter century of solid market gains.

Taking stabs at when a market correction will occur by using averages like duration sounds like mathematical and scientific rigour, but actually reveals very little about what drives and stops markets. And a quick survey of the world tells us a great deal more about global financial health and where potential opportunities for investment are than how long we’ve been the beneficiaries of positive market gains.

The Keystone Veto Was Meaningless

OILPossibly the most significant news in the last 24 hours was that Barack Obama had used his veto for the first time in five years to end the Keystone XL Pipeline. The pipeline, delayed by 6 years carried with it the hopes of the Canada’s Conservative party and oil executives in Alberta. The pipeline had been opposed, studied and debated, being bounced back and forth through the US government. It had been primarily opposed by environmentalists who object to the environmental impact of Alberta Tar Sand oil and hoped that by killing the pipeline less of it would be extracted, alternative fuels would fill some of the gaps and the world would be a healthier place as a result. It’s subsequent (and rather final) cancelation is being heralded as a victory by many environmental activists.

As we’ve already written, this was not case. While the pipeline hadn’t been built it hadn’t slowed the development of the oil sands, or impeded its movement to refineries. Instead it had simply been supplanted by rail cars. Although more expensive, the roughly $9 a barrel premium was well worth it when oil was above $100 a barrel.

The current price of oil helps explain why there was little real political risk to anybody in the veto of the pipeline. While oil was expensive there was real incentive to get Canadian oil to US markets. It helps offset oil from more troubling parts of the world and makes the economy run a little smoother. But the rise of US shale, the falling price of oil, the use of train cars, an improving economy and rising dollar has wrecked the economics of building the pipeline. By the time the Obama had vetoed the bill there was very little at stake politically except to satisfy his environmental base of voters. The pipeline may yet be still resurrected, but six years on and a new economic reality will likely mean little will get done soon.

The death of the pipeline is troubling most of all for Canada. Shipping oil by train is more expensive, and considerably more dangerous. It also reflects the new found reality that the government cannot rely on oil prices to bolster the economy.  But most of all it reflects the continuing declining fortunes of Alberta and returns focus to Ontario, the once and future king of the broad economy.

What a Race Car Driver Taught Me about Oil Prices

karun_carouselTesla is all over the news. Most recently I have seen several postings about the new P85D Tesla’s Insane Mode, a setting in the car that delivers the maximum amount of power to the car (a big thanks to my client who sent me the link).

Tesla, and it’s CEO Elon Musk (who is a real life bond villain) has made quite a splash, building a high quality and competitive electric car with a solid range. A real first. And while his current offerings in the market remain decidedly high end, his ambitions include creating a more affordable middle class version as well.

But the economics of electric vehicles remain challenging at best. There are more options than ever, from Chevrolet, to Ford to Toyota. But these cars all tip the scales at the upper end of the car market, and are not sensible economically on a three year lease.

This is the Tesla Model X. It's due to hit the road in 2016, and is gorgeous. Notice the "Falcon Wing." Notice it! Did you notice it?  Awesome, right?
This is the Tesla Model X. It’s due to hit the road in 2016, and is gorgeous. Notice the “Falcon Wing.” Notice it! Did you notice it?
Awesome, right?

But the problem for electric cars may be best explained by the new Formula E series that is currently in it’s inaugural season. Using a newly designed electric race car I was surprised to learn that there are limits on the power that drivers can use in races, (while fans can vote to give some drivers an addition 50 bhp to boost speed each race via twitter). Why is this? Ostensibly it is to help preserve the life of the battery, already the heaviest part of the car and not powerful enough to get a car through a single race without a second car. In other words, the economics of the battery is still the biggest challenge facing all auto producers.

By some good fortune my brother in law is a driver in Formula E for team Mahindra. Mahindra & Mahindra isn’t as well known in Canada, but is a large conglomerate and a significant auto producer that sells in many countries. This past year they have launched India’s first electric passenger vehicle, the Reva e2o, which they had loaned to Karun and afforded me the opportunity to test drive while visiting my extended family in India. It’s a good car, and I could see that Karun had enjoyed driving it. But he pointed out the first challenge to electric cars in India was that the Indian government is only just introducing an electric car subsidy (having previously canceled one in 2012). In fact it is government subsidies that have helped foster the boom in electric cars.

From NASDAQ, February 4, 2015
From NASDAQ, February 4, 2015

What this all leads to is the inevitable challenge poised by the sudden drop in the price of oil. Electric cars sit at the top of the market in terms of cost, and many aren’t even viable until after you both:

  1. Don’t have to buy gas anymore when oil is over $100 a barrel.
  2. Are given money by the government to help afford the car.

So if high gas prices underly the business case for electric cars, then a sudden cut in the price of oil does significant damage to that business case. It makes traditional petrol cars more cost effective, more competitive and more profitable compared to their e counterparts.

This tells us two things about oil and electric cars. The first is that while oil prices may stay depressed compared to previous market highs, the demand for oil is unlikely to decline and will likely recover as cheap oil spurs economic growth. The second issue is whether the rise of companies like Tesla is overstated. As exciting as they may appear, the market valuation of TESLA is the real insane mode, and certainly not in line with a traditional auto maker. The reality at least is that the end of oil, and the growth of electric cars is going to be dependent on considerable innovations in battery technology and will not be viable in the long term with cheaper oil and government subsidies. But who knows, next year’s Formula E series will allow teams to design their own cars and we may begin seeing some interesting innovations start in battery development.

You Won’t Believe How RRSPs Can Ruin Your Retirement!

h64ocNo seriously, you won’t believe it. That’s because RRSPs really can’t ruin your retirement, and yet every year someone, somewhere writes an article about the RRSP Tax Trap! This year’s contribution is from the Globe and Mail, which was also the source of last year’s main entry (also by the same author). The argument in these articles is that your RRSPs can become a taxation nightmare, forcing up your annual income and making you pay a higher marginal tax rate in retirement than you did in your working years! Cue panic.

Wondering why you don’t hear this complaint more? Why you don’t see lots of special reports on the nightly news of some sad-sack sitting at his kitchen table opening letters and then explaining to the camera how he “never foresaw the tax nightmare he’s in” happening? That’s because this particular issue is often overlooked as being one of having too much money, and is not widely regarded as a significant problem by most people (in fact the opposite for most Canadians is true). And while it’s true that being wealthy can create more complexity in investment strategies the “mo’ money, mo’ problems” aspect here has yet to stir a vast number of people to forgo their wealth and move to a commune.

The crux of these regular articles however (the reason why your average middle class Canadian should worry) is because RRSPs don’t save you taxes, but DEFER them. This emphasis on deferral, that your taxes will come back to haunt you is the kind of half truth that the media cheaply peddles without much thought for whether it does any real harm to the investor reading the article. It’s also bad math, because in addition to the taxes you deferred by contributing to your RRSP, there is also all the taxes you didn’t pay over the lifetime of the investment.

Let’s create a simple scenario to better illustrate what I mean. Assume the following things:

  1. You are 50.
  2. You currently earn, and will never earn more than $125,000 from now until you are 71.
  3. That you contribute every year $22,000 to your RRSP
  4. That your investments will return an average of 6% per year.
  5. That you start your RRSPs at age 50 with $100,000
  6. You invest $5500 of your tax refund into a TFSA with a 6% ROI

Let’s also create a second scenario, identical to the first, but instead of saving in an RRSP you do it in an unregistered savings account, splitting the $22,000 contribution between that and a TFSA, with a taxable rebalance triggered every 5 years. In all other respects the scenarios would be identical. What would happen?

Well thanks to excel it would look something like this:

20 Year Savings Plan

That gap in returns is the compounding difference of avoiding ongoing taxes from rebalancing and investing a portion of your tax refund into your TFSA. In essence you made each dollar travel farther over that twenty years by utilizing your RRSP more than you did without out, to the tune of nearly 25% additional savings.

There are a lot of ways to play with this, with numerous avenues to improve or refine this scenario, but no matter how you slice up these hypothetical scenarios there will never be a version where having less money is inherently better than having more. Having more is the whole reason you’ve been saving in RRSPs in the first place.


That isn’t to say that you shouldn’t be mindful of taxes in retirement, or that your retirement strategies shouldn’t include things like debt reduction or trying to maximize different investment pools, like TFSAs. It also doesn’t mean that there aren’t ways to be more sensible with your savings for retirement. What it does mean though is that realistic threats to your retirement are unlikely to come from having saved too much, and that concerns over your taxes being too high because you were good at saving your money is the literal definition of a first world problem. In short, don’t worry that your RRSPs are going to ruin your retirement when they will likely underpin a successful retirement plan.

Will We All Be Victims of Cheap Oil?

OILEarlier this year we wrote that Russia’s economy was fundamentally weaker than Europe’s and that their decision to start a trade war in retaliation for economic sanctions over the Ukraine would hurt Russia far more than Europe. As it happened Russia has suffered that fate and had a helping more. The collapsing price of oil was a mortal wound to the soft underbelly of the Russian economy, leading to a spectacular collapse in the value of the Ruble and an estimated 4.5% contraction in their economy for 2015.

The Ruble’s earlier decline this year had already made the entire Russian stock market less valuable than Apple Computers, but as the price of Brent oil continued to slide below $60 (for the first time since 2008) investors began to loose confidence that Russia could do much to prop up the currency, prompting an even greater sell-off. That led to an unprecedented hike in the Russian key interest rate by its central bank, moving it from 10.5% to 17% yesterday. Moves like that are designed to reassure investors, but typically they only serve to ensure a full market panic. The Ruble, which had started the year at about 30 RUB per dollar briefly dropped to 80 before recovering at around 68 to the dollar by the end of trading yesterday.

The Russian Ruble over the last year. The spike at the end represents the last few weeks.
The Russian Ruble over the last year. The spike at the end represents the last few weeks.

Cheap oil seems to be recasting the economic story for many countries and millions of people. The Financial Times observes that oil importing emerging markets stand to be big winners in this. Dropping the cost of manufacturing and putting more money in the pockets of the growing middle class should continue to help those markets. The same can be said of the American consumer, who will be benefiting from the sudden drop in gas and energy prices.

The Financial Times always has the best infographics.
The Financial Times always has the best infographics.

Losers on the other hand seem easy to spot and piling up everywhere. Venezuela is in serious trouble, so is Iran and the aforementioned Russia. Saudi Arabia should be okay for a while, as it has significant foreign currency reserves, but as the price drops other member states of OPEC will likely howl for a change in tactic. But along with the obvious oil producing nations, both the United States and Canada will likely also be victims, just not uniformly.

Carbon Tracker Initiative
Carbon Tracker Initiative

Manufacturers may be breathing a sigh of relief in Ontario, but Canadian oil producers are sweating it big. Tar sand oil requires lots of refining and considerable cost to extract. Alberta oil sands development constitute some of the most expensive projects around for energy development and a significant drop in the price of energy, especially if it is protracted, could stall or erase some future investments. This is especially true of the Keystone Pipeline which many now fear isn’t economically viable, in addition to being environmentally contentious.

This chart was produced by Scotiabank
This chart was produced by Scotiabank

Saudi Arabia has continued to allow the price of oil to fall with the intention of hurting the shale producers in the United States. This price war will certainly claim some producers in the US, but it will difficult to know at which point that market will be effectively throttled. Certainly new projects will likely slow down but the continued improving efficiency of the fracking technology may make those producers more resilient to cheap energy.

But there is one more potential victim of the falling price of oil. That could be all of us. I, like many in the financial field, believe that cheap energy will enormously benefit the economy. But our biggest mistakes come from the casual confidence of things we assume to be true but prove not to be. A drop in energy should help the economy, but it doesn’t have to. If people choose not to spend their new energy windfall and save it instead, deflationary pressure will continue to grow. As I’ve previously said, deflation is a real threat that is often overlooked. But even perceived positive forms of deflation, like a significant reduction in the price of oil, can have nasty side effects. The loss to the global economy in terms of the price of oil is only beneficial if that money is spent elsewhere and not saved! For now confidence is that markets will ultimately find the dropping price of oil helpful to global growth, regardless of the early losers in the global price war for oil.

Canada’s Problems Are More Severe Than You Realize

house-of-cardsOn December 10th, the Bank of Canada released it’s Financial System Review for 2014. It outlined numerous problems that continue to grow and potentially undermine the Canadian economy. Globally this report attracted a great deal of attention, not something the BoC is used too, but with a rising concern that the Canadian housing market is overvalued, an official document like the FSR gets noticed.

Screen Shot 2014-12-14 at 10.56.42 AMTo understand why Canada is growing in focus among financial analysts around the world you need to turn the clock back to 2008. While major banks and some countries went bankrupt, Canada and its banking system was relatively unscathed. And while the economy has suffered due to the general economic slowdown across the planet, the relative health of our financial system made us the envy of many.

Screen Shot 2014-12-16 at 10.39.42 AMBut the problems we’d sidestepped now seem to be hounding us. Low interest rates have helped spur our housing market to new highs, while Canadians in general have continued to amass debt at record levels. Attempts to slow the growth of both house prices and improve the standard of debt for borrowers by the government have only moved loan growth into subprime territory.

If all this sounds familiar, it’s because we’ve been talking about it for sometime, and sadly the BoC hasn’t been able to add much in the way of clarity to this story. While we all agree that house prices are overvalued, no one is sure quite how much. According to the report the range is between 10% to 30%. Just keep in mind that if you own a million dollar home and the market corrects, it would move the price from $900,000 to as low as $700,000. That can make a considerable dent to your home equity and its too big a swing to plan around.

Screen Shot 2014-12-16 at 10.39.06 AMOn top of this is the growth of the subprime sector in the market. Stiff competition between financial institutions and an already tapped out market has encouraged “certain federally regulated financial institutions” to increase “their activities in riskier segments of household lending.” This is true not just in houses but also in auto loans, where growth as been equally strong.

The Financial System Review also goes on to talk about problems growing in both cybersecurity and in ETFs (both subjects we have written about). It also talks about some of the positive outlooks for the economy, from improving economic conditions globally and support for continued economic activity. But its quite obvious that the problem Canadians are facing now is significant underlying risk in our housing and debt markets. These problems could manifest for any number of reasons (like a sudden drop in the price of oil, a significant slowdown in China, or a fresh set of problems from Europe), or they may lay dormant for months and years to come.

For Canadians the big issues should be getting over our sense of economic specialness. As I heard one economist put  it “Canadians feel that they will be sparred an economic calamity because they are Canadian.” This isn’t useful thinking for investors and as Canadians we are going to have separate our feelings about our home from the realities of the market, something that few of us are naturally good at. But long term investor success will depend on remaining diversified (I know, I link to that article a lot), and showing patience in the face of market panic.

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