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Four Interesting Stories From 2011

Jim Yih — Tue, 10 Jan 2012 10:00:44 +0000

One of my regular media gigs is sitting on the Alberta Primetime Monday Money Panel and for our year end show, we were asked to talk about some interesting stories from 2011 or share stories of interest and things we are watching in the new year. 30 seconds is not much time to respond properly to this question so I thought I would share four of my tops stories from 2011.

Pooled Registered Pension Plans (PRPP)

In January 2011, Finance Minister Jim Flaherty introduced the concept of a new PRPP as a means of trying to address the big retirement gap in Canada.

Later on November 17, 2011, the Harper government introduced the Pooled Registered Pension Plans Act(Proposed Act) legislation as the next step to the process of implement the federal portion of the PRPP. The government describes the PRPP as a change to Canada’s pension landscape that will make saving for retirement easier for millions of Canadians.

Being a strong advocate of workplace savings programs and financial education in the workplace, I have followed this story closely and written some articles:

The next steps for the PRPP is the Federal Government needs to pass this Proposed Act and adopt regulations. At the same time, work on provincial legislation and the multilateral agreements will need to be undertaken.

Task force on Financial Literacy in Canada releases their findings report

In the 2009 budget, the federal Minister of Finance announced his intention to establish a national task force dedicated to the issue of financial literacy. The Task Force would provide advice and recommendations to the Minister of Finance on a national strategy to strengthen the financial literacy of Canadians. Appointed in June 2009, the Task Force on Financial Literacy is comprised of 13 members, drawn from the business and education sectors, community organizations and academia.

On February 9, 2011, Canada’s Task Force on Financial Literacy today made public its report to the federal Minister of Finance, recommending urgent action on a national strategy to strengthen Canadians’ financial literacy. I am watching this story to see if this whole process makes an impact on the future financial literacy in Canada.

Vanguard comes to Canada

Back in June, US mutual fund giant Vanguard announced it’s intention to come to Canada with a series of Exchange Traded Funds (ETFs). In December they actually launched 6 ETFs with very low management fees. The management fee for all six Vanguard ETFs averages 0.24 per cent and the Canadian Equity Fund is reported to be 0.09 per cent.

I’m especially interested to see if the Vanguard Canada is able to create more awareness about the high fees being charged by the mutual fund industry. Canada has been reported as having some of the higher mutual fund fees around the world but despite that it remains the investment of choice for Canadians with $775 billion dollars of assets under management. ETFs have significantly less assets with less than $40 billion in assets under management.

Vanguard is targeting their ETFs to investment dealers and fee based advisors because the do-it-yourself market is too small (only 5% of all investors in Canada). Here’s a few articles I wrote on the topic:

Another year of Market Volatility

The last hot topic of 2011 was another tough year with more volatility. The TSX finished the year in negative territory (-8.89%) despite some hopes for a Santa Claus rally. The TSX hit a high of 14,329.50 and a low of 10,848.20 with 8 of 12 months with negative returns. September was the worst month of the year where the TSX lost 8.66% in a single month. October followed with the best month rebounding a 5.61% return.

In my line of work, I see a lot of investors who have accepted the volatility as normal and others who are just sick and tired of all the ups and downs and the market taking away any gains they make the previous weeks, months or years.

To help investors, here’s a few articles I wrote about dealing with market volatility:

Are there any interesting stories you are watching for 2012?

Best wishes to everyone in 2012.

Four Interesting Stories From 2011 originally appeared on Canadian Finance Blog on January 10, 2012.

Four Reasons The Economy Isn’t THAT Bad

Tom Drake — Mon, 05 Dec 2011 10:00:00 +0000

In the October 29^th issue of “The Economist” I read an article that asked the question, if you could be a resident of any place and time in history, which would you choose?” It’s an interesting question because not only do you think back to your high school and college history classes but you start to think about the world you live in now.

Still foremost on our minds is the economy. We don’t feel like we have what we once did but is that entirely true? According to a recent bankrate survey, 17% of Americans believe that they are better off this year than they were last year, and I’m thinking the mindset of Canadians is pretty similar. But to be fair to the 21^st century, if we were to compare what we have now to the economies of old, what might we see?

It’s Easier to Get Stuff

We’re used to Amazon sending us anything we want nearly overnight but that wasn’t the case a few hundred years ago. In those days infrastructure wasn’t such that it was cost effective for the average working class citizen to buy “imports”.

We Aren’t Slaves to the Weather

From Mesopotamia to the Maya, thriving economies have been brought down by the weather. Droughts, floods, and other natural disasters still affect us today and they can have lasting effects but when was the last time you heard of a civilization going extinct because of the weather? A more diversified economic engine can be thanked for that.

Better System of Money

Inflation, deflation and stagflation are now controlled by typing money in to existence on a computer. We can debate the merits of such a system but in earlier times, when coins were used to pay for goods, inflation could be caused by not enough money being made—literally. If the silver supply was disrupted, because of war, weather, or anything else, the value of that currency was affected.

Globalization

Let’s steer clear of debates over NAFTA and foreign produced goods for now. From a purely economic perspective, as more people compete for your money, they’re going to look for ways to give you more for less. Drug companies will compete for the best remedies for diseases that we hope to see eradicated. Globalization brings competition and products to us that weren’t possible hundreds of years ago.

The Best Time?

According to the author, the best time to live was 17^th Century London. This was a time when the stock market was being conceived in a coffee house, the insurance industry was born from mathematic principals of probability, and you could walk through the streets and peek in on some of the greatest artists of human history painting their next piece of brilliance.

Even with the romanticism that comes from The Economist’s portrayal of such a time, I’ve witnessed a company called Apple innovate the world with a hand held computer called an iPhone. I remember the first time I saw the picture of an HDTV, and I remember the great musical artists of my era who, often driven by the pursuit of money, have left their mark on art history.

The economy kind of stinks right now but I don’t know that it’s that bad when I look at where we could be.

Four Reasons The Economy Isn’t THAT Bad originally appeared on Canadian Finance Blog on December 5, 2011.

Is The Current Market A Return To Normal?

Tom Drake — Thu, 06 Aug 2009 09:00:01 +0000

I recently talked to Dr. Jean-Paul Rodrigue, from the Department of Economics & Geography at Hofstra University to discuss his research on business cycles and how it applies to our current economic situation. His work charted the phases of a bubble, based on hundreds of years of economic data. Thanks to Dave in Calgary for bringing Dr. Rodrigue’s work to my attention. Below is the chart and descriptions of the four phases.

: Source: Jean-Paul Rodrigue, Ph.D.

Stealth Phase

Those who understand the new fundamentals realize an emerging opportunity for substantial future appreciation, but at a substantial risk since their assumptions are so far unproven. So the “smart money” gets in, often quietly and cautiously. This category of investor tends to have better access to information and a higher capacity to understand it. Prices gradually increase, but often completely unnoticed by the general population. Larger and larger positions are established as the smart money start to better understand that the fundamentals are well grounded and that this asset is likely to experience significant future valuations.

Awareness Phase

Many investors start to realize the momentum, bringing additional money in and pushing prices higher. There can be a short-lived sell off phase taking place as a few investors cash in their first profits (there could also be several sell off phases, each beginning at an higher level than the previous one). The smart money takes this opportunity to reinforce its existing positions. In the later stages of this phase the media starts to notice and those getting in are increasingly “unsophisticated”.

Mania Phase

Everyone is noticing that prices are going up and the public jumps in for this “investment opportunity of a lifetime”. The expectation of future appreciation becomes a “no brainer” and a linear inference mentality sets in; future prices are a “guaranteed” extrapolation of past price appreciation, which of course goes against any conventional wisdom. This phase is however not about logic. Floods of money come in creating even greater expectations and pushing prices to stratospheric levels. The higher the price, the more investments pour in. Fairly unnoticed from the general public caught in this new frenzy, the smart money as well as many institutional investors are quietly pulling out and selling their assets to eager future bag holders. Unbiased opinion about the fundamentals becomes increasingly difficult to find as many players are heavily invested and have every interest to keep the appreciation – “the game” – going. The market gradually becomes more exuberant as “paper fortunes” are made and greed sets in. Everyone tries to jump in and new investors have absolutely no understanding of the market, its dynamic and fundamentals. Prices are simply bid up with all financial means possible, particularly leverage and debt. If the bubble is linked with lax sources of credit, then it will endure far longer than many observers would expect. At some point statements are made about entirely new fundamentals implying that a “permanent high plateau” has been reached to justify future price increases; the bubble is about to collapse.

Blow off Phase

A moment of epiphany (a trigger) arrives and everyone roughly at the same time realize that the situation has changed (like the Road Runner Coyote realizing he is about to fall after walking on thin air for a few seconds). Confidence and expectations encounter a paradigm shift, call it a reality check, not without a phase of denial where many try to reassure the public that this is just a temporary setback and that anyone saying otherwise does not know what he is talking about. Some are fooled, but not for long. Like a directionless herd many try to unload their assets to a greater fool, but takers are few; everyone is expecting further price declines. The house of cards collapses under its own weight and late comers (commonly the general public) are left to hold the bag while the smart money has pulled out a long time ago. Prices plummet at a rate much faster than the one that inflated the bubble. Many over-leveraged bag holders go bankrupt, triggering additional waves of sales. There is even the possibility that the valuation undershoots the long term mean, implying a significant buying opportunity. However, the general public at this point considers this sector as “the worst possible investment one can make in his life”. This is the time when the smart money starts acquiring assets at bargain bottom prices.

I asked Dr. Rodrigue for his opinion on whether the current markets are in the “return to normal” phase or the “return to mean” phase.

My assumption concerning the stock market is that we are in the “return to normal”. It is not because that the contraction is taking place at a slower rate that one should declare that “the recession is over”. There is quite a lot of desperation so the market appears to cling to any news that is not horrible with a positive spin.

The next shoe to drop is linked with the commercial sector that has overinvested and malinvested, fooled by the debt fueled consumption binge that was the real estate bubble (if debt is defined as present consumption at the expense of future consumption, then it can be assumed that there will be much less consumption than expected in the future). You should see the blood bath that is currently taking place in the maritime shipping industry; gigantic capacity coming online at the same time the demand is dropping sharply.

Once the “stimulus” will be spent, both financially and politically, and that people will see it for what it was – a macroeconomic fraud – then there should be a another downside until we reach the “return to the mean phase”. One can also wonder about the unfolding pension crisis as the baby boomer generation enters retirement age with limited savings and depleted assets (real estate and 401k/RSSP). A question I am asking myself these days is how all of this will be defaulted on, particularly defined benefits plans?

Thanks to Dr. Jean-Paul Rodrigue for taking the time to share his thoughts and research with The Canadian Finance Blog. His theroies show a possible outcome for the economy that isn’t being discussed much as stock markets move higher.

Is The Current Market A Return To Normal? originally appeared on Canadian Finance Blog on August 6, 2009.

The Kondratieff Wave: Tracking The Past Or Predicting The Future?

Tom Drake — Wed, 05 Aug 2009 09:00:35 +0000

In 1926, Nikolai Kondratieff (also spelled Kondratiev or Kondratyev) published a study called Long Waves in Economic Life for the Agricultural Academy and Business Research Institute in Russia.

Kondratieff noted that capitalist economies have long waves of boom and bust, that he described similar to the seasons in a year. However, for presenting his work to Stalin showing that capitalism will always return, he was imprisoned and then eventually executed.

The four seasons in The Kondratieff Wave are:

Spring (25 years) – Inflationary phase with rising stock prices and increased employment and wages.
Summer (3-5 years) – Stagflation phase with rising interest rates, rising debt and stock corrections. Imbalances lead to war.
Autumn (7-10 years) – Deflation phase where falling interest rates lead to a plateau and stock prices increase sharply.
Winter (3 year collapse and 15 year readjustment) – Depression phase with stock and debt markets collapsing and commodity prices increasing.

Source: www.chartingstocks.net

So what does all this mean? I found this chart very interesting, especially in today’s economy. I’d like to thank a reader, Dave in Calgary, for emailing this to me. Of course, it’s debateable whether winter is behind us and we’re back into spring… or are we currently in autumn, with winter still to come?

The Kondratieff Wave: Tracking The Past Or Predicting The Future? originally appeared on Canadian Finance Blog on August 5, 2009.

The Recession Is Over! No Wait, It’s Not

Tom Drake — Thu, 30 Jul 2009 09:00:30 +0000

Last Friday, the Bank of Canada governor Mark Carney said that “we believe the economy will grow this quarter”, which technically means the recession in Canada was over in June.

On Monday, Trade Minister Stockwell Day repeated this claim in the Penticton Western News, writing “I’m not kidding. The recession is over… Last week, after pouring over all the numbers he was able to declare, not on a whim but based on economic fact that the nasty ‘R’ word no longer applied to Canada.”

But then this Tuesday, when Finance Minister Jim Flaherty was asked if the recession is over he said ”No, I think we will have to look back as we always do and look at this quarter. There are good signs that the economy has stabilized, and there are the beginnings of a recovery. And I wouldn’t put it any stronger than that.”

Transport Minister John Baird had a similar statement on Wednesday, “What we want to make sure of is that we don’t pop out the champagne just yet. There’s a lot of Canadian families that are still feeling the pain of the economic times that are going around the world.”

I prefer Mr. Flaherty and Mr Baird’s cautious statements, especially with the jobless rate at an 11 year high and EI payments at their highest level since Statistics Canada began tracking in 1997. More importantly, being too much of an economic cheerleader might lead to another crash if, 3 months from now, the projection turns out to be incorrect. Ultimately, these mixed messages will not help a nervous stock market or a fragile consumer confidence.

The Recession Is Over! No Wait, It’s Not originally appeared on Canadian Finance Blog on July 30, 2009.