Monday, December 13, 2010

Our new way of life: The Age of Austerity

We see the term “austerity” far too often these days in the media, largely due to the financial collapse of Greece and followed by Ireland and England most recently. To them, austerity means a lot of change: severe government cut-backs that change the picture dramatically from a way of life that was so easy. It’s a form of fiscal surgery that takes years – if ever at all – to recover from. The basis of this was excessive government spending prior to and following the Great Depression of 2008-2009. And whilst there are numerous countries around the globe showing similar health diagnosis, especially a looming, highly-likely candidate the USA, Canada will come out of this new age better than most.


For weeks now I have tried to encapsulate a blog posting that put Canada and Canadians in prospective to what is happening in Europe, around globe and will be forthcoming in the USA. The key to it, after all, is a matter of country and government financial health – we in Canada had our mild version of austerity measures in the early 1990’s for nearly a decade. This is thanks in part to the Federal Liberal party at the time led by Jean Chrétien and Paul Martin. They took fiscal steps to clean our financial house (a real mess at the time) that is now paying big dividends. We as a country, from a fiscal, financial and banking standpoint – are the envy of the world. This doesn’t mean easy street for us, but it will be a lot less severe in years to come when compared to many of our neighbours.

- Saverio Manzo

Surviving the age of austerity

We won’t see plentiful jobs, rising housing prices and surging stocks for a while, but follow these tips and you can still realize your dreams.

American bond guru Bill Gross calls it “the new normal.” Bank of Canada Governor Mark Carney warns of “unusual uncertainty.” CIBC World Markets chief economist Avery Shenfeld labels it simply the “Great Disappointment.” Whatever you call the times we’re living in, it’s pretty obvious they ain’t great.

In every city, town and village across Canada, across the U.S., across Europe, it’s slowly sinking in: the party is over, at least for a while. The U.S. housing market catastrophe and the subsequent global stock market meltdown may be largely behind us, but in their wake we’ve been left with an unpleasantly persistent aftermath: sluggish growth, high unemployment rates, soaring personal and government debt, teetering house prices, and a dampened investment environment.

Add it all up—and throw in the fact that we’ve already done pretty much everything we can to stimulate our ailing global economies—and it really does look like we’re entering a new age of austerity. Some economists are saying that today’s sluggish real (inflation adjusted) gross domestic product (GDP) growth rate of about 2% a year could even become the new “cruising speed” for the Canadian economy—a big comedown from the 3% annual growth we’ve typically seen in the past. And let’s not even get started on the disastrous “double dip” scenarios sketched out by the economic bears.

In this environment, many of the assumptions of the past—house prices will always rise, interest rates will always fall, there’s a better job just around the corner—can no longer be counted on. That doesn’t mean you should load up on ammo and head for the hills. It just means acting a bit more defensively when it comes to your finances, at least for a while.

So what exactly should you be doing to survive—even thrive—in this age of austerity? Read on and we’ll take you through each of the specific threats on the horizon, and how you can protect yourself against each one. We’ll look at how to prosper in the new job market, what to do if you’re buying a house, how to invest your money defensively, and how you can adjust your retirement plans to stay on track. In the end, you’ll see that despite the challenging times, with a bit of belt-tightening, you can still keep your dreams within reach.

Threat # 1: No new jobs

Gone are the days when jobs were plentiful and employers focused on attracting and retaining talent. While the total number of people employed in Canada has recovered to where it was before the recession, much of the recovery has consisted of part-time work and service sector jobs. Unemployment has remained stubbornly high at about 8%, and more Canadians are finding themselves jobless for long periods.

The current situation is hard on many of us, but it’s worst for those trying to get into the job market for the first time. “It’s like the classic saying, you want me to have experience but you won’t hire me, so how do I get experience?” asks Brodie Metcalfe, 24, who graduated last spring from the University of Victoria with a B.A. in the humanities. He’s looking for work in the field of advocacy and community development, but he’s not having much luck. “Most of the organizations that normally would be hiring are not doing so because the government funding cuts have been pretty drastic.”

Those who already have jobs are having an easier time, but they’re still finding fewer opportunities to get ahead. Promotions are scarce and there aren’t many opportunities to jump to greener pastures, so workers are tending to stay put. Many human resources experts had thought the generation of employees now in their 20s, 30s and 40s were inveterate job-hoppers by nature, but now they’re seeing the whole market freeze up. “A lot of people are surprised,” says Claude Balthazard of the Ontario-based Human Resources Professionals Association. “They used to think of it as a generational thing—this is how this generation is—now they’re realizing that the economy was shaping those attitudes.”

Few economists see a big improvement in the coming years. “Economy-wide job creation is unlikely to be rapid enough to put a meaningful dent in the average unemployment rate,” wrote TD Bank economists Derek Burleton and Shahrzad Mobasher Fard in a recent commentary. They see unemployment continuing to hover at about 8% through 2011, before edging down to 7.5% by the end of 2012. Wage growth is expected to stay low at 2% or less for the next few years, except in a few of the more robust sectors.

How to protect yourself

More than ever before, education is the armour you need to survive in the current market. Craig Riddell, professor of economics at the University of British Columbia, says you can expect a good educational payoff whether you go to university, community college or acquire a skilled trade, he says, although university tends to pay off better than college. And if those financial advantages aren’t enough, Riddell says research has also found that higher education tends to yield better health, longer life and higher levels of life satisfaction.

If you’re an older worker with a job, but you feel like you’re spinning your wheels, consider enhancing your professional skills by working on a professional qualification or degree on the side. It also pays to focus on opportunities that might exist within your existing firm. Many employers are reluctant to hire new staff right now, so you might be able to grab an inside opportunity that normally would have been posted for outside applicants. Barbara Moses, a career expert and author, says if you get the chance, you might also consider a lateral move within your company to broaden your skills—such as moving from marketing manager to communications manager. That won’t provide immediate advancement, but there’s a good chance it will improve your long-term potential and pay off down the road.

If you’re in the later stages of your career, you’re likely caught between realizing your early retirement dreams and staying in your job a bit longer for safety. If you are truly weary of working, you may be able to move up your retirement date by scaling back your retirement plans. Other workers prefer not to quit work entirely, but to scale back to part-time work to bring in some income and stay engaged.

In some fields, you might find temporary or contract positions for short-term or part-time jobs, which tend to be relatively common in troubled times because employers are reluctant to commit to permanent hiring. If you’re an older worker with specialized skills who has worked for one employer for a long time, “adjusting your expectations is a key,” says Riddell of UBC. “On average, such workers are unemployed much longer after losing their jobs than younger workers, and a huge part of that is their expectations are unrealistically high given the labour market they now face.”

Threat #2: Home prices dip

Previous generations did well by riding the decade-long surge in home prices, but most economists agree that’s all over now. Prices in most large Canadian cities are very high relative to incomes and a slow-growth economy is unlikely to produce the rising incomes necessary to fuel a continuing boom. Economists don’t know whether prices will fall a little, a lot, or stay about the same, but no one sees significant increases in the foreseeable future.

“It’s always been ‘Buy a house. It’s a good investment,’” says Patricia Gibson, who would like to settle down with her husband Tony in pricey Vancouver (we’ve changed the Gibsons’ names and some details to protect their privacy). “I know that’s how it was for my parents and how they viewed it. But I don’t see that anymore, because Vancouver prices are ludicrous. You pay $800,000 for a shack.”

Many Canadians are borrowing every penny they can to get into the market, but if you stretch to buy a house with a long amortization now, you might find yourself weighed down for years, even if prices stay steady. That’s because your income isn’t as likely to grow quickly going forward, so you may not be able to make extra payments. Plus, while huge mortgages with long amortizations are easy to carry at today’s exceptionally low interest rates, those interest rates could easily rise in the future. “If you take a 35-year amortization and you’re making minimum payments and your salary isn’t going up fast, you’re going to haul that anchor for your whole working lifetime,” says Malcolm Hamilton, actuary and partner with Mercer Human Resource Consulting.

How to protect yourself

Interest rates are enticingly low and your bank will happily lend you absurdly large sums, so it’s up to you to show restraint. “The bank was willing to throw $800,000 at us—I started laughing at them,” says Patricia. No less an authority than Bank of Canada Governor Mark Carney has been travelling the country telling Canadians to resist the temptation to load up on low-interest debt. “This cannot continue,” he told an audience in Windsor, Ont., in late September. He hinted that one possible scenario is that house prices could tumble, leaving you holding the bag with a monster mortgage. “While asset prices can rise or fall, debt endures,” he said pointedly.

If you must buy right now, buy a place you can really afford. Patricia and Tony are both in their late 30s and want children, so they say it’s likely they’ll buy within the next 10 months, despite the crazy Vancouver market. “Tick-tock, tick-tock, that’s my biological clock,” says Patricia. But they’ve put off thoughts of a dream home until the economy improves. “We don’t need the granite counter tops for now. We just need a structurally sound home we can pay off in a reasonable amount of time.” They have their sights set on paying perhaps $600,000 for a 1,600-sq-ft townhouse. They expect to cover 20% to 30% of the cost with a down payment, and they want a 20- to 25-year amortization. In an era when housing may no longer be an investment, but just a place to live, the Gibsons realize they need to be careful about how much debt they take on and how long they take to pay it off.

Threat #3: Freedom 67

Borrowing has kept the world economy afloat during the recent recession, but governments have quickly accumulated debt to the point where it’s becoming a problem. Most international comparisons find that Canada’s combined federal and provincial debt is low to middling compared to other developed countries, so we’re not as badly off as some. Still, Canadian provincial and federal governments have been busy concocting plans to cut their deficits (which only slows the rate of debt growth) and ultimately start to pay down some of the debt itself.

It’s not going to be easy. They don’t want to do it too abruptly, for fear of knocking down the fragile recovery. But they don’t want to do it too slowly, either, for fear that the debt problem spirals from bad to worse. “The situations that governments are in today are astonishingly bad,” says economist William Robson, president of the C.D. Howe Institute. “It’s not like anything we’ve seen before. Looking around the world, Canada may be one of the less ugly contestants in this very unpleasant beauty contest. But at some point someone is going to say, you know what, they’re all ugly!”

Compounding the problem is the rising government cost of looking after aging baby boomers. According to a recent study by Robert Brown, professor of actuarial science at the University of Waterloo, governmental costs that can be attributed to an aging population will really start to bite around 2016, and they will keep increasing until they peak around 2031.

Some expect that the Canadian government will eventually be forced to raise the official retirement age from 65 to 67, or even higher. Other countries, like the U.S. and Germany, are already raising the official retirement date to 67 through a gradual phase-in program. For governments, getting people to work longer has the two-fold advantage of generating more taxes while reducing the cost of government benefits, says Brown. With a phase-in program, raising the official retirement age may have little or no impact on those already retired or about to retire, but it could have a big impact on the more distant retirements of Canadians who are still in their middle and younger years.

How to protect yourself

There’s no easy way to deal with this risk, other than to be prepared. Like those in Europe and the U.S., Canadians will simply need to get used to the idea of getting a little less help from the government while paying more in taxes. Canadians who are middle-aged or younger will likely at some point see the official retirement age push past age 65. That would mean Canada Pension Plan and Old Age Security payments might start a year or two later. It would be harder to retire in your early 60s, like most Canadians do today, because it is expensive to bridge the costs of fully supporting yourself until the government programs for seniors kick in.

On the up side, of course, is the fact that today’s young Canadians will probably live longer than those on the cusp of retirement right now. That means they may actually enjoy just as many retirement years as earlier generations did—they’ll just start a little later. The key is to consider this possible freedom-67 scenario when you’re doing your retirement planning so you’re not caught off guard. You may have to save a bit more, or you might have to work a little longer. But as long as your health is good, working longer could actually make things easier. After all, you’ll be able to spread your retirement saving over more working years, and hopefully you’ll still enjoy a couple of decades of stress-free living in your golden years.

Threat #4: Sluggish markets

In the heady days before the crash, Heather and Mark Mitchell, a couple living in a small town just outside of Calgary, were right on the verge of their dream retirement. They had almost all of their money in stocks, and their adviser had even persuaded them to borrow an extra $200,000 to invest in stocks to goose their hoped-for returns (and their adviser’s commissions along the way).

The crash was a horrible, unexpected shock. Their retirement portfolio, once valued at $850,000, was decimated. Today Heather is 54 and Mark is 60 (we’ve changed their names and some details to protect their privacy), and even after the subsequent partial recovery, their holdings are down almost 40%, with a current value of $525,000. “We were naïve,” says a chastened and wiser Heather about investing so heavily in stocks. And as for borrowing to invest, “We were dumb and greedy, which is a diabolical combination.”

The crash reminded all investors how disastrous it can be to have almost all your nest egg in risky investments like stocks. Today, there is more of a focus on “return of capital, not return on capital,” a phrase coined by investment guru Mohamed El-Erian, co-chief investment officer of Pacific Investment Management Co. (PIMCO). Individual and institutional investors alike have gradually moved enormous sums from riskier investments like stocks into safer fixed-income investments like bonds and GICs. Bond funds have had record inflows of cash, and U.S. private-sector pension plans have cut their stock exposure from almost 70% in the mid-2000s, to only 45% this year.

Unfortunately, partly because everyone wants to be in safe investments, that means returns on fixed income investments have sagged. If you had your nest egg primarily in GICs or investment-grade bonds before the crash, you avoided the stock market meltdown and did well in the immediate aftermath. But now record-low interest rates will ensure minuscule income going forward. Because of dampened performance expectations for both fixed income and equities over the next few years, economist Don Drummond says investors should lower their expectations. You should expect a total rate of return of 4% to 7% a year (not adjusted for inflation) on a typical diversified portfolio over the coming years, he says, even though surveys show many investors still think they will get well over 8%.

How to protect yourself

Some say the fact that many types of investments fell in lock-step during the crash means that diversification doesn’t work, but that’s not true. Almost everyone suffered, but those with properly diversified portfolios suffered less. Going forward, the situation is uncertain, and it’s at times like this, when no one really knows which asset classes will outperform or lag, that diversification makes the most sense.

The best way to protect yourself from the unexpected is to set a long-term asset allocation that fits your time horizon and risk tolerance and stick with it. The classic starting point is to devote 40% to 60% of your entire portfolio to stocks, and the rest to fixed income investments. Consider increasing your fixed income exposure as you get older, so that you’re less likely to be sideswiped by a crash just as you close in on retirement. One approach is to set the percentage of your portfolio dedicated to fixed income equal to your age—so if you are 55, for instance, then you would put 55% of your portfolio in bonds and GICs. It also makes sense in your senior years to consider adding annuities to your portfolio between the ages of 65 and 75.

Within the fixed-income portion of your portfolio you should avoid investing heavily in long-term bonds. The current unusual situation in the markets has bid up bond prices and pushed down yields. Inflation is very low due to the troubled economy, and investors have been flocking to government bonds for safety. Many economists fear the current flood of monetary stimulus from central banks will eventually rouse more inflation. That in turn would cause central banks to increase interest rates, which could push down long-term bond prices dramatically. Having most of your fixed-income investments in relatively short-term bonds, real-return bonds, or laddered GICs will provide some insulation against these risks.

After considering all the rotten things that could happen over the next few years, you may be getting discouraged. Don’t be. It’s always a good idea to try to predict what threats could derail your financial plans—but at the same time, there’s no reason to throw away your dreams. Letting yourself get so depressed about the future that you give up altogether is worse than being a little too optimistic.

You may need to make a few adjustments to your plans to prepare for this new age of austerity, but for most people, they needn’t be drastic. As the Gibsons realized, a little bit of extra saving each month goes a long way if you start well ahead of retirement and you are consistent. And as the Mitchells found, you can adapt to almost any situation more easily than you think, by adjusting your priorities and expectations.

Many of those adjustments are simply a return to the timeless personal finance basics that have worked wonders for generations: educate yourself, get a good job, save for the future, pay down your mortgage quickly, invest for the long run. If you have been following those principles all along, you might not have to change a thing. And when economic conditions improve—and they will—you could find that you’re far better off than you expected.

By David Aston

Edited by Saverio Manzo


About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.   Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses.  In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.

Saturday, December 4, 2010

America’s New Poor: The End of the Middle-Class Dream

America's middle class is disappearing.
A lifestyle sustained for 30 years by rising debt is dissolving as the credit dries up.

US census figures indicate climbing out of the pit will be hard. Middle incomes are lower, in real terms, than in 1999. The median income, static for a decade, fell by 4.2% once the crisis hit. Since December 2007 more than six million Americans have been pushed below the official poverty line. This sudden collapse in lifestyle will have economic and psychological impacts long after the crisis is over. Since the 1980s US growth has been driven by the spending power of the salaried workforce, and the consumer has been the dynamo of global growth. To get things back the way they were, the US has to create nine million jobs, plug the gap in disposable incomes and reopen the personal credit system to the millions excluded from it. Judged against that, the Obama fiscal stimulus has failed. The credit system, having created the crisis, compounds the agony: ‘payday loan’ stores are doing brisk business; so are credit reference agencies. Unable to borrow or earn, a whole generation is being denied the American lifestyle. Meanwhile, some states have begun a race to the bottom: slashing welfare, labour regulations and local taxes to attract investment.

High-wage companies relocate to low-wage states, and foreign investment flows to the towns where labour costs are lowest. Those states are being transformed by the arrival of low-waged Hispanic migrants even as the rightwing politicians who support the economics rail against the demographics. As a result, median incomes in the south are, on average, $8,000 lower than in the northeast and poverty rates are higher than anywhere else in the US – as are the racial and religious tensions.

The truth is that Americans have been living a middle-class lifestyle on working-class wages, and bridging the gap with credit – and it's over.
by Paul Mason



About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.   Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses.  In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.


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Sunday, November 28, 2010

China will become world's largest economy, but when?

To continue growing rapidly, China needs to make the next transition, from sweatshop economy to innovation economy. This transition is the one that has often proved difficult elsewhere. Once a country has turned itself into an export factory, it cannot keep growing by repeating the exercise. It can’t move a worker from an inefficient farm to a modern factory more than once. It cannot even retain its industrial might forever. As a country industrializes, workers will demand their share of the bounty, as has started happening in China, and some factories will start moving to poorer countries. Eventually, a rising economy needs to take two crucial steps: manufacture goods that aren’t just cheaper than the competition, but better; and create a thriving domestic market, so that its own consumers can pick up the slack when exports inevitably slow. These steps go hand in hand. Big consumer markets become laboratories where companies know that innovations will be tested and the successful ones richly rewarded. Those products can then expand into countries with less mature consumer markets. Look at the telephone, the personal computer and the iPhone and iPad, all of which were designed in the United States and are now sold around the world.

Source:
In China, Cultivating the Urge to Splurge
David Leonhardt
Published: November 24, 2010

In China’s halting efforts to build a new economy today, there is an intriguing parallel to the United States: Both the world’s largest economy and its latest challenger need to remake themselves. As Guo bluntly told me, “You are facing transformation, too.” The United States needs to shift away from debt-financed consumption with little long-term benefit and toward investments that can create good-paying jobs, like education, infrastructure, energy and scientific research. China needs to invest less and consume more — to keep growing rapidly and, in the process, to stimulate economic growth around the world. In both countries, significant changes are necessary to create more sustainable growth. And in both countries, they inspire fierce internal opposition.

We tend to think of the United States and China as rivals, and they will continue to compete in coming years, over which will build the industries of the future and which will be the dominant power in Asia and the world. But our problems are also linked, just as the Chinese export boom and the American consumption boom depended on each other and, together, helped create the financial crisis. The worst outcome now, for both countries, might well be economic stagnation in China. That would slow U.S. growth and could lead to political chaos in China. The best outcome would be for both countries to reshape their economies gradually, benefiting both. In neither country will it be easy.


About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.   Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses.  In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.

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Friday, November 19, 2010

When will Renewable Energy replace Oil & Gas, really?

131 = The number of years to replace oil


It seems the panic time for both green enthusiasts and peak oil pundits has arrived.

According to a new paper by two researchers at the University of California, it would take 131 years for gasoline and diesel to be replaced given the current pace of research and development; however, the world’s oil could run dry almost a century before that.

The research was published on Nov. 8 at Environmental Science & Technology, and is based on the theory that market expectations are good predictors reflected in prices of publicly traded securities.

By incorporating market expectations into the model, the authors, Nataliya Malyshkina and Deb Niemeier, indicated that based on their calculation, the peak of oil production could occur between 2010 and 2030, before renewable replacement technologies become viable at around 2140.

The estimates not only delayed the alternative energy timeline, but also pushed up the peak oil deadline. The researchers suggest some previous estimates that pegged the year 2040 as the time frame when alternatives would start to replace oil, could be “overly optimistic”.

As I pointed out before, despite the excitement and hype about a future of clean energy, most of the current technology simply does not make economic sense for regular consumers and lacks the infrastructure for mass deployment … even with government subsidies, tax breaks, and outright mandates.

In addition, the supply chain of renewable technologies is not as green as people might think. Most alternative technologies rely on rare earths for efficiency. However, the radioactive waste produced by the rare earths mining process makes oil sands look like a green energy. This overlooked (or ignored) fact has now received some attention due to the sudden shortage caused by China’s embargo and export quotas on rare earths.

Another case in point: In China, the city of Jiuquan in Gansu province needs to build 9.2 gigawatts of new coal-fired generating capacity as backup power for the 12.7 gigawatts wind turbines due to be installed by 2015. More wind farms would need more coal-fired power plants, with little or possibly no carbon reduction.

Capitalism means investment naturally flows to the more profitable proposition … and vice versa. With more data and information becoming available, not much could go unnoticed by the markets, particularly in a relatively new sector such as renewable energy. And this harsh reality is clearly reflected in this new study.

Now, in its latest long-term outlook, the International Energy Agency (IEA) predicts that oil demand, prices and dependence on OPEC are all set to continue rising through 2035, and that global oil supplies would be near their peak in 2035 as China, India and other emerging economies keep on trucking.

So the world needs to come to a common understanding that:


1. the alternative energy is not mature enough to completely replace fossil sources any time soon;


2. energy security means a diversified and balanced portfolio inclusive of every bit of resource, fossil as well as renewables, just to meet the projected demand, and


3. real “green” energy is easier said than done.

Furthermore, the increased rare earths dependency, and the latest food vs. fuel debate when the food industry instituted a lawsuit against the EPA over E15 ethanol, underline some of the unintended (we hope), yet nasty consequences that often come with ill-informed and poorly-planned policies. (In the case of E15, the EPA is an easy mark considering one in eight Americans is on food stamps.)

All this requires a balanced and unbiased government policy to guide exploration and development of technologies to unlock the new fossil fuel reserves, expanding the R&Ds of emerging technologies, while effectively practicing and promoting energy efficiency and conservation.

Otherwise, we may literally witness $300 a barrel of oil before the electric vehicle could even achieve one percent market penetration. Unfortunately, there’s no easy fix, and the clock is ticking.
Posted By Dian L. Chu





About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.   Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses.  In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.

Thursday, November 11, 2010

Fixed or Variable? The perennial mortgage question

As a financial planner I have been asked this question over the past fifteen years far too many times to count. My basic and fundamental answer has never changed, regardless of what situation we find ourselves economically or on the interest rate yield curve.

History and statistics don’t lie: A variable rate mortgage or loan has proven to be the cheapest form of borrowing in nearly every 5-year cycle over the past 100 years.

I only deviate from this stance when a friend, a family member or anyone seeking advice expresses to me some form of concern for the “unknown” – the simple little fact that rates, especially variable – can change drastically without any given notice. Some folks just can’t stomach a variable rate today and not knowing what that rate might be 6 months let alone 5 years from now. And heck, can you blame them? At 3.75% on a 5-year mortgage why take the risk?

So the real answer: keep in mind history and statistical truths BUT follow your own risk tolerance and ‘sleepful night’ mindset. - Saverio Manzo

Another Prospective By Tom Bradley

Last week a friend asked me what his daughter should do with her mortgage. The bank was giving her the option of going with a variable rate mortgage at 2.5% or a 5-year fixed at 3.75%.

Investment professionals get asked this question all the time by friends and family. I’ve come to learn that the askers have way more interest in this topic than anything I could ever tell them about our funds or their portfolio. This is ‘food on the table’ stuff.

So how did this investment professional answer the question?

With regard to the lower variable rate, there is no free lunch here. Research reveals that going variable saves money over the long run (Note: 30 years of declining rates, since 1980, has a huge influence on the numbers), but it comes with the risk that monthly payments will go through the roof if rates rise significantly. A borrower should only go the variable route if she/he has the resources and stomach to absorb a big increase for an extended period of time.

As for the fixed rate mortgage, we have to keep in mind that 3.75% for 5 years is an UNBELIEVABLE rate. Yikes! Knowing you’re going to have low monthly interest payments until 2015 sounds pretty good. We shouldn’t forget that we’re living in an artificially low rate environment right now. It won’t always be like this.

As an investor, I’m always comparing reward versus risk. There is a good chance that a variable rate mortgage will win over the next 5 years, but the potential risk is substantial. It seems to me the borrower has a chance of winning small or losing big. Go fixed.

(Note: With regard to the numbers, I’m simplifying grossly here. Rates and conditions are different in each situation. And I’m told that variable mortgages are available at lower rates.)



About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.


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Wednesday, November 3, 2010

Market warning from Peter Grandich

Wow! Peter Grandich has an unprecedented history of calling market bottoms and tops. So when he takes his bold position, I listen - and encourage all to at least do the same.

U.S. Stock Market (DJIA 11,189) – I’ve been targeting the 11,300 area on the DJIA and Election Day in the U.S. as a point in time when the “steroid-craze” rally meets horrific economic, political and social fundamentals and no amount of “QE” easing can provide enough legs to take this rise much further. My Yellow alert is now turning Red. The time has come to put the bear suit back on and suggest bearish strategies. Bearish call spreads on major indices and liquidation of most non-metals related equities now appear appropriate in this person’s eyes.


As you know, I’ve not had an official bearish stance against the U.S. stock market since March 2009 and have expected the “Don’t Worry, Be Happy” crowd to once again lead the sheep to slaughter. Bullish sentiment has returned with a bang thanks to the Pied Pipers who fill the airwaves on Tout-TV and elsewhere. This comes at a time when corporate insiders have dramatically increased their selling. Despite what many in the financial arena would like you to believe, the stock market is a place where you get to be a part owner of companies. Who knows more about what’s happening at a company than the key personnel who run the company? If they’re selling shares aggressively while the public is buying, who do think has an edge? If you don’t believe it’s the insiders, I have a bridge and some Texas Rangers World Series Champions memorabilia for sale – cheap!

I’ve often stated I’m not interested in the day-to-day movements in markets as the cemetery is filled with people who tried beating markets trading. My outlook is for the long-term and as you know I’ve stated our market and economy is likely to mirror what happened in Japan from 1989 until now. QE flamed out in Japan and it shall here as well. Borrowing and spending our way out of this mess is not the answer nor is it the first time America has tried it and failed.

We’re also not going to solve our problems simply because one party gets back into a majority because the enormous problems America faces is a sum total of both parties mishandling of things. Yes, politicians are part of the problem, but remember I believe the real culprits are Americans themselves. Having too much stuff got us here and until they’re closing public storage facilities versus opening them, we’ll never get to the root of the matter.

A beautiful Canadian sang a song a few years back that accurately described Americans then and now.


About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.   Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses.  In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.

Tuesday, October 26, 2010

15 Inviolable Rules for Dealing with Wall Street

The never ending parade of stock scandals seems to continue unabated, the stock lending scam being only the most recent. As history has shown us — from Madoff to Orange County to analyst banking crisis to Derivatives to etc., when the Street comes aknockin, best for you to hide your wallets.


For reasons we are all too familiar with, many of you rubes have no choice but to deal with the sharpies from the finance division of America. Whether its floating a bond issue to build a new bridge or hospital, managing a pension fund, or simply handling cash flow, for county, city and state execs, non-profit organizations, and private companies, you will eventually “get serviced” by Wall Street.

Those of you who have to interact with the sharks should learn the following rules:

15 Inviolable Rules for Dealing with Wall Street

1. Reward is ALWAYS relative to Risk: If any product or investment sounds like it has lots of upside, it also has lots of risk. (If you can disprove this, there is a Nobel waiting for you).

2. Overly Optimistic Assumptions: Imagine the worst case scenario. How bad is it? Now multiply it by 3X, 5X 10X, 100X. Due to your own flawed wetware, cognitive preferences, and inherent biases, you have a strong disinclination – even an inability — to consider the true, Armageddon-like worst case scenario.

3. Legal Docs protect the preparer (and its firm), not you: Ask yourself this question: How often in the history of modern finance has any huge legal document gone against its drafters? PPMs, Sales agreement, arbitration clauses — firms put these in to protect themselves, not your organization. An investment that requires a 50-100 page legal document means that legal rights accrue to the firms that underwrote the offering, and not you, the investor. Hard stop, next subject.

4. Asymmetrical Information: In all negotiated sales, one party has far more information, knowledge and data about the product being bought and sold. One party knows its undisclosed warts and risks better than the other. Which person are you?

5. Motivation: What is the motivation of the person selling you any product? Is it the long term stability and financial health of your organization — or their own fees and commissions?

6. Performance: Speaking of long term health: How significantly do the fees, taxes, commissions, etc., impact the performance of this investment vehicle over time?

7. Shareholder obligation: All publicly traded firms (including iBanks) have a fiduciary obligation to their shareholders to maximize profits. This is far greater than any duty owed to you, the client. Ask yourself: Does this product benefit the S/Hs, or my organization? (This is acutely important for untested products).

8. Other People’s Money (OPM): When handing money over to someone to manage, understand the difference between self-directed management and OPM. What hidden incentives are there to take more risk than would otherwise exist if you were managing your own assets?

9. Zero Sum Game: If I am winning, who is losing? And who wins if I lose? Does this product incentivize any gunslingers to make bets against my investments –or my firm?

10. Keep it Simple, Stupid (KISS): Its easy to make things complicated, but its very challenging to make them simple. The more complexity brought to a problem, the greater the potential for things to go awry – and not just wrong, but very, very wrong.

11. Counter-Parties: Who is on the other side of your trade? Any income/revenue/dividend hedging you do means there is a party that stands to win if you lose. Who are they, what are their motivations?

12. Reputational Risk: Who suffers if this investment goes down the drain? Who gets fired or voted out of office if this blows up? Who suffers reputational risk?

13. New Products & Services: The rules of consumer technology also apply to finance: Never buy 1.0 of anything. Before buying a new-fangled service, is there a compelling reason not to wait an upgrade cycle? Why not let some other schmuck be the guinea pig?

14. Lawyer Up: The people on the street buy the best legal talent on the planet, with money no object. Make sure you have damned good lawyers working for you as well . . .

15. There is no free lunch: Repeat after me: There is no free money, no riskless trade, no way to turn lead into gold. If you remember no other rule, this one wills ave your bacon time and again.

The list above will help prevent you or your organization from becoming financially disadvantaged by bad financial advice, excessively expensive services or inappropriate/unsuitable products.

Don’t say you were not warned . . .

Barry Ritholtz

-------------------
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.   Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses.  In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.

Tuesday, October 19, 2010

O' Canada!: from “basket-case to world-beater"

There are those who say the US is doomed, that there is no way out from our problems with deficits, future entitlement promises, and a dysfunctional political system. And in my darker moments I worry that they are right.

I get the problems, probably more than most. But there is a way out. Hopefully, it does not entail collapse first, as some suggest. But it will require a lot of hard decisions. Some will be very hard.

For example, many point to the unfunded Medicare liabilities of some $70 trillion. I don’t worry about them so much, as they will never be paid, at least not under the current system. LONG before we get to that point, there will be a crisis that will force us to deal with the issues. Rule: if something can’t happen, then it won’t. We can’t pay the Medicare bill, so it won’t happen. Something else will happen in the meantime. It may not be good or pleasant, but something will come along to change the rules. More taxes? Fewer benefits? That is up in the air. But the system as it currently stands will not be allowed to prevail. Ask Greece how that is working out for them.

In today’s Outside the Box we look at a country where they had an even worse problem than we are faced with here in the US. They were on the ropes and their bond market was balking. Yet, their left-wing government made some very hard choices and turned things around. And now they are on top.

The country? Canada. Maybe we need to look north for a lesson. My friend David Hay, Chief Investment Officer of Evergreen Capital Management, was vacationing in Italy, where he reviewed a great new book on the Canadian turnaround of the mid-’90s. This week we get the short read of a remarkable story. May it happen in the US and in developed countries all over the world.

“Debt and deficits are not inventions of ideology. They are facts of arithmetic.”

– Paul Martin, Canada’s finance minister at the start of the country’s “Redemptive Decade”

Arrivaderci, Italia; Yo, Canada

It’s ok—you can be honest with me. Many of you on the receiving end of this newsletter were probably wondering if I had developed some kind of Italian infatuation, sort of like the young cyclist in that fun movie from the late 1970s, Breaking Away. You can rest easy. Although I readily concede it is a breathtakingly beautiful country (save for Naples, which we discovered is the Tijuana of Italy), my wife and I were thrilled to be back in the US of A, where the first thing I did was order a cheeseburger.

Certainly, the Italian locals were consistently friendly and extremely gracious even as we mangled their lovely language. However, as they opened up to us, it became clear how fearful they are about their country’s economic future. Like so many southern European nations, Italy’s debt levels have soared to grotesque levels, even compared to our own current state of fiscal debauchery. Therefore, it was somewhat ironic that one of the two books I read while over there was about Canada and, specifically, the extraordinary financial turnaround that country has made over the last 15 years. Remarkably, if you were to roll the clock back to 1995, Canada was actually deeper in debt than Italy. In those days, the Canadian dollar was derisively known as either the Loonie (after the bird on Canada’s $1 coins) or the Northern Peso. The situation was so dire that the Wall Street Journal ran what turned out to be a pivotal article in which the authors asserted that Canada had become “an honorary member of the Third World in the unmanageability of its debt problem.”

This editorial set off shock waves around the world and, of course, within Canada itself. To its credit, Canada’s political establishment got fiscal responsibility religion in a hurry; it was almost like they went from being atheists to Southern Baptists overnight. And, get this: for the most part, it was Canada’s equivalent our Democratic Party that assumed the yoke of pulling the country back toward the high ground of financial solvency. Do you think that perchance we could learn a thing or two from Canada’s experience?

Canada High and Dry
It’s been a consistent theme of mine for a year or more that Americans are not going to passively accept the disastrous fiscal path on which our brilliant political parties have put us. It has also been my belief that politicians from both sides of the aisle would get the message. At this time last year, there weren’t many who agreed with me (in fact, when I put forth this theory to the CEO of a huge financial firm 13 months ago, he looked at me like I was suggesting the Mariners’ front office knew how to run a baseball team). But the public backlash against unsafe and insane fiscal policies is now unmistakable, and it’s very much a bipartisan movement. Politicians, being the generally feckless creatures they are, have scrupulously (or should that be un-) avoided putting forth much in the way of tangible solutions prior to the critical mid-term elections, now just a month away. Yes, I know, the GOP came up with the Pledge to America, and it’s a start—of sorts—but it strikes me as woefully unequal to the massive task. A far more rational way to approach the problem (I realize that rationality and politicians rarely converge) would be to make the book I just finished—The Canadian Century, Moving Out of America’s Shadow—required reading for all incoming members of Congress. It would be nice to demand this from incumbents as well, but let’s face it: most of them don’t even bother to read the legislation they put into law.

Many of you also know that I’ve brought up the remarkable Canadian renaissance more than a few times. Thus, I was truly excited to read the aforementioned book after seeing a review of it earlier this year. Though I was aware of the happy outcome, I really had no idea how Canada pulled off moving from “basket case to world beater,” in the writers’ own words. And there’s no exaggeration in that statement; Canada then was in far worse shape than even we are now in our headlong rush to fiscal perdition. For example, in the mid-1990s, one-third of all government revenues were being devoured by interest costs on Canada’s rapidly escalating debt. To illustrate how bad that was, in the US today interest expenses consume just 10% of tax revenues, excluding the non-cash interest accrual on Treasury debt held by the Social Security trust fund (more on that later).

By the 1990s, Canada had also become one of the developed world’s most socialized economies, with the government accounting for 53% of the country’s GDP. Economic growth was stagnating, while debt levels were inexorably and dangerously mounting. At its scariest zenith, Canadian federal and provincial government debt amounted to 120% of GDP, with roughly 70% at the national level and an outrageously bloated 50% owed by the provinces. Again, to put that in perspective, despite our debt binge over the last decade, US government debt is around 60% of GDP, while state debt is nearly 17% of GDP, or 77% overall (this is based on net, not gross, debt and excludes the Social Security trust fund holdings as well as intergovernmental liabilities). Moreover, unlike in our present situation, Canada’s interest rates were rising due to worries about the nation’s solvency. Its coveted AAA credit rating was yanked, and the market was treating it as an increasingly unreliable borrower. In other words, it was much like the situation a number of European countries find themselves in today—except that Canada didn’t have Germany to bail it out. As you can readily see, there’s simply no question that Canada was in some very deep doo-doo. Which begs the multitrillion-dollar question: How the heck did it get out of that jam?

Northern Composure

As I’ve given various speeches over the last year, it has become clear to me that very few Americans are aware of the extraordinary recovery Canada has achieved since the mid-1990s. When I bring it up, most people seem surprised that Canada could have gone from a laughing stock to the envy of the developed world in just a decade. But, actually, 10 years wasn’t the true recovery period. And that was my big surprise from reading The Canadian Century. The reality is that Canada achieved stunning progress in a mere three years. Further, this time frame was consistent at both the federal and provincial levels. In case you think I’m exaggerating the speed and magnitude of the rehabilitation, let me provide some specificity:

• Paul Martin, the finance minister for the national Liberal Party, unveiled a budget in early 1995 that shocked all the cynics accustomed to smoke-and-mirrors accounting. It reduced program spending by 8.8% over two years (and our politicos quiver over a mere hint of spending freezes).

• As part of this radical spending rationalization, federal government employment was reduced by 14%.

• Federal grants to the provinces were reduced by 14% as well, but the trade-off was that they were allowed to control how the money was spent. Provincial governments also needed to provide half of all funding (i.e., put skin in the game).

• While some taxes were raised (and, according to the authors, these worked against the recovery), spending cuts were 4 ½ times tax hikes.

• Canada’s welfare system was dramatically modified. Rather than just providing a blank check to the provinces (which administered the welfare programs), Ottawa incentivized them to put the funds to better use. Benefits were cut for single, employable individuals and aggressive efforts were made to get them back in the work force.

• Despite accusations from the far left that the poor would suffer due to these changes, the percentage of welfare recipients fell in just a few short years from 10.7% of the population to 6.8% by 2000. From 1997 to 2007, the percentage of Canadians classified as low-income plunged by over 30%.

• The tax structure was dramatically redesigned. Corporate tax rates were cut by nearly a third, taxes on corporate capital were abolished, and personal income and capital gains taxes were reduced.

• The General Services Tax (basically a consumption tax or VAT) was instituted to pay for the tax cuts described above. While initially very unpopular, it was a key part of the rehab plan.

• The Canada Pension Plan (CPP), the country’s version of Social Security, also underwent major surgery. Instead of payroll taxes gradually rising to 14%, the increases were pulled forward but capped at under 10%. This produced immediate surpluses that were invested in higher-returning corporate securities. (As noted in past EVAs, this is a huge defect with our Social Security system; its many trillions are tied up in low-yielding US government bonds that simply add to our overall national indebtedness.) The CPP today is well-funded and actuarially sound.

• As a result of these actions, and many others I’ve left out, the federal budget was balanced within three years.

After achieving this remarkable feat, Canada went on to produce 11 straight budget surpluses. This allowed our northern neighbors to reduce their federal debt from 80% of GDP to 45%. Further demonstrating how quickly good policy can turn things around, the provinces enacted similar measures. Most of them also moved to balanced budgets or surpluses within just three years, though in the case of Ontario it took five years. However, that was still one year ahead of schedule (pronounced “shh-edule”, of course). By contrast, even Congressman Paul Ryan’s allegedly bold goal to balance the US budget will take decades to attain.

One of the recurring themes from The Canadian Century is the concept that not all taxes are created equal. Some have a much more negative impact on economic activity than others. This totally resonates with me and it’s why I believe estate taxes should be our version of the VAT. However, I would concede that possibly a combination of the two might be necessary and desirable.

Most of all, I have tremendous respect for what has worked in the real world and within a country so similar to our own. By the way, in case you think that Canadians universally supported these rational reforms as they were first enacted, consider how similar our northern friends are to us. They are every bit as fractious as we are. There was a cacophonous chorus of extreme Keynesians (those who believe government spending should never be cut) who predicted Canada’s grand experiment would be an abject failure. Yet, despite all those who were sure that downsizing government would do the same to their growth rate, Canada’s economy grew at 3.3% per year versus the developed-world average of 2.7%. Notwithstanding Canada’s undeniable success, should we decide to follow in its footsteps, be prepared for folks like NY Times columnist Paul Krugman to wax apocalyptic. Come to think of it, given his forecasting track record, that would be a good thing.

Quite an amazing story, eh? Unquestionably; and it’s interesting that today, most of Europe is essentially following the same game plan (without giving Canada credit—probably due to its legendary pride, bordering on arrogance). Yet there is one immensely important difference.

The Crucial Currency Tailwind

The aforementioned Wall Street Journal article from early 1995 that strongly suggested Canada was careening toward bankruptcy not only served as a national wake-up call, it also tanked the Canadian currency. While this collapse was highly embarrassing to its citizenry, it sowed powerful seeds of recovery. Canadian goods became very inexpensive on world markets, thereby stoking demand. And Canada’s real estate became irresistibly attractive to both American and Asian investors, drawing in massive amounts of hard currency. As mentioned in numerous past EVAs, this is the vital missing link for countries like Italy. The stunning rise in the euro from the depths early this summer is the worst thing that could be happening to the Continent, especially for the weaker countries—almost all of them except Germany.

Fortunately for us, our situation is much more like Canada’s was in the 1990s. The buck is once again seriously undervalued, not only against the euro but versus the yen as well (the dollar recently touched 15-year lows against Japan’s currency). This will greatly aid our exporters, who are already prospering.

Perhaps I’ve missed it, but I haven’t heard a single representative from either party bring up the notion of emulating Canada. Both parties seem to be infected with, among other maladies, an acute case of Not Invented Here-itis. Maybe it’s time for all of us who are deeply concerned about our country’s financial future to harness the power of the internet to influence the many fresh faces that will soon be moving to the other Washington. The good news is that this incoming class promises to be far less indoctrinated by their respective parties’ failed ideologies and much more open to innovative concepts. If they are, it’s not a stretch to believe that our finances can begin to track the Canadian path, as illustrated below.
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Role reversal time? The Canadian Century was clearly written for domestic consumption. As such, there is a fair amount of chest-puffing over Canada’s accomplishments, as well as some thinly veiled savoring of our own current predicament (the Germans have a perfect word for this: schadenfreude). Yet the authors also concede a few chinks in Canada’s armor. For one thing, they note that there is some serious backsliding going on when it comes to adhering to the fiscal reformation creed. A certain amount of this is attributable to combating the ravages of the Great Recession, even though Canada was not nearly as hard-hit as the US. But beyond this, the authors are seeing clear evidence that the resolve to restrain spending seems to be waning. Alas, this does seem to be the natural cycle of democracies: Governments spend recklessly until the situation is so bleak there is no choice but to drastically cut back. Once financial health is restored, there then seems to ensue a long, almost imperceptible erosion of fortitude until a crisis hits and debt levels rise so terrifyingly that corrective action becomes unavoidable. Often, as in Canada, it’s the more putatively liberal party that administers the tough but necessary medicine.

The book is also quite candid in its admission that Canada’s healthcare system is largely as dysfunctional as our own. The authors point out the immense challenge that lies ahead for both countries in bringing the wealth-devouring beast of healthcare under control. It’s hard to disagree with their belief that both the US and Canadian healthcare systems need a healthy injection of incentive-based economics, competition, and behavioral modification. Thus far, neither country has made much progress in that regard.

For me, though, the key message of this book is that the future does not have to be a depressing choice between accepting sub-par growth or committing fiscal suicide. Canada’s experience emphatically demonstrates that replacing bad policies with good ones leads to dramatic and rapid improvement, with the shift to financial soundness restoring confidence and actually boosting long-term growth. Some forty years ago, then US President Richard Nixon famously remarked, “We’re all Keynesians now.” To fully channel his inner Keynes, Nixon needed to take us off the gold standard, which he did in 1971. The keys to the perpetual printing press had been found. Soon thereafter a new economic term was coined: stagflation. These days, at least when it comes to fiscal policy, a far wiser statement would be: “We’re all Canadians now.” If we want to right our nation’s financial ship, we might be well-advised to swallow our pride and follow the lead of a country that has long been in our shadow. This is likely to be far more effective than further pursuing failed economic policies from our distant past. Page 6 Evergreen Virtual Advisor (EVA) October 8, 2010

John Mauldin, Editor
Outside the Box


About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.   Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses.  In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.

Saverio Manzo
www.saveriomanzo.com

Wednesday, October 6, 2010

Is America bringing us down?

The U.S. is an anchor around Canada's neck, but our best bet might be to grasp it even tighter.

Canada's economy should be blazing by now. The country this year recouped nearly all the jobs lost during the recession, saw hikes in consumer spending and business investment and had some of the best economic growth in the industrialized world. Things would be going gangbusters, if not for those damn Yankees.

Canada currently finds itself tethered by its southern border to an economic anchor. The United States still grapples with near double-digit unemployment rates, surging foreclosures and sputtering consumer spending. America's travails slashed Canada's export market and blocked the chance for "an absolutely rip-roaring recovery," according to Douglas Porter, deputy chief economist with BMO Capital Markets.

Canada's largest trading partner is dragging it down. But the United States' economic woes don't just mean a weak market for Canadian goods. The dismal outlook has inflamed America's protectionist tendencies. It took more than a year for Canada to negotiate a waiver of the "Buy American" provisions contained in America's $787-billion stimulus package. Less than a month after that dispute was resolved, 28 members of Congress introduced a bill calling for the scrapping of the North American Free Trade Agreement. The situation is so worrisome that the Canadian Council of Chief Executives has enlisted Gordon Giffin, the former U.S. ambassador to Ottawa, as its envoy in Washington. The message from the U.S. is clear: Americans can't afford our goods right now. Even if they could, they'd rather buy American.

"It's that feeling of — I hate to say 'attacked' — but that the United States has to look inward for solutions," says Birgit Matthiesen, a Washington-based adviser to the Canadian Manufacturers and Exporters (CME).

As America pulls up its drawbridge, it seems an ideal time for Canada to pursue other trading partners. Everyone knows that emerging markets like India, China and Brazil are where the future lies anyway, right?

But for Canada, the inescapable fact is 73% of our exported goods go to America. Canada's annual trade with India represents less than two days of trade with the United States. Trade with the European Union, Canada's second-largest trading partner, is one-ninth of what crosses the U.S. border. Diversification is a good idea, but it doesn't offer a real alternative to the American market. "Nothing can replace our trading relationship with the United States," says Peter Van Loan, the federal minister of trade. "Growth in other places is a plus, but an American economic recovery is very, very important for Canada."

Canada's interests lie not in divorcing the United States but in wooing it again. There are still too many regulatory differences, too little policy collaboration and too few champions of trade liberalization, business leaders say. Canada can't cut away the millstone around its neck; it needs to hug it even closer.

In separate interviews on different days, both Manley and Van Loan said they expected America will remain Canada's top trading partner for the rest of their lives. The rhetorical coincidence emphasized how long-term Canada's thinking about the relationship must be. The United States economy is currently a drag on Canada; its policies decidedly protectionist. But by geographic imperative, the relationship will far outlast the few years of an economic downturn. "We're not floating in the middle of the Pacific Ocean," says Manley. "We're joined at the hip with the United States." Canada can dream of rich new trade with distant lands, but our future remains linked to the United States. If not by choice, than by the imperative of geography.

By James Cowan, From Canadian Business magazine

www.saveriomanzo.com
Saverio Manzo

About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.
In addition, I truly belive in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.

Monday, October 4, 2010

Proven formula in Stock Market investing

Today I want to address an issue many have asked me about in the past. They have a background as a fundamental trader and are discovering the benefits of applying or at least incorporating technical analysis into their trading decisions. The reasons are manifold. A few that come to mind are ‘fundamentally sound’ trades that didn’t work out, the desire to improve performance and the need to improve timing.

I consider myself a technical trader but I do lots of research in the background which also makes me a full-time researcher. I wouldn’t say the non-technical stuff I look for fits the fundamental approach description. I typically am interested in analyzing a trading opportunity from the psychological perspective. I need to know the market capitalization of a company, the country it is operating in and the people running the company. Then I basically try to gauge the price appreciation potential which is highly correlated with the stock’s potential to develop into a ’story stock’. There is much more to it but for the sake of brevity I’ll leave it at that.

So what to do if you have a background as a fundamental trader, want to improve your results but somehow doubt technical analysis? My recommendation in that case has always been the following: You need to find a way to trade that suits your personality. A stock’s personality needs to match your own. The same applies to the way you trade. The approach you use needs to suit your personality as well. Otherwise you won’t trust your method. This will make trading without hesitation impossible.

The solution is simple: Combine both methods. Make a decision regarding the number of stocks you want to hold when fully invested. Then select potential candidates using fundamental aspects exclusively. Assuming you go for a portfolio comprising 10 stocks I would build a pool of 20 – 25 stocks which you would be willing to own based on the fundamental criteria you applied. Now comes the hard part. Forget everything you ‘know’ about these stocks. Going forward strictly stick to technical aspects when it comes to initiating and closing positions.

Some great traders have devised trading rules that are dealing with this topic. The trading maxim I am referring to is part of Dennis Gartman’s Trading Rules.

Rule Number 10: To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then, and only then, can we or should we, trade.

A similar rule is the famous “trade what you see not what you think”. The essence of both rules is to eliminate hope and to objectively analyze a chart’s message. Simply apply discipline with your entries and exits. Then you repeat the process over and over. The ultimate stage a trader can reach is when trading itself becomes boring. You know what you are doing and you know the odds of specific patterns. You have then reached a stage where you execute trades and are emotionally detached. A stock then is reduced to its ticker symbol.

Everything that we see is a shadow cast by that which we do not see.
- Martin Luther King Jr. -

Article writen by Olivier on January 17, 2010

www.saveriomanzo.com
Saverio Manzo

About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.   Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses.  In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.

Friday, October 1, 2010

What the scholars are saying

Academia produces a steady outflow of studies on investing and personal finance topics. The math and jargon scares many people off, which is unfortunate because there are often some interesting ideas to consider, like the ones on index investing in this paper.

I have a quantitative background myself, so often go browsing through the journals and working papers to glean some new perspectives and insights. Below are some brief summaries of recent papers that I found of interest. I’m thinking about doing this on a regular basis, approximately every two weeks or so.

1. Ageing and Asset Prices, by Elod Takats, finds demographic factors have affected real house prices significantly. His model projects “ageing will lower real house prices substantially over the next forty years.

2. Intermediated Investment Management, by Neal M. Stoughton, Youchang Wu
and Josef Zechner, looks at how financial advisors and the financial industry are impacted by trailer fees. A common interpretation is that these fees are payments for financial-planning services, but the authors find they are better understood as tools for aggressive marketing by portfolio managers (and for price discrimination).

3. Linking Self-Esteem with the Tendency to Engage in Financial Planning, by Florence Neymotin, discovers a strong positive link between self-esteem and an individual’s decision to engage in financial planning. Better self-esteem leads to better financial planning, it seems.

4. Diversification and its Discontents: Idiosyncratic and Entrepreneurial Risk in the Quest for Social Status, by Nikolai L. Roussanov, finds a link between social status needs and the share of risky assets in portfolios – those wanting to “get ahead of the Jones” tend to have higher concentrations in risky investments and encounter greater volatility.

5. Do Individual Investors Have Asymmetric Information Based on Work Experience? by Trond M. Døskeland and Hans K. Hvide, examines the tendency of investors to overweight stocks in the industry they work in (11% in the case of Norwegian investors). Finding these holdings (shares in employer were excluded) underperformed the market, the authors conclude that the ill-advised concentration of risk across human-capital and financial assets does not reflect an information edge but overconfidence.
By: Larry MacDonald, From Canadian Business Online Blog

www.saveriomanzo.com
Saverio Manzo

Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham; Merrill Lynch Fund Managers Survey, Gordon Pape,

Tuesday, September 28, 2010

Warren Buffett's secret sauce revealed!

Warren Buffett has earned a reputation as one of the preeminent value investors of all time. His Berkshire Hathaway (BRK.B- NYSE) Holding company has stakes in insurance, railroads, publishing, retailing, and manufacturing, among other businesses, and its investment portfolio includes about $53 billion (as of June) of marketable equity securities.

How does Buffett make his picks? What exactly is “Warren’s Way?”
In his rare public remarks and widely followed annual letters to Berkshire shareholders, Buffett makes it sound very simple: he says he buys stocks that are “available at a sensible price.” In fact, Buffett uses very sophisticated screens to determine which companies belong in his portfolio.

Specifically, he uses these five investment criteria:

• Free cash flow (net income after taxes, plus depreciation and amortization, less capital expenditures) of at least $250 million.

• Net profit margin of 15% or more.

• Return on equity of at least 15% for each of the past three years and the most recent quarter.

• A dollar’s worth of retained earnings creating at least a dollar’s worth of shareholder value over the past five years.

• Ample liquidity. Only stocks with a market capitalization of at least $500 million are included.

In the S&P “Warren Buffett” portfolio, they added one more criterion to eliminate overvalued stocks. Overpriced stocks are identified by comparing the five-year discounted cash flow (DCF) estimate with the current price.

www.saveriomanzo.com
Saverio Manzo
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.   Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses.  In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.

Sunday, September 26, 2010

The most common ways we sabotage our retirement plans

The following post is from a Financial Planner/Advisor resource website where the underlying audience is normally the financial planner. However, I think it holds some valuable points for all...

By Joanne Sommers, IE

Most clients know what they should be doing to prepare themselves for retirement. The problem is that many are not very good at following through. As a result, too many clients may find themselves unprepared financially as retirement draws closer.

There are many ways in which your clients may be sabotaging their retirement plans. Here are some of the most common:

> Procrastination

Caught up in the demands of day-to-day expenses, many clients simply wait too long to start saving for retirement, says Al Nagy, an Edmonton-based certified financial planner with Investors Group Inc.

“We tend to think in the ‘now’ rather than about the future,” Nagy says. “My job as an advisor is to get my clients thinking about how the choices they make today will impact their wealth accumulation strategy. I try to get them to establish a plan and review it regularly. That helps them maintain their focus.”

Human nature is such that anything happening in the present or short term seems more important than the long term, says Tracy Piercy, founder and CEO of Moneyminding International, a Victoria-based financial literacy firm.

The key to helping clients avoid procrastination is to get them to focus on creating sustainable income to support their desired lifestyle, she says.

That approach brings long-term financial independence into the present and helps to minimize procrastination, says Piercy, adding, “We won't succeed if we continue to 'try' to get people to behave in a way that is counter to basic human nature.”

> Misusing RRSPs

People often regard their RRSPs as tools for reducing their taxable incomes rather than as the retirement savings vehicles they were intended to be, according to Clay Gillespie, managing director with Rogers Financial Group in Vancouver.

Using RRSP funds to finance pre-retirement needs and desires is another frequent mistake clients make, Gillespie says. “It’s quite common to see RRSPs used as savings accounts, with the funds used to pay for non-emergency purchases.”

The use of RRSP money to pay off short-term debt can also create tax problems, while permanently reducing RRSP room.

Two more ways clients sabotage their retirement plans

By Joanne Sommers

Your clients already know they should be making regular RRSP deposits, investing long term and paying off debt. But they don’t always follow your advice to a tee.

They may procrastinate about starting a retirement savings plan or raid the RRSP funds for a non-essential purchase.

Here are two more ways clients sabotage their retirement plans — and ways you can steer them in the right direction.

> Failing to set goals

Many clients sabotage their retirement plans by failing to set clear personal financial goals, says Piercy.

To help clients understand what a clear personal financial goal looks like, Piercy offers this example: “I’d like to be financially independent within five years, with household income of $10,000 per month from our stock, real estate and business investments so I can spend my time gardening, looking after our grandchildren and volunteering with at-risk youth. I’d like to take two vacations annually with my husband in our motor home.”

That’s much better than a long list of unspecific, generic goals such as “retiring early,” “paying off the mortgage,” “getting a better return on investment” or “selling the business,” she says.

“Generic goals simply don’t resonate with the commitment required to see them through,” Piercy says, “whether it’s a retirement goal, a fitness goal, or any other lifestyle goal. The goal must be personal, specific and have an emotional meaning to the person setting it – and of course it must be in writing and be measurable in terms of accomplishment.”

> Carrying debt

An estimated 40% of Canadians currently retire with some debt. That’s a significant reversal from the past, when the conventional wisdom was that most or all debt should be eliminated before retirement.

Gillespie believes that debt elimination should still be a priority when planning for retirement. “[Advise clients to] repay credit card balances as a demand loan rather than a line of credit,” he says, “because that forces you to pay it off.”

It’s also better for clients to repay non-deductible debt, such as a mortgage, before investing in anything else, Gillespie adds.

He recommends this strategy for some clients: “Sell your portfolio to pay off your mortgage, if necessary, then borrow to invest, using the house as collateral. That makes the interest tax-deductible.”

Piercy, suggests advisors help their clients think about debt as a wealth-building tool rather than pushing them to eliminate it altogether.

“The key is to focus on income creation,” she says. “When clients can earn income from their assets, with proper monitoring and exit strategies in place, carrying debt isn't an issue.”

www.saveriomanzo.com
Saverio Manzo

Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham; Merrill Lynch Fund Managers Survey, Gordon Pape,