We're living longer than ever: StatsCan

As a CFP Professional Financial Planner, I find this information imperative when making all sorts of different projections, from client's finances to estate planning tactics.

The trend of humans living longer will continue (as I have written in past: Demand for Medical Services Will Continue to Expand longevity) as much of what we do is based on one's "life expectancy".

You may simply find this info interesting...

A new study says Canadians are living longer than ever.

The Statistics Canada study, released Tuesday, says life expectancy at birth reached 80.7 years for the three-year period between 2005 and 2007.

That’s up from the average of 80.5 between 2004 and 2006, and 78.4 a decade earlier.

Gains during the past decade were strongest among men, although women still live the longest.

Men’s life expectancy at birth rose 2.9 years to 78.3 in 2005-2007, while among women it increased by 1.8 years to 83.

Provincially, life expectancy at birth in British Columbia was 81.2 years in 2005-2007, highest among the provinces, followed by Ontario at 81 years.

Life expectancy at birth in Quebec was at the national average, while it was below the national average in the rest of the provinces.

The lowest life expectancy was in the three territories combined, at 75.8 years.

Death rate increases

Deaths recorded their largest increase since 1993, continuing a long-term upward trend resulting from a growing and aging population.

In 2007, 235,217 people died in Canada, up 7,138 -- or 3.1% -- from 2006.

Both male and female deaths rose, but the increase was slightly larger among women, 3.2% compared with 3.1 for men.

The infant mortality rate rose to 5.1 infant deaths per 1,000 live births in 2007 from five in 2006.

Source: The Canadian Press



Saverio Manzo

GOLD: An Investment, Hedge or for Protection?

Why gold is rising and will keep rising

While gold has rallied 350% from the lows of 1999 and is up about 285% when adjusted for inflation, this still pales in comparison to the 1976-1980 bull market in bullion. During this period, the price rose by more than 750%. (See chart 1)

To some, this suggests that history is repeating itself and gold is heading beyond US$2,000 per ounce. That might be why John Paulson is launching a pure-play gold fund.

Let’s start with the U.S. dollar, which the price of gold is widely understood to mirror (See chart 2). When the dollar falls, the price of gold has to rise, assuming nothing else has changed in the supply and demand balance.

When fundamentals make gold more attractive, it overcomes its normal relationship, according to J.P. Morgan analyst John Bridges. “Don’t be surprised if gold is strong even on a modest dollar bounce,” he said.

So while the short-term correlation between gold and the dollar index has strengthened recently, it leaves much still unexplained.

Moving onto supply and demand factors, the gold market appears relatively balanced. The decline in mine supply in recent years has been supplemented by increased scrap sales and sustained central bank gold sales. In the first quarter, scrap sales rose sharply as gold re-visited its all-time high.

Meanwhile, central bank reserve sales, which have play ed a key role in keeping gold prices in check during the past decade, have slowed recently, according to Citigroup. In the 1990s, central bankers were acting as a group to reduce their gold holdings, confident that the fiat currencies were a better store of value.

Now gold’s attractions are re-emerging and bankers look set to be net buyers, which should help tighten the market, according to Mr. Bridges, who also sees sharp increases in industry costs supporting the gold price.

With industrial demand for gold limited, unlike other precious metals like silver or platinum, changes in demand are primarily due to fabrication needs, which have dropped sharply since 1997, according to a Citigroup report. Add to that the fact that the economic downturn, coupled with higher prices, further reduced the demand for jewelery, and supply-demand changes add little in terms of explaining bullion’s rise. With the exception of the 1976-1980 period, gold prices show little to no relation to changes in the Consumer Price Index, the firm noted.

So far the massive expansion of the U.S. Fed’s balance sheet and those of other central banks has not affected inflation due to the scale of the de-leveraging and slower money velocity. If it is not current inflation the market is worried about, then its future inflation, right?

The evidence is scant here too. Ten-year U.S. treasury yields have definitely rebounded from their end-of-2008 lows between 2% and 3.3%, but this can hardly be deemed conclusive evidence of inflation fears, according to Mr. Hart at Citigroup.

Yes, the government bond market is highly distorted right now, but markets don’t appear to have embraced the inflation thesis so far. So it can’t be said that gold buying is definitively a result of inflation fears.

Then what about speculation and ETF buying? Looking back to the surge in crude oil to US$147 per barrel in 2008, the market justified the move with an array of structural factors. This might suggest that a similar speculative bubble is forming in gold.

However, one obvious difference is that when oil peaked, the forward market was in backwardation, indicating that the market was expecting a decline in prices. The gold market does not and prices a value of US$1,268 per ounce for June 2014. While ETFs were cited as a culprit for the rise in oil and are also playing a role in the gold market, their impact has been limited of late, Mr. Hart noted.

ETFs may have been active buyers early in 2009, but their activity has leveled off since. There has been a sharp increase in long forward positions in gold at the Commodity Futures Trading Commission (CFTC) and net longs have reached a record.
”However, more often that not, these flows correlate with spot moves and rarely serve as a leading indicator. As a result, speculative positioning hardly represents the main factor driving the recent spike in gold prices,” the analyst said.

Despite all the attention being paid to sales of gold by central banks and the fact that world gold holdings have experienced a broad decline, holdings in industrialized economies are on the rise as a share of total foreign reserves. And this trend was renewed in the first quarter.

There is a popular presumption that developing economies will increase the share of their gold holdings. However, Mr. Hart explains that gold holdings in advanced economies are largely a function of the legacy of the previous gold standard. So if the rest of the world is to move toward the industrial country average of 40% of reserves in gold, then industrial economies would presumably have to sell some of their gold holdings, which would offset upward price pressure.

China does remain a big unknown in all of this and its reported gold holdings seems to suggest a large degree of under-reporting. This is particularly significant now that Chinese authorities can make their purchases on the domestic market.
So what about gold as simply another currency?

First off, this is factually untrue since it does not serve as legal tender in any economy, Mr. Hart points out. Yes, it is an investible asset, like cash, and its supply is limited, so it can serve as a more suitable store of value that fiat money.
“But unlike other assets, it doesn’t yield a return. Holders simply incur capital gains or losses and these are as uncertainas those of other assets over the long term (the relevant time horizon for central banks),” Mr. Hart said.

Then why hold gold? The answer lies in an increasing lack of confidence in paper-based currencies. The debasement of the U.S. dollar has a broad effect that undermines confidence in other currencies. And with central banks and policymakers still far away from removing themselves from their unprecedented fiscal and monetary accomodative positioning, this could continue for much longer.

So it is not a case of whether gold leads the dollar or the dollar leads gold, Mr. Hart explains, rather price movements in both are the expression of the same underlying malaise with the lingering effects of the financial crisis.

“Occasionally, investors lose confidence with currencies, and when this happens, because the pool of gold and related investments is so small, demand for gold can become intense,” Mr. Bridges said.
Some reprint from Jonathan Ratner



Saverio Manzo

Greece & Europe: how their woes will affect us in Canada

Here come the strikes, governments put to the test

First it was Dubai, now Greece. Government spending and excessive debts in dealing with the great recession have put some countries on the brink on bankruptcy.

Today, a history-making event in the 21st century: Greek government employees, namely customs and tax officials, will conduct a 48 hour strike. Next week there will be a 24 hour civil servant, doctor and Communist backed worker strike that will be followed by a general strike called by Greece’s main union on Feb 24th for 24 hours. This is all in protest to Greece’s new fiscal budget and is exactly what other countries will face that will test their will to make tough decisions on spending.

Up next to deal with these tough policy, spending and debt issues: the governments of Portugal, Spain, Italy and Ireland.

The markets continue to have a lack of confidence that these government choices will be implemented as country-denominated bond issues and stock markets trade lower, particularly in Portugal, Greece, Spain, Italy and Ireland.

The European concerns have the euro at the lowest level vs the US Dollar since June ‘09. With this we have seen an assertive increase in the value of the US Dollar, a countertrend to the Dollar’s slide over the past 10 months.

Not surprising Gold has been pulling back (inversely related to the US Dollar) and the Canadian Dollar has also retreated, but not in proportion to Gold and is, thus far, holding up well.

The greater implications for global stock markets? If Greece does not resolve their issues soon (unlikely) and we see the next country, as described above, encounter like issues, there will be a run on liquidity towards safety. And, as ironic as it sounds, the US Dollar is still considered the world’s safest store of value (even with the greatest amount of debt and deficit spending).

Thus, a scenario as depicted above would see a loss of appetite for any risk, US Dollar strength and global equity market and commodity, including gold, sell-off.



Saverio Manzo

Loonie will hit parity with U.S. dollar in few months: analysts

Some are forecasting the Canadian dollar will shoot well above its U.S. counterpart. As many of my BLOG readers will note, I have long argued the case for a 2:1 $CAD to $USD by 2020. As our dollar appreciates, so will our per capita wealth and standard of living.

SAN FRANCISCO (MarketWatch) -- The Canadian dollar is on track to hit parity with the U.S. dollar, a rise that would underscore the strength of Canada's economy compared with that of the United States, as well as the country's vulnerability to swift changes in commodities prices.

Analysts are forecasting that the Canadian dollar will trade on equal footing with the U.S. dollar within the next few months, largely based on investor demand for assets linked to rising commodities prices.

The loonie, the nickname for the gold-colored coin that replaced the paper dollar in 1987, is now trading at 94.11 U.S cents. It would have to rise about 6% to trade at one American greenback, or at parity.

"Our forecast is for [the loonie] to hit parity by the end of the first quarter," said David Watt, currency strategist for RBC Capital Markets. "There's a chance it could hit before that."

Such gains would increase the purchasing power of Canadian consumers. But they could curb Canada's export growth and cool inflation, taking pressure off the Bank of Canada to raise rates. Higher rates tend to make a currency more valuable.

"If China is tapping the brakes now, that would certainly upend the bullish views on commodities," Watt commented.

Rising prices of commodities like oil and gold, as well as a weak U.S. dollar, helped drive up the loonie 22% by the end of last year.

Some countries are diversifying their reserves into Canadian dollars. Russia, which has been outspoken about wanting to unload some of its U.S. dollars that it makes exporting oil and natural gas, said last week that it was buying loonies.



Saverio Manzo

A Correction or Something More?

The major equity markets across the globe have had a respectable pull-back over the past several days. Is this a natural and healthy correction within the major upward trend or the beginning of a more serious downward secular bear? Of course if we had the answer to that we’d be the one with the crystal ball.

The TSX (Toronto) stock exchange has had an 800 point retracement from its high of 12,070 on January 11, 2010. Today the index fell to 11,271 (as I write). That’s a 6.7% decline.

The market technicals suggest that there is good support around these levels (buyers believe this level represents good value) but if we break below the December low of 11,248 we could be in for a more serious pull back to the 10,800 level.

Some of the sharpest technical traders suggest that we’ll see a decent bounce upward from around this level, but could break down to lower levels shortly thereafter.

Most fundamentalists believe the global economy is getting stronger, not weaker – which bodes well for equity strength.

Some conspiracist say that “Wall Street” is trying to send a message to President Obama that his suggested levy on big bank (an effective sur-tax) and senior big-pay executives, a message to “back off”.

President Obama is having a state of the Union address tonight, which will very likely affect markets tomorrow. This speech could be the precipitous to the next leg down, or an adrenaline shot to get the markets moving up again. We’ll just have to wait and see.



Saverio Manzo

US Housing watch & Consumer Psychology

Our housing is red-hot in many markets throughout Canada, reaching new all-time highs in certain markets. But the US housing market is showing some serious signs of cracking. What will this mean to us in Canada?

Many US home owners have tried to wait out the bear market in housing, a technique that worked in earlier years when any price declines were small and short-lived. But huge excess inventories, a flood of distressed sales after mortgage modification attempts are over, depressed incomes and rising unemployment will probably keep sellers plentiful, buyers reluctant and prices falling throughout 2010 and perhaps beyond. In past regional house price collapses, it’s taken homeowners a year-and-a-half to give up and throw their houses on the market for whatever they will bring. After the final bottom is reached, house prices will likely mirror inflation, or in future years, deflation as they have historically.

As reported a few days ago, US existing home sales (EHS) fell a disappointing 16.7% as the rush from the first time home buyers credit earlier in the fall depleted sales in December. However, sales had rebounded significantly from the lows last Jan-Mar and have reduced inventories significantly as well.

2009 was a terrible year for US housing on many fronts, but was especially onerous from a foreclosure standpoint. Approximately 2.9 million home went into foreclosure and the outlook for 2010 is similar. As most know, a foreclosed home on average loses 15-25% of its value and also drags down other homes in the area due to comparables.

As part of the State of the Union address, the Obama administration is expected to announce changes to the Making Home Affordable program to assist more middle class borrowers. It's estimated that millions of US homeowners are upside down on their mortgages meaning that they owe more than they home is worth. This negative equity situation has not been addressed due to banks not incented to reduce the principal owed especially if the homeowner is keeping up on the mortgage.

Behavioral scientists are having a field day with this behavior and one professor states these borrowers are suffering from "norm asymmetry. According to a paper by University of Arizona professor Brent White, "Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This (article) suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences."

"Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations - and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse."

Writing in the NYT, Richard Thaler provides the disturbing potential conclusion on homeowners changing their viewpoint and strategically defaulting: "An important implication is that we could be facing another wave of foreclosures, spurred less by spells of unemployment and more by strategic thinking. Research shows that bankruptcies and foreclosures are “contagious.” People are less likely to think it’s immoral to walk away from their home if they know others who have done so. And if enough people do it, the stigma begins to erode." If enough people do it, the housing market collapses.

Fortunately if the US residential market continues to recover and prices continue to improve, the desire to walk away will decrease further as the potential recovery will keep borrowers paying. The key is to keep the market recovering. Job growth, low rates, and better access to liquidity will be all needed to keep the housing market recovering. If not, the scenario described by Thaler becomes more likely. And truly disturbing.

Source: Dave Rosenburg & Andrew Busch



Saverio Manzo

A "safe" bond market bubble?

Investors poured money into bonds and bond funds in late 2008 and all of last year in search of safety and higher returns. Now the bond advantage is shrinking as risks are rising.

In the late 1990s, it was tech stocks. In the mid-2000s, it was real estate. And today bonds are the investment people can't get enough of, unlikely as that might seem. Lured by bonds' perceived safety -- not to mention some spectacular deals, the kind unseen in decades, with 15% yields -- investors plowed $313 billion more into bond funds than they took out in the first 10 months of 2009.

Risk-free? Not really
Brokers, of course, get a commission on each bond they sell -- usually between 1% and 1.5%, often much higher than for a stock trade. And that adds up quickly: Based on 2009 data, fund companies stand to earn at least $2.6 billion more than they did in 2008 from sales of bond funds, whether bonds make or lose money.

Bonds, of course, are not the most straightforward of investments. Trying to explain how bond prices work -- they usually go down when interest rates go up, and vice versa - this inverse relationship - can exhaust even patient financial planners.

The math on bonds comes down to this; ask yourself one simple question: Will interest rates eventually rise from their current historical lows?

Consider: a one percentage point increase in 5-10 year rates can equate to a 10% drop in the value of your bonds.

Prices on even "safe" government bonds could fall 30% or more if interest rates soared over the next few years. Some corporate bonds could fall even more. Be ware.

For further see: MoneyCentral and WSJ.



Saverio Manzo