Saturday, June 25, 2016

The Great Brittish Experiment

There is lots being written today about what this decision (to leave the European Union) means for the UK, Europe and the world, so I will defer to the political /social experts to sort out all of that and the future uncertainties on those fronts.

Yesterday financial markets responded with their opinion, sending the Brittish Pound to record lows and equity markets down some 8% in Europe and Japan and 3-4% in the UK and the US.

What does it mean on an economic scale? The world has stepped closer to a global recession:

We are now awash in a world of uncertainty. When uncertainty strikes, confidence suffers and businesses postpone investment plans and consumers postpone spending plans until they have a better feel for their financial future. This in turn, shuts down the wheels that turn the economic machine.

Monetary policy has proven an ineffective motivator of confidence and fiscal policy (ravaged by the 2008 financial crisis and "great" recession) has been going the wrong way in many countries. Austerity does not motivate economic growth.

The problem is that there is more global debt now than there ever has been and low interest rates that have fuelled much of this debt are low and headed lower which inspires even more debt. The great "de-leveraging" that was expected post 2008 became "unfinished business".

So we will watch as the experiment plays itself out. Unfortunately, the "populist, anti-establishment upprising" will be given momentum and there may not be enough time to wait and see the results of the Brittish situation before other nations make their own decisions and even more uncertainty lies in that direction.

Especially if the US moves in that direction.

A reader writes: "What’s is your contingency in this unexpected turn of events?"

As I suggested in yesterday's blog, we were not expecting this particular outcome, however we have been on guard for increased volatility in financail markets and prepared our High Rock models well in advance by increasing our holdings of cash, cash equivalent investments and Candian Government bonds. At all times our first priority is to protect our clients (and our own) capital.

There will be, at some point of time in the future, some good opportunities, but if you are fully invested, you cannot take advantage of those opportunities, you just have to sit, wait and hope that the cycle evolves quickly so that you can get back to growth.

The S&P 500 is back to levels it attained in the fall of 2014. The benchmark All Country World Index is back to levels it was at in the fall of 2013. It will probably take your standard 60% equity / 40% fixed income model a few more years to get back to its historical average annual returns (oh and remeber, historical returns are not in any way a guarantee of future returns...). If you are patient, you can wait it out. Or you can look to adding a more tactical approach to the management of your wealth and investment portfolio.

Feedback, questions, concerns (I would love to hear from you)....

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Friday, June 24, 2016

2am EDT And It Is "Shock and Awe" For Financial Markets

We did not think that this would be the outcome, necessarily, but our key theme for 2016 was that it would be a year of volatility so we decided that it would be prudent to be defensive and carry over-weight cash positions in our and our client portfolios. I found out yesterday that someone had referred to this strategy as incompetent. Really?

Well those that follow this apparently incompetent blog can make up their own minds I suppose.

Brexit has happened and the British Pound has plummeted (by 9%) in unprecedented fashion on the news, dwarfing the confident up-tick that it had yesterday. I do feel sorry for the "bookies", there will be some interesting reckoning for them.

Meanwhile equity markets have plummeted in similar fashion:

S&P 500 futures are down approx. 5% at this moment (the limit). I fear that when European markets open shortly they will be down more (Japanese markets are down approx. 8%).

Uncertainty rules and cash (and cash equivalent and government bonds) is / are king! 10 year US Government Bond yields have fallen some 20 basis points (prices are way up) .

The great thing is that through all of what is to come (and that is very uncertain at the moment), there will be some excellent buying opportunities made available to those who have cash on hand. Imagine that for incompetence?

Here is a short note from a client I got a few moments ago (only 11pm on the west coast):

"Being a salesman, I can tell the difference between selling and substance, you have never sold…  But if you ever do want one to sell your brand, let me know ;-)"  

He is rather happy about his cash position, I think.

We shall monitor developments here on this blog in the days and weeks to come, so tune in for an update if you wish.

Now I will go off to sleep, knowing that our clients and I will sleep better.


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Thursday, June 23, 2016

The Post-"Brexit" Referendum World

Things financial look like they have already seen the results of the UK referendum to depart or remain in the European Union.  If you have been following the media, the polls and the odds-makers, the choice was basically down to a sovereignty (leave) issue and an economic (stay) one.

In the polls it was too close to call. The gambling odds favoured the stay camp.

The British Pound is, this morning, at it's best levels since December, up more than 6% from its lows last week (indicating that financial markets are going with the "bookies"): 

Global stock markets are higher as well. Relief is in the air, this morning, but the polls don't close until 10pm UK time (5pm EDT) later today.

It will be behind us soon and will be one of the many uncertainties that financial markets have been facing.

If, as the sentiment appears to be indicating, the status-quo is maintained, the focus shifts back to the global economy which in a number of major advanced economies remains mired in deflation or low inflation and economies are not yet showing the expected results of the massive amounts of monetary stimulus in Europe, Japan and China.

Further, the path of the US economy remains a major question mark. The US Federal reserve wants to "normalize" interest rates, but cannot, at the moment, because the economic data does not yet warrant it.

And, even if the data permits it (as we have suggested numerous times on our weekly webinar over the last number of weeks ), a flatter yield curve (higher short-term rates or lower long-term rates or a combination of both) pushes the US economy closer to recession (as was the case in 2007):

And of course, there is the US presidential election campaign and who knows what twists and turns that situation holds for us.  A"Reality TV" show like no other!

And of course, if equity markets rally, as they have already this morning (S&P 500 is closing in on 2100, only 35 points or 1.6% away from its all time highs) with earnings and expected earnings levels entering their 5th consecutive quarter of negative growth, then the fundamentals will continue to be out of line with market prices and equities remain very expensive on those metrics.

If the bookies are wrong? I do not even want to think about the consequences of the UK leaving the European Union and the domino effect on all of Europe and the global economy, but the volatility meter would spike because the added uncertainty would send investors into a flight out of risk assets.

Thanks for all the great feedback, please keep it coming...

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Wednesday, June 22, 2016

Wealth Interrupted: Protection Against Identity Theft, Fraud And Insolvency

A reader writes: "So I was talking to my friend today and she mentioned that she literally had 50K stolen from her bank account. She had a GIC, cashed it, and was about to make a downpayment for her condo. When she checked her account from the time she cashed it to the time she checked (about 2 days), the money went missing. The bank froze all her accounts and did an investigation where it was revealed that a bank employee actually used my friends drivers license to steal her identity and her money.

Of course, it was all refunded to her. After a police investigation and the bank investigation. But it did bring a topic to mind - Identity theft.

Maybe you can write about the controls that are in place to ensure that investments are not 'stolen'. Also, you can tie that into the insurance that is available in the event of losses, the role of the ombudsman etc."

 I always wonder about the folks that perpetrate these crimes, as in : how is it that you think that you're not going to get caught?

Anyway, it is a great question, because given all the new regulation around anti-money laundering and "proceeds of crime" issues as well as the "know your client" rule, we are asked to give up a great deal of personal data and information just to prove we are who we say we are, as well as our personal finances, objectives, risk tolerance, etc. 

And then all of that information, while protected under privacy laws, is in someone else's hands, usually in a computer data base which as we read about regularly can be hacked into and stolen.

The investment industry has rules and regulations to protect client data (as we all are aware) it is not only in a computer data base, but in most large institutions there is also the physical data (mounds of paper-work filled out and signed) that also represents a risk.

Individual firms will also have there own internal security systems (and firewalls) that they have to maintain and upgrade to stay ahead of the "genius" criminal element.

In my time at Raymond James, I can say that there was a very heavy emphasis on cyber security and while other institutions were experiencing difficulties, to the best of my knowledge, Raymond James never did have a breach and were very efficient in identifying potential problems and notifying employees of their courses of action.

This is one of the reasons that we use Raymond James Correspondent Services for our High Rock client account custody (back-office).

With apologies (in advance) to Canada Post, the regular mail can get "lost", so we always use a courier that can be tracked (to protect that data as it physically flies about the country).

In my time as a branch manager, there were a few instances that I was made aware of,  where client emails were "hacked" and the criminal element used the email to ask to have money sent to a (different than the usual) bank account. If I recall correctly, the "fake" client was on a vacation and that was the excuse for a different bank account for the money to be sent to.

Needless to say, any money sent would have to be verified by a follow-up phone call, but we had to make sure that we were paying attention.

The Canadian Securities Administrators (CSA) has a number of suggestions for "protecting yourself" against fraudulent activity

However, if you do not get satisfaction from the institution or the advisor, you can also go to the Ombudsman for Banking Services and Investments (OBSI)
for any dispute resolution.

You also want to ensure that the institution (like Raymond James) where your accounts are held is a member of the Canadian Investor Protection Fund (CIPF), so that if they do become insolvent, your accounts are covered for up to $1,000,000.
More here:

Questions? Feedback?...

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Tuesday, June 21, 2016

The Skinny On Canadian Bank Risk

It is webinar day at High Rock today, so I am working away on prepping the power point slides on the latest economic news and financial market charts and returns and all the interesting metrics that we follow in order to allow us to make the best possible decisions on getting ourselves and our clients the most efficient risk-adjusted returns (maximum growth / minimal risk).

We will post the recorded version at or about 5pm on our website :

In the meantime, my very astute business partner and the guy responsible for the lions share of company "bottom-up" research (I do the lions share of "top-down" or macro research) at High Rock has written some great pieces on Canadian Banks:

I would highly recommend having a look at these, it does put a lot into perspective.

Together we have been breaking new ground on affordable wealth and portfolio management, while continuing to provide clients with a high level of service for the ultimate client experience that you likely will not find anywhere else.

In addition, we are also here (with many, many years of experience in financial markets and wealth management and with lots of widely recognized credentials) to help improve financial literacy for those who want help doing so...

So please feel free to ask questions and send feedback because it does provide me / us with excellent topics (beyond what you might find in the media) to discuss...

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Monday, June 20, 2016

Behavioural Finance: Mental Accounting

Another great question from a reader: 

"Can I have 2 separate accounts, one for investing in your portfolio models and one for my house money?".

We can make the assumption that at some (at the moment unidentified) point of time in the future, there is the desire to purchase a house. I won't get into the debate about whether a house purchase makes sense or not because that becomes the realm of a wealth forecast and is a highly personal (and perhaps emotional) decision. There are plenty of risks involved in home ownership and our job is to identify them and quantify them in the context of a family's goals and needs (which allows them to make an informed decision). It is however, their decision.

Back to the answer to the original question:

Of course you can, but why would you?

It is natural human behaviour to want to categorize different classes of the same basic asset: money.

It however, doesn't really matter:

If you have a $500,000 "investment account" that earns an annual total return of 5.5% (before fees and taxes)  and a $250,000 "house account" that earns 1% annually, then you actually have $750,000 that earns 3.9%.

But people like to separate "risk" money from "safe" money, because the pain of loss is greater than the pleasure of gain. It is, according to Richard H. Thaler (one of the foremost experts on Behavioural Finance), part of "the set of  cognitive operations used by individuals and households to organize, evaluate and keep track of financial activities."

The theory behind "Mental Accounting" can often lead to decisions which may have irrational and detrimental impact on their consumption decisions and behaviour.

If you have a $500,000 investment portfolio earning 5.5% (or more) annually, why would you rush to use that money to pay down a line of credit or mortgage that has a cost of 2.5-3% just because you don't like debt?

And vice-versa: if you have a mortgage or line of credit at 2.5-3%, why would you put money in a (safe) savings account earning less than 1%. Especially if it is the held at the same institution because they are thrilled that you are paying them 2.5-3%  (to borrow from them) on one account and they are borrowing from you at 1% on the other.

Basically, all money is "fungible": whether you "worked" for it or "found" it (unexpected windfall), it is the same and its use all has risk associated with it.

If you spend it, you don't save it.

If you want it to grow, then you have to ensure that its growth is at a rate above the growth in the cost of the things that you will need to eventually purchase with that money (inflation). You also need to ensure that the risks of getting that growth are suitable.

Need help with that concept? (or other feedback)

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Saturday, June 18, 2016

Thank You Readers, Friends, Clients 

It is really exciting to get the feedback that you continue to send. I do really appreciate it all because it tells me what you are interested in reading about and I can go about the business of doing just that.

I am not, nor was I ever trained as a "professional" writer (and my Chief Compliance Officer often reminds me of this when he corrects my grammar and punctuation). So I may not have the wit and charm that others may bring to the blogging world. 

However, I have been trading and managing risk and wealth for over 35 years now and have lived through lots of economic and market cycles (and seen lots of crazy volatility) over this period of time. Oh and I hold a Chartered Investment Manager designation as well. My business partner Paul, is a Chartered Financial Analyst and our other partner (at High Rock), Bianca, is a Certified Financial Planning professional. Between the three of us we have some pretty strong skill sets that we combine to offer a very solid wealth management team.

But my job and my passion are really about helping people. I have all of the time in the world for that and I have a fantastic platform from which to do it. It has taken me years to find the best possible way to offer a truly client oriented strategy that tailors very specifically to the needs of each family that we work with.

However, it is your questions and feedback that gives me continued insight into all the many different goals, objectives and needs that various families have. This fuels my research (our research) and provides me with interesting topics to explore and report back on. I am of the mindset that, many of you likely have similar questions and hopefully I am (in this blog) covering issues that are important to you all. If not, please, there is no such thing as a "stupid" question when it comes to financial literacy (because they do not teach you this very important topic of personal finance in school, unless you are a business/finance major, if then) and it is so important to seek the help and advice of someone (or in my case, a team) who has the skill set to give you the correct direction.

So, thanks for being in touch and for those who want to participate, don't be shy! 

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