What He Said

"When the market is going up, most people get complacent and sit on their thumbs ... nothing to worry about".

http://www.highrockcapital.ca/pauls-blog.html

...and at the risk of overblogging y'all to death:

It is so true.

And consistent with that equation (the corollary, as it were) is that most folks in the investment advice channel are busy selling their clients on the buy and hold strategy ("nothing to worry about"). When the market starts to go the other way and all their client's money is spent (fully invested), only the very brave advisor will come out from their hiding place to hold their clients hands through the volatility. Most don't want to answer the question "why didn't you wait?" (so you may end up talking to an assistant instead).

The "psychology" is proven time and time again when the individual investor participates the most at market highs (on the buy side), finally convinced that things are safe again. And once again waits until thay can no longer stand the pain to "abandon ship" (usually at a market's lows).

And as Paul said in his blog: we (at High Rock) get the most attention when things are looking grim because all of a sudden we don't sound like such a bad idea after all (the alternative). We were crazy busy taking on new clients in March and April.

The point is, quite clearly, why put yourself in a spot where you are going to have to ride out the storm and suffer more discomfort (have your retirement scenario put on hold, perhaps) as a result?

The on-going conversation we have surrounds people's basic priorities: but generally financial matters are on the back burner until they matter and usually it is when something is going awry: 

"If it ain't broke, don't fix it!" goes the old cliche.

We say:

Why drive the old model if you can get the new (and improved) one and it costs less?!

How is that for an idea?

Sleep better at night.

Feedback...

scott@highrockcapital.ca

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bianca@highrockcapital.ca

US Debate #1: More Hype Than Substance

It was a debate for the ages, if you like facial expression. But if I was a part of the US electorate, I would not be thrilled that there was very little other than the personal attacks that came out of this "reality TV" episode which likely was off of the ratings charts. So the winners were really the networks and the "fact-checker's", who had numerous corrections to offer us: 

http://www.nytimes.com/2016/09/27/us/politics/fact-check-debate.html?action=click&pgtype=Homepage&clickSource=story-heading&module=span-abc-region&region=span-abc-region&WT.nav=span-abc-region&_r=0.

Decide for yourselves who had the most "fabrications".

Foreign exchange traders bought Mexican Peso's, so they think that Clinton may have had the edge. In overnight trading, equity markets popped up briefly, but ran into more selling for other reasons that make more sense (like concerns over banks).

In the end, the polls will give us an idea as to how the American people thought it all went and ultimately they are the ones who count. 

In the very end, it will be about whether the electorate wants change (fairly big change if what we are told will all come to fruition) or trying to evolve within the same style of system. 

For us, what matters most is the level of confidence that businesses and consumers put into whoever takes the helm. Will businesses be ready to finally release their purse strings to move forward with investment in productivity growth. 

Certainly at this point they are not.

Will consumers be confident enough to spend? 

The most recent data show that they are now deferring spending plans, which suggests that this election campaign is taking its toll on US economic growth.

I can't get any clarity in the future from listening to these two spar and I am not really certain how anyone can (except for the foreign exchange traders, perhaps).

It is webinar Tuesday and we shall be discussing this and other developments in financial markets, the global economy and any other issues that might impact the management of our wealth and portfolio strategy with our clients.

We will post the recorded version on our website at or about 5pm EDT: http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html

Feedback...

scott@highrockcapital.ca

If you would like to receive this blog directly into your inbox...

bianca@highrockcapital.ca

Positioning For A Recession

"...I have been following your and Paul's blogs...based on what you have been saying, there is a high risk of recession (vs. others stating the exact opposite). What sort of approach would you take in the face of a recession?"

An excellent question (as are all questions)! Thank you.

Let me start by saying that we all want asset prices to go up (especially those that we are invested in) because it lifts the value of our net worth and gives us confidence in the future. 

A great many in the investment advice world (who believe in being fully invested at all times) will focus on the long-term nature of investing to suggest that it is best to just ride out the cycle and in time, asset prices will once again start to rise and in the meantime dividend and interest payments will cushion the downside.

To this, I cannot disagree.

However, if we can find ways to take advantage of what we believe will be lower asset prices (of those assets that we want to own) in the future and add value and reduce risk to our client portfolios, then we also think that in our clients best interest (and ours because we do invest in the exact same models as our clients) that we should do so.

Our fixed income model will likely be (initially) weighted to have longer duration (a longer average term to maturity) than the index. If and when the recession cycles through its term, we can adjust accordingly to take advantage of yield curve shifts (flattening first, then steepening eventually).

We think that stock markets historically are vulnerable to significant price corrections in a recession, so we would continue to maintain under-weight holdings in our global equity model until we felt that valuations had returned to more reasonable levels.

In the meantime, we also have our tactical model, where we can look for opportunities outside of the mainstream market's where individual company circumstances are not being impacted by the macro-economic cycle and where we are almost fully-invested (at the moment).

This represents a great deal more work (fundamental research) for us (than just telling our clients to wait it out), but in the end, is that not what they are paying us for?

If our assessment is incorrect and a recession does not occur?

We (at High Rock) are a discretionary portfolio management company and can act quickly and efficiently on behalf of our clients (silmultaneously) should we determine that the economic climate has changed (and valuations are more reasonable as a result) and we need to return to a more fully-invested situation.

To date, within our more conservative view, we are ahead of our benchmark index in returns (after fees and costs) for ourselves and clients (accross all of our portfolio combinations) and we are prudently taking less risk to get there, so right or wrong on our macro-economic outlook, we are still getting better risk-adjusted performance (portfolios have less volatility).

What makes you sleep better at night?

Waiting it out?

Or having managers working hard to find the safest way to continue to get growth?

There is an alternative.

Feedback, any and all questions...

scott@highrockcapital.ca

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bianca@highrockcapital.ca

Fed Lowers US Economic Growth Outlook

No surprises here for us. No interest rate increase (as expected).

"The Committee judges that the case for an increase in the federal funds rate has strengthened but decided for the time being, to wait for further evidence of continued progress toward its objectives."

https://www.federalreserve.gov/newsevents/press/monetary/20160921a.htm

Then they issued a revised economic outlook for growth to 1.8% from 2%.

So I ask you my friends, what am I missing?

A lower economic outlook is not a strengthening case for raising interest rates.

Consumers are not spending and businesses are not investing because they lack confidence in the future. Confidence does not come from interest rate moves or quantitative easing, it comes from believing that incomes and earnings will grow in the future.

As I have often said on this blog and in our weekly client webinars, there is just far too much uncertainty at the moment and until that gets sorted out, economic growth of any significance is not going to happen.

Brexit, Trump, Terrorism, North Korea, Syria, Russia (and others that I have missed): nationalism, populism and push-backs against globalization continue to threaten the global economy.

Enormous global debt levels and inflated asset prices because of low interest rates are weakening the structure of the global economy and there is, at the moment, little ammunition left for central banks to stimulate growth and have room to act if there is another economic or geo-poilitical shock.

An economy growing at 1.8% does not suggest the equity market analyst projections of 13% earnings growth for 2017 are anywhere close to being realistic. 

So it is hard to believe that the stock markets should be up 6% in 2016 whether you are looking forward or backward (2016 earnings growth is projected to be flat: -.2%) 

Analysts projected 6% earnings growth for 2016 at the beginning of the year and consistently revised these down over the course of the year.

This economic cycle which began back in 2009, is now over 7 years old and is sending signals that it doesn't have much left in the tank. The coming recession, which will happen eventually, will likely not be as steep and deep as the last one, but it will happen and the sooner it does, the sooner the excesses will get shaken out and then we can get back to some better growth potential for the future.

Historically, stock markets do not perform well in recessions, so we remain defensive and caution others to follow suit.

Feedback....

scott@highrockcapital.ca

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bianca@highrockcapital.ca

Central Banks (Part 2): Bank Of Japan

http://www.highrockcapital.ca/pauls-blog.html

Good reading for today at the link above.

Yesterdays client Webinar:

http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html

Tune in to BNN at 3:45pm today to catch Paul chatting about the Fed with Catherine Murray.

Central Banks As Economic Leaders

Awkward!

Back in the days following the great recession when the US Federal Reserve needed to supply some "extra" ordinary monetary stimulus in an attempt to re-build economic and investor confidence they introduced Quantitative Easing as a bold new step and it had the impact that they were looking for. They followed with two more efforts and financial markets went into a dither which was dubbed the "taper tantrum" in 2013 when it became clear that they were not going to follow with more.

In 2011, The European Central Bank, facing a debt crisis and a currency crisis adopted the extraordinary measures to subdue the negativity. Again a successful effort as calmer financial markets followed in their wake. There have been a number of extraordinary measures added since then and the Bank Of Japan and  Bank Of England also joined the party.

However, like Pavlov's dog, financial markets, it appears, have become expectant of something each and every time that central bankers make their interest rate decisions. 

When they hold back on further stimulus, it causes convulsions. When the Fed raised rates in December of 2015, volatility spiked in January and February of 2016. Central bankers live in fear of volatility and the end result of how that impacts economic decision making, so they have taken on a leadership role that necessitates making financial markets happy in order to keep volatility at bay.

They do not cherish this role.

They want business leaders to use the "cheap money" to invest in their businesses to increase productivity and enhance economic growth. Instead, lingering uncertainty has pushed business leaders to take a more short-term view: buy back their company's shares, pay more dividends out to shareholders and not necessarily make the longer-term investments in productivity and growth.

But, having had to adopt this leadership role, central banks are not certain as to what to do next.

The Fed wants to "normalize" interest rates, but there will be consequences (probably a recession) and are they ready for those? They will make their announcement at 2pm on Wednesday. 

The Bank Of Japan decision is due out late Tuesday (11pm EDT) and it is unclear whether they will stay on the fence as did the European Central Bank or make bold new moves in monetary stimulus. There are arguments for both sides, but they will likely be reluctant to add to a policy that has so far had a limited impact.

Central bankers would certainly like to hand off the reigns of economic leadership and move gently into the background in their intended "supporting" role, but there appears to be nobody willing to take those reigns.

Until that happens, it is likely that the global economy will struggle.

Feedback, etc. ...

scott@highrockcapital.ca

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bianca@highrockcapital.ca

Always Interesting Conversations With Clients:

As it is part of our regular service to meet in person (or via webinar) with our clients at least every 6 months, it does allow some important dialogue as part of our on-going desire to keep open the channels of communication: in addition to our weekly webinar, almost daily blogs and a wide open 24/7 policy for staying in touch for whatever our clients immediate financial needs might be.

The 6 month review is important because it allows us to not only answer any questions about what we are trying to accomplish on behalf of our clients but also allows them to judge their progress against what their Wealth Forecast (last updated and revised 6 months ago) is suggesting where they should be.

During the conversation with a client in a recent 6 month review, he suggested that it was just hard to "wrap his head around of all the changes in the banking world today", but he especially wanted to make sure that he did not get "caught out" in the next market sell-off (because through the recovery and up until recently (when he became a High Rock client) his rather expensive mutual funds had not returned to pre-2008 levels), so he had kept a savings account (with a reasonable sum in it) with the same financial institution that also held his now shrinking mortgage.

Here is an example of how folks looking for "safety" are being conditioned to think that a financial institution is providing it, when that exact same banking institution is allowing you to have a savings account that earns you maybe about 0.25% on your account balance (which you are lending to the bank) and at the same time the bank is turning around and lending to you (for your mortgage) at a rate in and around 3%.

As a client of that bank, you should be infuriated because the bank is taking a 2.75% spread on your money from you!

The shareholders (of the bank) love it (it is pure profit).

As we will often say at High Rock, there are alternatives: If you can possibly earn 4-5% on your money (after fees and costs)  with low levels of risk (and plenty of that in cash / cash equivalents) why would you:

1) be anxious to pay off a 3% mortgage?

 and 

2) why would you lend money to that same financial institution (who lends to you at 3%), basically for free? They would never do anything for you for free.

There are so many options for folks that are looking for great service and direction with equal or better safety (Canadian Investor Protection Fund) features outside of the mainstream banking and insurance institutions. Just because they are large and have been around for a long time, it doesn't necessarily ensure the quality of care or safety, for that matter.

Times are changing, there is a better way to save, grow and invest your money (and still get the service that you want).

Feedback?

scott@highrockcapital.ca

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bianca@highrockcapital.ca

Slower Growth, Higher Inflation In The US And  Growing Canadian Household Debt

Back to things economic as we wait for next Wednesday's FOMC interest rate decision: 

Thursday was a day of significant data releases (otherwise referred to as a "data dump") in the US which showed slowing retail sales and industrial production (more than had been anticipated) and enough for the Q3 GDP Now forecast (that we show each week on our weekly client webinar) to be lowered from 3.3% to 3%, largely because the consumer has decided to put off purchases ahead of a highly uncertain presidential election.

Meanwhile, this morning, the latest Consumer Price data showed that the "core index" grew at an (higher than expected) annualized 2.3%, with medical care and shelter (among other items) leading the way. 

The Federal Reserve's dual mandate includes price stability (low inflation) and full employment and if they focus solely on these two items, some may argue that it is enough to raise interest rates.

The other camp will argue that there is also "behind the scenes" data (like consumer activity and business investing) that auger for future economic growth to slow (putting pressure on employment / unemployment data down the road) and that this should inspire caution among Fed decision makers.

Here at High Rock, we will argue that a Fed rate increase will only put the US economy closer to recession.

It will also create significantly more volatile financial markets.

The odds-makers will suggest that it is unlikely for a rate increase at next Wednesday's 2pm announcement, but the odds-makers were wrong about Brexit as well.

Whatever the case, higher interest rates south of the border will put upward pressure on 5 year mortgage rates in Canada because Canadian and US bond markets tend to trade fairly close together. This in turn, can tend to put upward pressure on mortgage rates, but likely nothing too significant at this particular moment in time (but longer-term it is something to consider).

The problem, in Canada, is that Household Debt to Income ratios have reached another record:

 Higher debt servicing costs  (that would come with higher interest rates) could make the housing market tremble.

In Canada, the Bank of Canada only has one mandate: price stability. If we should see inflation rise (forcing higher interest rates) without correspondingly stronger economic growth (and household income), that could certainly spell trouble.

Something (another risk, albeit not a near-term one) to think about.

Feedback....

scott@highrockcapital.ca

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bianca@highrockcapital.ca

Things That We Just Have To Shake Our Head At:

Today I was "out-blogged" by my High Rock business partner:

So I send you the link as suggested reading!

http://www.highrockcapital.ca/pauls-blog.html

Enjoy!

More On The Stuff That Nobody Really Wants To Think About

We all want to have a happy, healthy and somewhat stress-free retirement. However, as I suggested in Monday's blog, there are risks that we have to mitigate (as best as we possibly can) in order to accomplish this.

We have to know and understand these risks.

Sadly and unfortunately we are not educated in these risks at an early age (financial literacy should be a core subject from the 1st through to the 12th grade). I actually looked into the curriculum for Ontario and this is what I found:

Is financial literacy offered to students as a separate course?

No. Financial literacy education is integrated in the existing Ontario curriculum.

How is financial literacy taught in Ontario schools?

Financial literacy is part of the elementary and secondary curriculum in many different subjects such as mathematics, social studies, Canadian and World studies, business studies and many others. In some subjects, students may be learning specific skills such as understanding money, consumer awareness, personal finances, budgeting and money management that will help them develop financial literacy skills. In other subjects, financial literacy connections may be made as students learn about their place in the world, as a responsible and compassionate citizen or when they study different economic systems.

Through the curriculum, students are developing skills in critical thinking, decision-making and problem solving that can be applied to subjects at school and to real life situations. Resources have been developed for teachers to help them connect financial literacy topics across the curriculum to deepen students' learning and make financial literacy more relevant.

http://www.edu.gov.on.ca/eng/parents/financial.html

So, depending on the teacher: "financial literacy connections may be made as students learn about their place in the world".

Good luck with that.

Teachers get a pretty favourable Defined Benefit Pension Plan that will ultimately take a good deal of the risk out of their achieving a successful retirement, so are they the best at educating our youth about financial risk (if it is not structurally built into the curriculum)?

The media try to help, but their target market is the already under-educated (in financial literacy topics) adult and a good deal of their motivation (other than selling their product) comes from trying to protect the under-educated masses from the predatory financial services industry.

We may all have some particular respect for Canadian Banks (because they were able to survive, mostly unscathed, through the financial crisis of 2008), but beneath the surface my friends, they are focused on their profitability and that makes them more interested in acquiring assets, collecting fees and minimizing costs that may run counter to the desire for their clients to pay lower fees and get better service.

So do we want to be turning to Canadian Banks and their affiliate investment advice channels for financial education? I would suggest that, in and of itself, poses a conflict of interest.

The Bank Of Canada is a more neutral player in our current state of affairs, non-political (for the most part) and with the Canadian economy and the Canadian people and their best interests at heart.

I know, parents (and caring teachers), that getting school age children to read the speeches of Bank of Canada staffers is probably going to be like pulling teeth. However, it is important stuff (as I said in the title) that we, for the most part, really don't want to think about. 

But I think we should all take a moment to read what Carolyn Wilkins had to say in her speech today:

http://www.bankofcanada.ca/2016/09/slow-long-financial-stability/

Canadian households need to play their part in ratcheting down their growth expectations and reigning in their exposure to financial risk because the returns are just not going to be there.

Paul (my business partner at High Rock) and I shake our heads at so many things that Canadian investors leave themselves vulnerable to (because they just don't know any better):

1) They pay too much in fees and costs for what they receive in return. Over-charged and under-served.

2) They are easily sold on investment advice that may be out-dated or just plain wrong (because the advice channel is built to pay the advisor quite handsomely and the bank / insurance company shareholder as well).

3) They really do not have a good understanding of risk and risk-adjusted returns (if they did why are they vulnerable to such wild portfolio swings?).

4) They, in many cases, do not have a detailed financial plan, that sets out the risk parameters, time horizons, cash flows and goals for their retirement.

A rainbow is not located at a specific distance from the observer, but comes from an optical illusion caused by any water droplets viewed from a certain angle relative to a light source. Thus, a rainbow is not an object and cannot be physically approached. Indeed, it is impossible for an observer to see a rainbow from water droplets at any angle other than the customary one of 42 degrees from the direction opposite the light source. Even if an observer sees another observer who seems "under" or "at the end of" a rainbow, the second observer will see a different rainbow—farther off—at the same angle as seen by the first observer. Wikipedia

Our High Rock Weekly Client Webinar:

http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html

Feedback:

scott@highrockcapital.ca

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bianca@highrockcapital.ca

What The "True Risk's" Are

Last Thursday Catherine Murray (BNN Business Day PM) said to me, that there "were a lot of opinions out there of what the true risks really are..." ( http://www.highrockcapital.ca/in-the-news.html )... and we went on to discuss what some of those risks are (in my "humble" opinion, as my mother always so succinctly put it).

As we are wont to do from time to time (post interview / discussion), we go back in our minds and wonder if there was something else that we might have said that would have been a bit more poignant.

For example, actually, the "real" risk, shared by the great majority of us, is that we will, somehow, out-live our money and that between now and that time, we best do what is most prudent to ensure that we don't.

The risk that we take, from now until then has to do with preserving and in most cases growing our wealth to continue to be able to provide what we desire as an "appropriate" lifestyle (and of course this varies amongst us all).

Inflation becomes a big risk because that will erode our purchasing power. If the costs of the goods and services that we need to live comfortable lives (and provide those same types of lives for our dependents) grow at an increasing rate, then we need to take that into account in our life-long equation.

Hence we talk about the math behind present and future value.

These days, we don't talk about inflation as much as we did back in the 1970's and 1980's when it was running at annualized rates of 8-9%.

We believe that our personal levels of consumption (and they are not necessarily what Statistics Canada's "basket of goods" for the purposes of calculating CPI are) will have a cost that grows each year.

Some of our clients have actually gone to the trouble of doing this experiment, but it is a whole lot of work. Their reactions were quite interesting however (surprise and shock), because in most cases, you will find that your actual personal rate of inflation is likely to be well-ahead of the annual rates that we are provided with by the number crunchers at Stats Can. Especially if you are dealing with tuition, health care and other lifestyle costs that are more "up-scale".

So add that to the list of risks: under-estimating your personal rate of inflation. 

I know that is not what Catherine had in mind when she asked me about "the risks out there", but if we are under-estimating our future cost of living, that makes us more vulnerable to the running out of money concern.

Be that as it may, we save and invest our money to try and get a rate of growth (after fees and taxes) that will allow us to stay ahead of the erosion of our purchasing power.

If our personal rate of inflation is at 2.5 - 3%, then we need to achieve a rate of growth on our money (after fees and taxes) of at least 2.5 - 3% to just stay in our comfortable lifestyle (whatever that may include).

The really big risk now, is that there is no way to get that kind of return without taking some pretty substantial risk: some banks will pay you 1% (or a little more, but there is still a little risk and the return is taxable if it is non-registered money). So for all intents and purposes the risk-free rate of return (after taxes) is somewhere between 0 and 0.5%. Then you have to add in the fees. There are always fees (there is no way a bank does anything for free), regardless of what the headline says, just read the fine print!

Basically, at this point in time, there is no way to get growth and take no risk and there is no way to stay ahead of inflation without taking some risk.

So you have to do a couple of things (to lower your risk):

1) Do not be fooled by "headline" fees, without digging a little deeper. There are safe alternatives to banks (and as my friend and business partner Paul Tepsich will tell you, banks are not without their own set of risks).

2) Understand your personal rate of inflation and what you need to achieve to stay with it. (Do a Wealth Forecast).

3) You will have to take risk (even owning a house has significant risk attached, despite what you may hear and read). So you have to have a partner (a professional) who can guide you through the minefield of risk.

4) You need to be careful who you partner with. You need to understand their motivation: are you their priority? or are they their own priority? (if it is a bank, is the client most important or is the stakeholder)? That is crucial.

Want to be the priority?

That is what we do, we make you our priority and while the financial service industry is going the other way (stakeholders first), we are not, because we believe in the "service" part.

So think about your "true risk" when you have a moment.

Feedback, questions, ideas...

scott@highrockcapital.ca

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bianca@highrockcapital.ca

No Stimulus "Fix" For Markets And

"Withdrawal" Gets Painful

So a bit of a taste of reality when the artificial stimulus is pulled away (no new European Bank Stimulus) and with a hint of the repercussions of what may follow if the US Federal Reserve raises interest rates when the FOMC meets in a week and a bit.

Pull away the thin layer of sugar coating of low interest rates and a real world full of uncertainties is revealed:

1) The global economy continues to struggle and is at risk (there is a high and rising risk of a US recession).

2) Global debt levels are at record levels.

3) Central banks have spent their "bullets" and need to keep a few in reserve for any unexpected "shocks".

4) The world "order" may be tested if and when there is a new US president.

5) North Korea has nuclear weapon capability and a "madman" at the helm.

Uncertainty = Volatility

And The CBOE Volatility Index (VIX) spiked by 40%.

The CNN Money Fear And Greed Index moved back to "Fear" territory (only a month ago it was in "Extreme Greed").

The S&P 500 lost close to 2.5% yesterday (on above average volume):

There wasn't the usual "safety" of bond markets (yesterday) as they sold off as well.:

Last Tuesday we reported on our weekly client webinar that our benchmark (which we measure our performance against) 60% equity / 40% fixed income (fully invested) combination had produced a total return of 6.34% (less fees and costs of approx. $.80 = 5.54%) so far this year and our client portfolio comparison was 6.33% (after fees and costs) over the same period.

As of Yesterday, that same benchmark is only returning 4.30%, 3.50% after fees and costs thus far this year. That is a big swing (close to 2%) and a lot of volatility.

(Source Bloomberg Total Return Analysis, Daily: Dec 31, 2015 to Sep 9, 2016 for ACWI /XBB)

Meanwhile our client who began with us in January, who's return this year to date had been 6.33% as of last Tuesday, is now at 5.69% (after fees and costs) as of the close of business yesterday, significantly less volatility.

As I have been rambling on and on for some time now, we have taken a very cautious approach to investing: choosing (often to the less than favourable views of our critics) to be less invested (than normally might be the plan) in equities (especially the very over-valued US equity market).

Hopefully, the reality of the impact on fully-invested portfolios is clear from yesterday's example. If that is OK for you. "Keep Calm And Carry On" (as they say).

However, if you prefer to sleep better at night, there is a way to get reasonable (perhaps better) risk-adjusted returns (less risk, same or better return) and that is through the use of a more tactical approach to investing (rather than the always fully invested 60 /40 model).

Our clients sleep better at night.

Feedback (from those not sleeping, or anyone else for that matter...)

scott@highrockcapital.ca

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bianca@highrockcapital.ca

Watching vs. Reading?

http://www.bnn.ca/business-day-pm

Risk of U.S. recession is high, says strategist

Scott Tomenson, Managing Partner and Chief Market Strategist at High Rock Capital Management, tell BNN why he thinks there is a high risk of a U.S. recession.

You be the judge!

Feedback...

scott@highrockcapital.ca

Why Are Folks Surprised?

The Bank Of Canada Has Been Wrong For At Least 2 Years Now!

Don't get me wrong, I have a great deal of respect for Stephen Poloz, he is a very smart (and well-educated) individual. However he, like his compatriots to the south, east and west, have been overly optimistic about their expectations for a global economic recovery.

This (the art of economic forecasting) is not science, this is psychology. The central bankers of the world have done what is in their power to do: keep interest rates low, monetary policy "stimulative" and be vocally optimistic.

However, despite their best efforts and intentions, it has not been enough. Equity market participants have bought in, driving prices back to record highs (especially in the US), but businesses are not convinced and have held back investing in productivity advances and the global economy has struggled and earnings are entering their 6th consecutive quarter of annualized negative growth.

Cheap money was intended to let the deleveraging process (paying down debt) work its way through the system, but it has only encouraged greater levels of debt: in Canada, the most highly leveraged and risky households have only added to their debt burden and this frightens both the CMHC and the Bank Of Canada.

Complacency is rampant in the Vancouver and Toronto housing markets: "it has always gone up, so that will continue" is the mantra for those who are paying what we "value" oriented folks consider to be outrageous prices.

Everything economic moves in cycles: it always has and it always will. The timing of those cycles is what is not predictable, but there will always be a peak and a trough and the peak is coming (if it is not already here) and the trough, hopefully shallower than the last one, will follow.

Yellow flags are up and the red one's will soon be flying. Pay heed to the Bank Of Canada's warning signals: they are no longer as optimistic as they once were. That has to stand for something.

Feedback, questions, ideas...

scott@highrockcapital.ca

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bianca@highrockcapital.ca

"Timing" The Market

There are many academic studies that will show that over the long-term, trying to consistently time the market (buying the lows and selling the highs) is not as successful a strategy as a simple "buy and hold" over the same time period.

Agreed!

And that is the argument for the "core" of any portfolio.

It still doesn't excuse the fact that investors have parked close to $6B in an RBC balanced mutual fund with an MER of 2.36%

What am I missing?

Do people actually look at the costs associated with owning this stuff? It riles me up!

But, I digress....

There is a place in a portfolio for "timing", when it is done by the professionals: 

If you have new cash to invest and a re-balancing of your portfolio concludes that a certain % of that cash needs to be invested in the S&P 500 ETF (as an example, not as a recommendation), but all the metrics suggest that it is close to its all-time highs and very expensive, why not wait? (especially if you are already exposed to that asset class).

If you are paying a fee for having your money managed, wouldn't you expect your manager / advisor to at least make that consideration? It can make a difference.

There are advantages to be had by being tactical. Not the whole portfolio, mind you, but just a certain portion.

It is what sets the good managers apart from the pack: the ability to pick their spots (to buy and to sell). It is what I would expect if I were paying a manager to manage my money. I would want some value for the fees that I pay.

So have a "core" of your portfolio fully invested, but have a portion of your portfolio that is tactically managed (by someone who knows what they are doing).

And for your own sake, please research the costs!

Feedback, questions, ideas...

scott@highrockcapital.ca

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bianca@highrockcapital.ca