"But The Economy Is Doing Just Fine"

That is the message folks are being told by their investment advisors, the media and their central bankers and is what I am getting in anecdotal conversations I have with prospective clients. Our High Rock clients know that we are a lot more conservative than the aforementioned, but they pay us to be more than just stock market "cheerleaders".

As economist David Rosenberg said in his Breakfast With Dave market and economic commentary yesterday: "The rose-coloured glasses crowd can be expected to explain away the further inversion of the yield curve as they did in 2000 and 2007" (see charts above and below).

"And yet, I see every Tom Dick and Harry on bubblevision telling the masses just how solid the U.S. economy is performing. We had real private final demand growth of 1% in Q1 and real GDP is converging on this stall-speed pace in Q2. What an economy! Oh yes - the most oft-cited reason for the bullish view on the macro backdrop? The ultra-low unemployment rate". (please see my blog from a few weeks ago about the "hype" on employment data).

And while I am on the topic of investment advice (and perhaps the media too), there is another book to be read, if you all are out promoting my thesis of alternative (non-bank or large financial institution) wealth and portfolio management (or just interested in another honest perspective): John De Goey's STANDUP to The Financial Services Industry. 

"This book argues that the advice investors are getting is quite likely to be wrong even though the advisor who is giving it wants to do well by the client." 

"This might be the first book that shows advisors to be simply the friendly face of an industry inclined to get clients to think in specific, revenue maximizing ways."

"Advisors might be better seen as unwitting accomplice intermediaries between some sophisticated corporations and trusting Canadian consumers".

I wish that I could write as succinctly as John does. At least my heart is in the right place.

As for central banks: today the Bank of Canada will announce their latest interest rate decision. In all likelihood they will continue to keep rates on hold, as expected, although if they want to be proactive on the upcoming economic slowdown, they may want to consider lowering them. It will be interesting to hear how they will paint the current economic outlook. Last time they cited employment growth as being important for future consumption, so they too may be caught up in the lagging indicator of employment growth, even though wage growth is moving in the opposite direction. We shall see. The bond market (yield curve inversion) in Canada is telling us something different:

And as we always say: Bonds lead all financial markets.

David Rosenberg agrees: "it is the bond market that is telling the tale of global economic underpinnings".

In the media, bad news usually sells. In the financial world, it is good news that seems to sell, so it may be best to follow John De Goey's advice and ask the tough questions.

Keep Your Eyes On The Prize

"Wealth and portfolio management is not about shooting the lights out. It is about slow, methodical and well thought-out planning to reach long-term goals" (twitter: @jstomenson)

Survey says:

Have you ever had a Financial Plan or Wealth Forecast prepared for you?

Clearly our readers who responded to our survey (if you have not, you still may, just click on the link, 10 quick questions), have been paying a little bit of attention, congratulations!

We cannot have a strategy for investing if we do not have a plan that focuses on our goals (most of us apparently know this). However, for the 10% and any others you all might know to pass on this valuable information, beware the investment advisor who wants to plow you in to a "cookie-cutter" type portfolio without first preparing a detailed, written plan (with charts and graphs and cash flow numbers, etc.). 

Further, make sure that they have the credentials to be preparing a plan (like High Rock's Certified Financial Planning, CFP, professional). The Plan (we call it a Wealth Forecast at High Rock), needs to be regularly monitored, reviewed and updated and the strategy (asset allocation) adjusted should it be required (portfolio re-balancing at a minimum).

The journey will be fraught with the noise from many levels of sales and media bombardment, sometimes raising the question of "am I doing the right thing?".  Sellers of a "better opportunity" (at that particular moment in time) will make it difficult to stick to the original plan. Some call it the "shiny object syndrome": distracted by something apparently new and better.

Just like an airline trip to your favourite destination, your journey may encounter turbulence along the way, but pilots are well trained to handle it (only 1 in 11 million airline passengers may not survive the worst outcome). Once you arrive, the turbulence is long forgotten. Make sure that the financial professionals you are working with are as well trained (with the appropriate accreditation, licensing, ethics) as those pilots (unfortunately the statistics on "abused" investors are not as good as they are for safe flying). For us too though, it is getting you to the destination that is ultimately the most important.

It is easy to be frightened by the geo-political landscape, by the short-term economic outlook and the impact of volatility on your net worth, especially if you are close to or in retirement when you are more dependent on your portfolio for income.

But even the most recently retired have likely at least 20 years plus to go. That is probably at least two recessions and two recoveries (or more) to cycle through. Everything economic cycles. It has before, it will again.

Some of us will find opportunity in these cycles, some will choose to ride them out. Active management, passive management or a combination of both will all have their time to shine. 

Regardless, stick to your plan and keep your eyes on the prize.

The Evolution Of Wealth Management

I started working in the world of wealth management just before the dotcom bubble burst. I came in full of a desire to help investors manage their risk (after a 20 year career as a bond trader and manager of billions of dollars of risk). I was the oldest (at 40) of all the rookies on the TD Evergreen  advisor training program. What were we all being trained in?

Selling. 

Specifically, TD (but not exclusively) branded mutual funds and TD Asset Management products. They paid the best commissions. The Canadian Securities Institute was responsible for making sure that we all had the proper understanding of financial products (exams to be passed) and the Investment Industry Regulator Of Canada (IIROC) dealt with licensing and compliance.

IIROC was / is still a self-regulating body operated by the financial institutions themselves. As I have suggested in the past, this smacks of the potential for conflicts of interest. 

The problem in Canada is that there is no legal entity that governs the entire securities industry, instead it is within the jurisdiction of each province, so it becomes hard to unite and apply legal responsibility evenly across the country.

Unfortunately the gaps left are pretty easy to squeeze through for some who may wish to take advantage. And so they do. The banks saw an advantage way back in the late 1980's and then started buying up independent investment companies and folding them into their growing financial conglomerations. 

Since then, the banks have run the show. Having worked for a number of them over the years, I have some insight. But in their desire to turn a profit and pay their shareholders, the quality of service and care leaks out. But they resist change at every turn, only reluctantly acquiescing when they need to adjust their strategies to retain market share.

There will always be a more astute client who gets bank fatigue and figures out that there are alternatives and good ones at that.

In their desire to find a better option, they may cross our High Rock path and we get a glimpse of  our competition (sometimes under-supervised) who attempt to woo our prospective clients with tales of great past performance (without the mandatory disclaimer of past performance being no guarantee of future returns) and wonder aloud (out of a sense of frustration) whether we should stop swimming upstream and start swimming with the rest of the overly optimistic sellers of financial products and forget the reality that there is the possibility of risk inherent in the world of investment management.

Of course we won't, but sometimes being honest and forthright in the face of misstated optimism requires a great deal more work.

However, I take heart when I read reports on the state of the global wealth management world such as the 2019 EY Global Wealth Management Research Report that tells me that we (at High Rock) are well ahead of the pack in Canada, where change is happening, although not nearly as fast as the rest of the world, where the client is the focus as opposed to the revenue they generate for the big banks and financial institutions. 

"Wealth Management is in high demand, yet clients are not fully engaged or loyal."

"Clients are switching providers to capture better value."

"Solutions are more important than products or services: clients want more advice and planning."

"Most clients want simple, personalized and connected solutions".

Being at the forefront of this evolution of wealth management is not easy because we have to wait for the client to change their mindset, or at least assist them in seeing it from a different perspective: building, growing and maintaining wealth is well beyond the scope of gambling in the stock market: It is about planning and stewardship, asset allocation strategy, monitoring and review, fiduciary responsibility (without conflicts of interest) and client service.

So we soldier on, continuing to fight the good fight.

Beware The Hype On Employment Data

First and foremost, Statistics Canada's monthly employment change data (as can be seen in the above chart) is notoriously volatile. So don't be expecting any major shift in Bank of Canada monetary policy based solely on the big jump in this number (plus 107,000) for April. 

Second, as can be seen clearly in the above chart, employment is a lagging economic indicator and tends to follow economic growth, not lead it.

If you want a clear leading indicator on the state of employment and economic activity, look at wage growth:

Wage growth has been in decline since the beginning of 2018. One of the hyped-up bloggers that was forwarded on to me (because I don't ordinarily read such) even suggested that wage growth was "spiraling" in his rant to get home-owners to lock in 5 year mortgage rates. Spiraling down perhaps.

If one were want to look closely at the employment data, head over to Statistics Canada's website. You will find that almost half of the increase (47,000) was in Ontario and "primarily due to gains in part-time work among people aged 15 to 24". In fact part-time work contributed 66,000 to the overall number.

The 32,000 growth in retail and wholesale trade, likely not earning much more than the minimum. How many are working more than 1 job to support record household debt levels?

The global uncertainties that are persisting because of the U.S. desire to continue to take a protectionist stance on trade will likely be the real drivers of economic activity for Canada and the Bank of Canada will be very much on guard for how that plays out.

The Bank of Canada's mandate is to create currency stability by monitoring inflation. There is certainly no wage inflation and the core (outside the more volatile products like food and energy) is stable. So there is little likelihood of a near-term increase from the Bank of Canada.

If locking in 5 year mortgage rates gives you peace of mind for cash flow purposes (can you get 3%?), then have at it, sleep better at night. However, because the yield curve is normally positively sloping (at least 80% of the time) variable rates will remain below 5 year rates over the long-term and that has proven itself, over time, to be the best way to borrow.

Annuities Are Insurance Products And Subject To Plenty Of Hidden Costs.

With thanks to the Sun Life Annuity Calculator, the above example is for a male (life expectancy of 87, vs. a female who has a life expectancy of 90): 

For simplicity (a straight life annuity): If you put $500,000 of non-registered money into an annuity at age 65, it will pay you $30,657 per year, before tax and $28, 548 if your marginal tax rate is 35%.

For the ladies, because you are expected to live longer: only $27,816, before tax.

Most importantly, men, inclusive of fees and commissions and all the other costs associated with an annuity, the annual compounded rate of return (before tax) to age 87 (22 years) is 2.77% (using simple future value calculation).

Ladies, who get to 90, it is 2.72% (annually).

Men who get to 100, 5.03%.

Ladies who get to 100, 4.28%.

In these examples, there is no inflation protection, so your real return (after increased cost of living of approx. 2.5% per year) is rendered pretty light.

Remember, if you depart this world early (before your expected to), nothing goes to your beneficiaries: if a Male dies at 82, the compound annual return goes down to 0.46%, for females, yes, you guessed it, a negative -0.41%. Yikes.

Peace of mind from the insurance companies is not a cheap prospect.

What about those new Advanced Life Deferred Annuities (ALDA) that were recently announced in the latest budget?

In case you missed it, CBC covered this a couple of weeks ago and an astute and inquisitive client asked me what I thought.

Using the example in the article: a 65 year old woman who has $500,000 in retirement savings.

The ALDA would, apparently give her $28,000 per year at age 85 with a payment of $50,000 at 65.

In my communication with the writer of the article, Aaron Saltzman, he passed on the calculations he received from Prof. Bonnie-Jeanne MacDonald.

My initial impression is that the estimates are high (for this example) because they appear to be using 5% as the nominal interest rate for their growth calculations and the payout of $28,000 per year from age 85 ultimately leaves the Life Insurance company who underwrites this a little too close to the break-even.

Since we are not going to see any of this until 2020, Canadian Lifeco's do not have these in their lineup yet, or I could not find them if they do.

But I did find a U.S. Website with a calculator and plugged in the same values and timelines as Mr. Saltzman's example that kicked out a result that appears to be more realistic to me:

Initial monthly income of $1,491, or $17,892 per year.

We shall see what transpires from this with the Canadian Lifeco's when they bring this product to market, but I would not get too excited just yet.

(co-authored by Bianca Tomenson, CFP)

No U.S. Rate Cut Coming Soon For Stocks

The U.S. Federal Reserve updated us on their monetary policy stance yesterday, in case you had more important things to attend to and did not notice. Of course we do have to pay attention.

In his press conference following the decision announcement, Fed Chairman Powell said that officials did not see a strong case for moving rates in either direction. 

One of the catalysts for the strong stock market performance since the beginning of the year has been the change in Fed monetary policy from one of wanting a higher trajectory for interest rates to a more neutral stance. 

The theme for stock market investors has been that this should continue to help propel stocks to higher levels. President Trump called for the Fed to cut rates by a full percentage point on Tuesday because he equates his success with higher stock prices. It appears that the Fed was able to hold on to its independent decision making methodology, although there is clearly some who think that economic slowing on a global scale and now starting to show up in U.S. economic data, might warrant a rate cut later in the year.

Yesterday a key U.S. manufacturing index (Purchasing Managers Index), usually a leading indicator for future growth, hit a new 2 1/2 year low:

It still begs the question of what we call the fundamental value for stocks which are based on future earnings and earnings per share (EPS). Slowing economies tend not to be favourable for earnings growth and there is nothing favourable about expected future earnings growth.

From the peak in Q3 2018, earnings expectations are showing growth of about a 4% annual growth rate out to Q2 2020. It is hard to see this as a great catalyst for stock prices, which means that with stock prices making new highs, there is growing and considerable downside risk to stock markets (as there was in December) again.

For now it appears that the Fed has removed, at least temporarily, one of the hopes for the stock market bull camp. 

We all love to see stock prices go higher because we all own equities in our portfolios (some more than others) and rising stock prices mean, at least for the moment, higher portfolio values. It is simply the management of our own expectations. We must keep them tied to a sense of reality that more volatility is on the horizon. If you are a long-term investor and are happy to ride out the storm, good on you. 

We at High Rock like to try and add some value to our portfolios (without added cost to our clients) with a more opportunistic perspective of volatility which will let us add to our investments when prices are lower. We also know that there are alternatives to expensive equities and with one of the top portfolio managers in the High Yield space in Canada on our team, it opens up a world of other potential and at the same time helps us to reduce our exposure to risk.