US Unemployment and Recession

The latest data released this morning presented employment numbers (and wage growth) that were underwhelming, relative to expectations.

The chances of a Fed rate hike in 3 weeks has now likely diminished, a bit.

However, one of the key indicators that we are following on this blog and via our weekly client webinar is the relationship between the unemployment rate and the 3 year (36 month) moving average unemployment rate and how its convergence has historically been foretelling of the next recession:

After July's number, the convergence gap (36 month moving average vs. actual unemployment) stood at .09% = 5.8% - 4.9%

As of today's data, that convergence gap has narrowed by .4%: 5.4% (new 36 month moving average) - 4.9% (August unemployment rate = .05% convergence gap.

So the rapid narrowing of this gap, puts a US recession at about 3 months away (if it continues to narrow at this pace).

That also coincides with the timing of the US presidential election.

Will the Fed assist this process by creating a flatter yield curve on September 21 (by raising interest rates)?

That does make things interesting.

Historically, recessions are not good for stock markets.

Stay Tuned...

Feedback, ideas, questions...

scott@highrockcapital.ca

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

bianca@highrockcapital.ca

A Wonderful Story Of Accomplishment

I came across a story on the CTV news website:

"Young, rich, and retired: How one millennial couple made it happen"

http://www.ctvnews.ca/business/young-rich-and-retired-how-one-millennial-couple-made-it-happen-1.3052761

In fact they were (as clients of Turner Tomenson Wealth Management Group back when they started investing) the subject of a blog I wrote back in May after having a lively lunch together with them (our High Rock champion Wealth Forecaster and Certified Financial Planning professional: Bianca was also with us to get a first-hand peek into this awesome tale) at Trattoria Nervosa in Yorkville .

It is a wonderful story and it evolves, not just around the investing mix (which I did actually put together for them, because that was my role on the team), but about the planning. And by planning, I mean the Wealth Forecast.

We created a plan together which allowed them to prudently grow their savings. To their credit, Kristy and Bryce were great savers too (and that helps, allot). 

Most importantly, they had a dream, turned it into a plan and made it become real.

It's not just about millenial's (who type with all digits as opposed to my two-fingered approach), it is about anyone who takes the time and makes a plan and then sticks to it.

It is the "sticking to it" that always gets tricky. Investors get "spooked" by short-term events (like financial market volatility) that get into their psyche and make them second guess themselves.

Sometimes peer and family pressure interfere, as was the case with Kristy and Bryce. They had the courage to stare that down and take their own path, never an easy route to follow, but certainly, for them, the best one.

Not everyone should necessarily try to retire at 31, but they should have dreams with which to aspire to and in order to get there, make a plan. 

A plan can be modified and updated as circumstances warrant, but you want to have something detailed and specific (as we did with Kristy and Bryce) to follow.

If they ever write a book about it, it will be a good read!

Feedback, questions, ideas....

scott@highrockcapital.ca

If you would like to receive this email directly into your inbox...bianca@highrockcapital.ca

Confidence

 I do tend to go on about certain topics: and so it is with consumer, business and investor confidence because they are crucial to the ongoing growth of an economy.

Uncertainty tends to put decisions to spend and invest on hold: Post 2008 -2009 "great" recession, businesses (on the whole) have yet to commit to long-term investment strategies (preferring to spend $ on share buy-backs) and productivity has suffered to the detriment of economic growth.

In the US, however, consumer confidence had been growing until mid 2015, when it dipped, but yesterdays data pushed it back close to its 2015 highs. Should bode well for the US economy, right?

Hmmm....

So I thought that I might go back and look at the historical relationship between US consumer confidence and US recessions:

And it appears that US consumers actually get a little "over" confident in the months preceding a recession (the blue periods).

So strong employment data give consumers confidence, but usually that is at the top of the cycle (and we know how everything economic cycles). Interestingly, that coincides with when the US Federal Reserve usually starts to raise interest rates, at the peak of the cycle (as we have pointed out on numerous occasions).

And as we have discussed regularly on our weekly webinar (http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html) the Fed's rate hikes will tend to flatten the yield curve, which then, in turn, signals a recession is not far behind.

Unintended consequences perhaps, but consequences nonetheless.

So the Fed is looking for a reason to normalize interest rates. 

And they will certainly be analyzing the employment data to be released on Friday (because their decision making is "data driven"). If the data is strong, chances will grow that a rate increase may be announced at their September 21 FOMC meeting announcement.

So hold on to your hats, low volatility levels that we have seen in July and August may be subject to some spikes as market participants try to figure out the Fed's next move.

As always, we are very aware of the potential for volatility and have continued to immunize (as best as is possible) our and our client portfolios from this potential: staying away from over-priced assets and waiting for better values to purchase them.

Stay tuned....

Thank you for feedback, please keep it coming...

scott@highrockcapital.ca

If you would like to receive this email directly to your inbox...

bianca@highrockcapital.ca

And I Repeat: Stocks Are Expensive 

The S&P 500 is up close to 7% this year. S&P 500 companies are likely going to have negative earnings growth for 2016.

So do the math there. 

So then, why are so many investors buying stocks and driving prices higher?

Dividend yields (apparently) are better on a relative basis to safer assets (like bonds) because central banks are keeping interest rates low, so the going advice from the investment advisor base is to forget risk and jump into stocks.

Go nuts.

But, we can remain close to 40% in cash (equivalents) for safety purposes and still get our clients' (and ourselves) returns close to 6.25% after fees (so far this year) in a 60 / 40 model (although it is not exactly 60% equity with that healthy weighting in cash), but the model is "targeted" to be 60% equity, when we so deem it wise to step back into the broad equity market and get fully invested.

Oh and by the way, the benchmark 60% ACWI / 40% XBB has had a combined total return of 5.92% (before fees) (Bloomberg Total Return Analysis, Daily from Dec. 31, 2015), so if you take off .80% for fees, it is closer to 5%. that puts our 6.25% (after fees) return well ahead of the benchmark as well.

We say "safety first".

In the meantime, we use our deep research to find other places for value in our tactical model to help continue to get growth with significantly better risk-adjusted returns (than those who are fully invested in equities at their over-priced levels).

When equity prices do move lower eventually, our clients (and ourselves) will face considerably less fluctuation in value than the fully invested model.

Volatility will increase.

The US Federal Reserve may raise interest rates (as soon as September).

The US economy (and the global economy for that matter) will inch closer to recession (that is what bond markets are telling us).

And our clients will sleep better through it all (focusing on the longer - term perspective built into their Wealth Forecasts).

And today we will discuss all of this in more detail on our weekly (except for the last 2 weeks) client webinar.

We will post the recorded version on our website at or about 5pm EDT today, so if you are interested, please feel free to tune in at...

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

And... if you wish to communicate directly with me with any feedback, ideas or questions:

scott@highrockcapital.ca

If you would like to receive this email directly to your inbox...

bianca@highrockcapital.ca

Campfire Musings On Retirement 

With Six 58-Year Olds:

Put a financial / investment guy with an eclectic variety of other professional folks (writer/journalist, university professor, environmental lawyer, shipping / transportation safety expert, cartoonist) and when the conversation turns to retirement, it takes various and (for me) some fascinating twists and turns.

Interestingly, 4 out of the 6 of us have (or have spouses with) very good defined benefit pension plans. Probably higher than normal averages for this group.

Lots of real estate among the bunch, 2 of us currently "renters", 1 just cashed out of Vancouver home ownership.

So plenty of variety and in all likelihood, no one will be struggling (too much) as they move forward.

Anybody have a specific plan?

1 (possibly 2, but I was not convinced).

So, of course I went on about that, as I will do when I encounter anyone without a specific plan: It needs to be very specific.

What will your proposed retirement lifestyle cost you? (So many just have an approximate sense of it, but...) if you have more time on your hands, what will you spend your time on and where? and more importantly, will it have additional costs attached?

If you have a pension, how much of that will cover it?

For those who are relying on their spouses plan, what are the survivor benefits?

At least 1 of us has resolved to work until the end of his time (but what happens if you cannot attain the expected income that you need?).

Some of us won't spend all of our money, which also needs to be considered: Estate planning and taxes that will be passed on to beneficiaries (on real estate or other assets). Wills need to be updated.

Having been an executor only once, I know that I do not cherish the thoughts of that responsibility again, especially the lack of specifics. If you want to be remembered well, don't forget to allocate items individually. Just allotting % amounts can be daunting (especially if there are items that need to be monetized) and can cause even the best of intentions to lead to hard feelings amongst the beneficiaries.

How do you plan?

Don't skimp on "do it yourself" (DIY) stuff. Use the professionals, errors can be costly (for everyone) and hard to fix.

And, most importantly, have a Wealth Forecast prepared: get a picture of what your financial future holds for you, monitor it and update it frequently (at least every 6 months), because life is a very dynamic place and uncertainty is the only thing that is guaranteed. So to protect your goals and aspirations from uncertainty as best as is possible, don't just do the "mental math", but get it down on paper (or the modern equivalent) and know how each of your decisions will impact your total net worth and meeting your future lifestyle needs. It also tells you what your acceptable (investing) risk should be relative to your needs and helps to determine how to properly structure your portfolio (for balance and diversity).

It is not an easy process to go through, but like any difficult accomplishment, it will definitely have its rewards.

I am happy to be back after some thrilling whitewater adventure in Canada's beautiful Yukon wilderness, very appreciative of the new technology of rain gear and light "quick dry" materials as well as durable canoes.

Happy to take your feedback, questions and ideas...

scott@highrockcapital.ca

and...if you would like to receive this email directly to your inbox...

bianca@highrockcapital.ca

Apparently There Is No Internet Access Here:

For anyone who might be geographically challenged, that is the Wind River, north and east of Whitehorse, Yukon Territory and a little south and west of Inuvik, the Beaufort Sea and the Arctic Ocean.

For the next 2 weeks I will be enjoying the challenges of class 2 whitewater, dining on Arctic Grayling (a freshwater member of the Salmon Family) caught on a fly, doing some "bad" campfire singing and experiencing the vast beauty of the Canadian Arctic and if we are lucky, the Aurora Borealis.

Likely, the state of the world and financial markets will survive without my commentary (for the next couple of weeks, anyway) and our clients, all well-positioned to deal with any potential volatility, will remain in the very capable hands of our High Rock team.

If you are looking for reading material in the interim:

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

or

for something a little different:

http://timfalconer.com/books/bad-singer/

PRAISE FOR BAD SINGER

“In his journey to understand why, exactly, he can’t hold a tune — while having the ears and taste to appreciate great singing and songwriting — Tim Falconer takes us on a deeply absorbing journey into the worlds of brain science, singing coaches, music psychologists, ethnomusicologists, and into his own keening, music-loving heart. Bad Singer is a fun, fascinating, beautifully written, and strangely moving tale of a melodically-challenged man who yearned to sing. And it has much to say about the mystery of how music moves all of us, good and bad singers alike.”
— John Colapinto, author of Undone and member of The New Yorker staff band

Yes, Tim will also be on our expedition (helping with the vocal harmonies)!

Enjoy your summer!

I Love Vancouver (And Appaerntly I Brought Some Toronto Weather With Me)

It has been too long since I have visited this wonderful city and the last time I was here we breezed through way too quickly.

Yesterday, I had the wonderful experience of sitting down with clients to listen to their stories and get a first-hand appreciation of their life here.

The conversation is not complex: lovely, intelligent folks, active with young children (soccer, hockey, etc.) and in the challenges that modern day parenting presents (especially with social media concerns), active in the community and active in their professional lives:

Their key concerns: can we save enough to have a retirement lifestyle that is comfortable and have some left over for our kids.

As we always do, we check in on their goals and how those goals translate into their wealth forecast. Most importantly we also take stock of the progress that their wealth forecast is making since the last time we reviewed it, approximately 6 months ago (monitoring) and are there any lifestyle changes that need to be taken into consideration: additional costs, additional income, additional savings?

Where is their total net worth (including their recent home purchase, because they got tired of waiting) now, relative to where the wealth forecast had projected it to be.

Do we need to make any adjustments to their investment strategy to accommodate these changes and /or the current investing environment?

Based on our view of the current state of financial markets and the recent successes of our tactical model, we might recommend a little more (5%-10%) increased allocation to the tactical model and a similar reduction in the global equity model (with some stock indexes at record highs).

Asset allocation up-dating and re-balancing: It is extremely important and should happen at least every 6 months, if not sooner and it should be in conjunction with your long-term goals and objectives relative to where you currently sit in relation to those goals. 

Are you on target to meet your goals?

Our clients are all on target to meet their goals because that is what drives the investing process, if there are changes to be made, they are quickly identified and executed.

That is managing wealth. 

And it is so great to hear the stories about the kids and vacations and professions that are and should be the true focus of a family's life because they have their financial house in order.

Feedback, ideas, questions, concerns...

scott@highrockcapital.ca

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

bianca@highrockcapital.ca