And this is important because it will directly impact 2017 Q1 US GDP. This mornings data (from the US Department of Commerce) showed that "real" (after inflation) consumer spending (for February) continues to remain muted (after an acceleration in late 2016). The white line represents the fairly volatile monthly data, but the smoother 12 month moving average data show the trend and since 2014, that trend has been toward lower spending growth. We must also remember that in the US, the consumer is responsible for about 2/3 of the US economy (that is significant).
On the inflation front, the US federal Reserve's target PCE (Personal Consumption Expenditure) Core Price Index moved a little higher:
This justifies their stance of interest rate increases which are even more likely to happen twice more this year.
Interest rates rising and economic growth (although expected to increase) is not.
For us this is a "yellow" flag.
Further, President Trump is scheduled to meet with China's leader Xi Jingpin nest week.
He "tweeted" this message yesterday (in case you all missed it):
Protectionism and protectionist policies are one of our key concerns for 2017: protectionist policies, if they escalate a trade war, just do not work (economic history). It will not help to grow the US economy, it may even be detrimental (no one wins in a trade war).
Another warning flag for us.
For our (High Rock) clients (and ourselves, because we invest in the exact same models and assets as our clients), these warning signs plus high equity market valuations (see our weekly webinar for more on valuations:http://highrockcapital.ca/current-edition-of-the-weekly-webinar.html ) continue to tell us that the US equity market is vulnerable to disappointment.
When risk is high in one asset class, we prefer to look for value in others and so with continued deep research, we do just that, preferring to err on the side of caution and disciplined investing.
As does happen often, people will change their place of employment because it might mean a better quality of life for them (aside from the financial decisions). In a recent situation one of our clients came to us with a dilemma: "should I commute my (defined benefit) pension that I had with my former employer (plan "a") or should I keep it until I retire and receive the payments in retirement (plan "b")". In this case there was no pension plan offered with the new employer.
Many financial advisors would automatically jump to plan "a" because it would "gather" some $400,000 in additional assets to have under administration. Believe me, in my time I have seen it up close and personal, without the advisor doing a scrap of analysis to justify their decision.
Fortunately for our clients (at High Rock) we hold ourselves to a higher standard.
As we do with many clients, we offered to create 2 Wealth Forecasts to show how we (under the guidance of our Certified Financial Planning, CFP professional) would expect both scenarios to play out over time.
Clearly, scenario 1 (plan "a") after a number of growth, inflation and tax assumptions works out in their favour (although not by an enormous amount). The management of the assets is not necessarily the most important point here. It could be the tax consequences of the initial lump sum payment and it could even come down to the health benefits provided with the pension plan (considerably reducing long-term uncovered health care costs in the future).
What is most important is that the client now has a very good basis for making their decision.
Is that the type of advice that you deserve?
The financial industry tends to reward the asset "gatherers" with incentives for doing so.
We are changing that at High Rock, one client or client family at a time.
We do not have managers or shareholders to report to and we are salaried employees. Clients actually do come first.
There is an alternative to what the banks and investment dealers will offer you and we are it.
Historically, shortly following a peak in consumer confidence, a recession has followed. Today's report from The Conference Board showed March Consumer Confidence to have jumped to 125.6 from February's 116.1. The highest level since 2000.
Is it the peak?
Can't say. However the data for the survey was collected prior to March 16th. The American Health Care Act (TrumpCare?) failed on March 24th. Definitely notable.
So the "soft" data (survey data) is strong.
But the "hard" data (actual data) is weak: According to the Atlanta Fed GDP Now data, Q1 US GDP growth is tracking at a less than robust 1.0% annualized rate of growth. Significantly below the original estimates of 2-2.5%.
It is ultimately the "hard" data that will have the greater impact on corporate earnings. Corporate earnings will determine the true value of stock prices, once the emotion is stripped out.
We shall discuss this and a number of other aspects of global economic, financial market and wealth management issues on our weekly client webinar today. We shall post the recorded version on our website shortly thereafter (at or about 5pm EDT). So please feel free to tune in...
As you can imagine, in my line of work, I have plenty of conversations with prospective clients. Sometimes, I just have to shake my head. It all goes back to the real lack of financial literacy that stems from our education system. Personal finance should be a mandatory prerequisite at the secondary level, but it is not.
When I encounter an "investor" who "follows the market" and "picks stocks" and is only interested in monthly, quarterly and yearly performance but has no concept of risk, return per unit of risk taken or risk-adjusted returns, the financial literacy issue becomes clear and present.
Investing is not gambling. When I hear the term "bet" when it is used in reference to the buying and selling of assets, it sets off all sorts of flashing red lights: A "winning" or "losing" day on Wall Street or Bay Street as often announced by the media are completely misunderstood, because investing is not a game.
Investing is an educated decision to buy an asset (or a broadly diversified group of assets) that will pay you for the risk that you are taking (with a perceived future stream of income): income from interest, dividends or capital growth.
A steward of her or his family's wealth is not a gambler. They understand that growing wealth is a long-term, mapped out plan with goals that require a very specific strategy for attaining them.
Gambler's tend to chase returns, going from what might have worked in the past and transferring that cognitive bias to expect that the same will work in the future.
There is a reason that the securities regulators insist that we provide the disclaimer: "past performance is not a guarantee of future performance".
To protect these gamblers from themselves.
At High Rock we do not work with gamblers. We work with stewards.
If you are a steward of your family's wealth and would like to know a little bit more about us: http://highrockcapital.ca/private-client-division.html
I received an excellent question from a client this week about the difference between "nominal" returns and "real" returns.
Simply put, nominal returns are your actual total annualized rate of return. If your total portfolio return over the last year is 10% and you allow about 1.5% for fees and taxes (taxes will only be those paid on income, dividends and realized capital gains in a non-registered portfolio, as there is none to pay in a registered portfolio or TFSA), then you have a nominal return of approx. 8.5%.
"Real" returns take into consideration the annual increase in your cost of living (inflation).
This morning, Statistics Canada released data that tells us that a basket of goods of consumer items (listed in the above Consumer Price Index chart) which they track for us, increased in price by 2% from last February until February 2017.
The difficulty is that each of us consumes somewhat differently and may not have the same basket of consumer items. To understand our own cost of living and year to year increases, we have to track our own spending habits.
We try to do this in our client Wealth Forecasts as we track how our clients spend from year to year. However, we have to make assumptions about how their cost of living will adjust into the future (based on this historical input).
If we are a little bit conservative, and estimate the annual cost of living at or about 2.5%, the "real" rate of return would equal your "nominal" return (say 8.5%) less the cost of living allowance (2.5%), which would give you the "real" return of 6%.
Of course, this annualized number is rather simple, but it is relevant because you need to know that you are growing your money at a rate that is ahead of your cost of living and reducing the likelihood of running out of money.
The complexity comes into play as we look out multiple years and take the compounding of both nominal returns and inflated costs of living into consideration.
Hence the Wealth Forecast that we (at High Rock) create and review every 6 months with our clients (our stewardship of your financial health), so that we can understand how these returns are expected to progress in the years to come.
However, it does have to be an on-going process, whereby we monitor how we are progressing against previous forecasts (6 month review) to determine if our investing strategy is driving you to your goals and if we need to adjust our assumptions (like cost of living increase) or the investing strategy itself.
And of course this is a long-term approach to the growth of our wealth, so simple year to year changes are going to be smoothed out over those longer periods of time.
Love to get your questions...
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However, the trial balloon for an increase in the inclusion rate (% of gains that are taxable) has been launched and this is not an idea that is going to go away. If you have significant unrealized capital gains, you now have some time to plan on how best to capture them while the inclusion rate is still at 50%.
Another reason the TFSA is likely to become an even more important vehicle in the future.
Increased deficit spending will definitely require increased revenues:
If an average or weaker (than expected) economic growth scenario should evolve, there will be efforts made to find new sources of revenue.
One of the spending measures taken in this years budget allocates a half billion $ to improved tax surveillance and enforcement over the next 5 years. Certainly this highlights efforts to garner increased tax dollars from those who are evading and avoiding paying taxes.
So expect the CRA to be potentially more aggressive in their demands.
Otherwise, there are not too many wealth management issues of significance in this years budget.
A case in point: our benchmark ETF ACWI (All Country World Index) opened at a new high and reversed course for a painful -1.5% yesterday. So if your "buy and hold" balanced 60/40 strategy has you at 60% equity, that is akin to a 0.9% swing in your portfolio (to the downside). About $9,000 for a $1mm portfolio. Meanwhile our benchmark bond ETF, XBB (Canadian Bond Index) was up about only 0.01%, which hardly offsets the move in stocks. We have been repeatedly discussing (for those who will listen) how these historical correlations are no longer necessarily reliable and suggesting a more tactical approach to reduce this kind of volatility. High Rock clients looking at their portfolios this morning are likely not too bothered by a significantly smaller move.
If those kind of swings (over 1 day) don't bother you, then you need not read on. If you happen to string a few of them together, however, it might make you squirm a bit because all of a sudden, your year to date returns are not what they were.
Of course, we do as we say and focus more on the longer-term returns and achieving client goals (per each client's Wealth Forecast), which over time, do smooth out the day to day swings. However, if you are human, you may lose a little sleep when you do look at your daily portfolio totals and they have dropped a bunch of $$.
Getting those $$ back (in a "buy and hold" strategy) also takes time, so you may also have to be a bit patient. If you have more cash in your portfolio, however, you not only defend against the downside (cash is a defensive asset), but you also get to take advantage of buying opportunities as prices move lower.
I am certainly not saying you have to move your whole portfolio in and out of cash, but just have a little more of a tactical approach (which we certainly have at High Rock. It may help you get to your goals a little faster or allow you to have a little more $$ in retirement than initially forecast. It might also help you sleep better at night.
Now how can you argue with that?
Yesterday we held our weekly client webinar which discusses our rationale in a bit more detail (so our clients can get a little insight to our thought process). The recorded version can be accessed here: http://highrockcapital.ca/current-edition-of-the-weekly-webinar.html Feel free to have a listen.
Political uncertainty is at its highs, but volatility measures suggest that equity markets don't care.
Over the weekend, the meeting of G20 finance ministers could not agree on previous wording to "resist all forms of protectionism" (largely based on the position taken by the US) for their communique. For the global economy, this was not a step forward.
Consumer confidence has been rising (at or close to pre-recession highs), according to recent data and as we all know, the consumer is about 2/3 of the US economy.
At the same time, indications of Q1 GDP are suggesting that growth is not following the consumer's confidence higher (at the moment only a rate of growth of 0.9% is anticipated). Consumers have not yet translated confidence into spending.
The US Fed is confident because they are raising interest rates.
But the yield curve is flattening. Historically, a flat yield curve has been a good indicator of recession to follow, but at the moment we are not there, yet.
Equity valuations are fully anticipating the benefits of US tax reduction and infrastructure spending although the health care issue (repeal of Obamacare and implementation of a new American Health Care Act) has stalled the process.
Investors have become used to shrugging off the "shocks", preferring to stay with the growing risk in their portfolios.
But risk is growing (despite what has been a muted reaction to it). In fact, it has been growing steadily since investors decided to jump into the "Trump Rally".
Our job as portfolio managers is to assess the investing environment and prepare our client portfolios for the impact when investors decide that they no longer like the risk that they have.
That means looking behind the headlines and into the emotion that is driving investor sentiment:
When portfolio values are rising, wealth and risk management are low on the scale of family priorities. Oddly, that is when it should be the highest (because risk is high and rising).
So we (at High Rock) are standing watch for our client families, making sure that their financial futures are not put in jeopardy.
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Friends, the Canadian banks have been taking advantage of us all on so many fronts. Problem being is that we have been brainwashed with so much "goodwill" for so long that we all don't realize that there are other options.
They have so much political clout and so many dollars afforded to their marketing that they are able to convince us that they are the only safe and secure option and that all the fees and service charges are worth our while.
They are good corporate citizens, they do give back to our communities, but it is our money paid in the billions in annual earnings that they garner for their shareholders (and themselves, because all the senior exec's are shareholders) that we appear to be so complacent about.
There is plenty of safety in many other financial institutions: the Canadian Investor Protection Fund (CIPF) protects our High Rock clients (whose accounts are held at Raymond James Custodial Services) for up to $1 million per account.
So the fallacy of Canadian banks being the safest place to hold your money is just that: a myth.
Of course you have to have trust in the folks that are working for you. The Canadian banks would have you believe that they have that ingrained into the ethics codes of their institutions. I have dealt with some very good people in my day at those banks, but I have also worked with some very unethical people in my day as well, and I was a Branch Manager, so I saw it, up close and personal.
The news is telling us that their greed (sales targets that are apparently unrealistic) is in conflict with their ethical standards.
What is the difference between being "sold" financial products and engaging in a trusting partnership that will guide you through your financial future?
The problem is that most folks do not know that they have an alternative. But they do. There are plenty of us who actually want to work for them and give them all of the great service, wealth and portfolio management that they require and deserve: safely, securely, with care and with their interests as our absolute priority.
At High Rock we are held to incredibly high standards imposed on us by our professional designations:
We are governed by the CFA (Chartered Financial Analyst) Institute Code of Ethics and Standards of Professional Conduct which are fundamental to the values of the CFA Institute and essential to achieving its mission to lead the investment profession globally by promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of society.
Our Certified Financial Planning (CFP) professional is bound by the CFP Board’s Code of Ethics and the 7 Principles that form the CFP Boards Rules of Conduct, Practice Standards and Disciplinary Rules: Integrity, Objectivity, Competence, Fairness, Confidentiality, Professionalism, Diligence.
And of course we have to answer to the Ontario (BC, Alberta and Saskatchewan) Securities Commission(s), who impose a fiduciary duty upon us (as do all portfolio managers, accountants and lawyers), which we gladly adhere to.
There is an alternative and it is time to seek out the better option.
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This is slightly technical, but I will do my best to explain:
Short-term interest rates are controlled by the central bank but they are a function of the market for short term (usually on an overnight basis) loans and deposits between banks.
Everyday a bank looks at its cash position (daily cash flows from deposits and withdrawals by customers) and determines whether it needs to increase (borrow) or decrease (lend) the cash.
The central bank creates the appropriate amount of liquidity in the system to allow them to do so.
If there is an abundance of liquidity (as there has been because central banks have been maintaining a low interest rate policy) then interest rates for this day to day borrowing and lending are rather low.
However, when a central bank wants to raise interest rates (as the odds expect the Fed to do so tomorrow), they reduce the amount of liquidity in the system which makes the cost of the day to day borrowing and lending rise: (economics 101) supply of money available goes down, the cost of money goes up.
The reduction of liquidity, likely in the billions of dollars, has reverberating effects across the financial system and financial markets. Borrowing becomes more expensive. For those who have borrowed to invest (we call this using margin and as is shown in the above chart it is at record highs) the increased cost becomes an issue.
As financial institutions scramble to find the necessary liquidity to maintain their cash flows, there is a greater likelihood that they will sell expensive assets to raise some of the cash required, instead of borrowing more.
What assets are expensive?
At the risk of sounding repetitive, US equities are.
We will discuss this and other global economic issues and how they impact our decisions on investing for our and our clients portfolios today in our weekly client webinar, which is just one of the ways we (at High Rock) keep our lines of communication with our clients open. We will post the recorded version on our website http://highrockcapital.ca/current-edition-of-the-weekly-webinar.html at or about 5pm EDT today.
For Wealth Management, there is an alternative to the traditional Advisor channel and we and our Disciplined Investing strategy are it.
Feel free to tune in to find out why.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist