By Jonathan Chevreau
One of the more entertaining financial presentations at this week’s BMO investing conference in Chicago was a keynote talk by author and broadcaster Andrew Busch on who killed the global economy. (I qualify this with the phrase financial presentations because Rick Mercer’s talk was also highly entertaining but could hardly qualify as being financial).
By contrast, Busch had worked at BMO Capital Markets for 22 years earlier in his career and grew up in Chicago. His financial research is available free here.
Billing his talk as a “Murder Mystery,” he ran movie clips from various Film Noirs to illustrate his points.
Among his suspects; the ECB’s Mario Draghi, Japan prime minister Shinzo Abe, China president Xi Jinping and the Federal Reserve’s Janet Yellen. Busch played the role of “Private Economic Investigator.”
Resemblance to Greece?
Starting with Yellen, he submitted clue number 1 as the unemployment rate. With 3 million Americans underemployed, this fact shows up in sluggish wage increases so “we’re not seeing an acceleration in wealth gains so are not seeing inflation.” What jumps out from the latest job numbers is where they are located; 14 million Americans are employed in local government, another 2.7 million in the federal government and 5 million more in the states. “Now we know why it’s important to look at government spending,” Busch said, “We have to pay tax to have them employed.” Sequing to Greece he asked rhetorically “Are we more like them than we realize?”
Clue # 2 pointing to Yellen is GDP, which slowed down from 5% in the third quarter to 2.3%. “This quarter will be bad and earnings won’t be good.” So far, markets are ignoring pre-warnings as the S&P500 stalls around 2100 but the earnings hit will be “substantive,” Busch said. However, “Most are ignoring it for good reason: we will snap back in the second quarter with GDP growth close to 3% as warm weather comes and things return to normal but we will hear lots about potentially negative GDP in the first quarter.”
The slump in energy prices has curbed inflation, which is “short-term bad but medium-term good because of more money in consumer’s pockets.” Cheap oil helps middle-income earners heat their homes and fill their cars’ gas tanks. That should translate into a pickup in consumer spending and accounts for the recent strength of consumer discretionary stocks.
The Fed’s motive is to normalize interest rates and its first opportunity to raise them will be in June. But the Fed itself is still not sure when inflation and average hourly earnings will go up. “We don’t know what the Fed will do because they don’t know.” The process has begun with hikes in the minimum wage at major retailers like Walmart, Target and even McDonalds. “At some point the Fed will act and I believe it will be in June.”
Dead Man Walking
Busch then moved to Suspect #2 (Mario Draghi) by rolling another film clip. Clue #1 in Europe is that employment rates are just starting to tick down. Clue #2 is the GDP growth rate, which is above zero. “We’re starting to see some acceleration. That’s great but I’m not sure it will last.”
Clue #3 is a major problem: the “sinking feeling” on Europe’s inflation numbers. To avoid Japan’s fate of 15 years of deflation, Europe has mimicked the Fed’s Quantitative Easing program by launching its own QE program in March, lowering rates to zero. It’s bought 60 billion worth of Euros and added 1.1 trillion Euros to the balance sheet, moving beyond 3 trillion. The difference is that when it started its program, the Fed only had US$800 billion on its balance sheet, with QE eventually taking it to US$4.4 trillion. “I expect the ECB will mimic that and do it in three or four tranches.”
Suspects 3 & 4: Japan & China
Busch moved on to Shinzo Abe and Xi Jinping, showing a photograph of the two shaking hands and clearly uncomfortable with each other. Clue 1 is their unemployment rates but these can be safely ignored because the numbers are clearly unknowable. China’s unemployment rate has “magically” stayed at almost exactly 4% since 2012. Japan has horrendous productivity numbers and are “like zombies in the Walking Dead: they should be firing people.”
Clue #2 is GDP. China can force its banks to lend, which it did in 2009, when its high-velocity money stimulated economic growth in areas like infrastructure and housing. This resulted in inflation heating up and commodity inflation but the country is attempting to shift to more US-like consumer spending.
In the US, consumer spending accounts for 70% of GDP, while it’s only 40 to 45% in China. “They want it higher,” Busch said, so it relies less on infrastructure spending. In both countries, politicians “tell central banks what to do.” Abe shot the three arrows of huge fiscal stimulus, massive QE and economic reform in a bid to generate 2% inflation within two years. But last month inflation in Japan was “zero, so they missed the target. It’s vastly different from QE in the ECB and US. … It’s not surprising to see their (Japan’s) stock market reach 15-year highs this week as they reaffirm the QE path, and it won’t end any time soon.”
China wants to keep its currency weak relative to the US dollar and has cut rates twice. The results have been dramatic: Chinese stocks have been on fire since September.
And the murderer is:
In his finale, Busch concluded “the dame did it.” (Yellin). While he expects the Fed will start to raise rates in June, “Nothing is going to happen.” Busch said what happens next may be similar to the 1930s, when the Fed moved rates up several times aggressively. At first, nothing happened but they kept doing it until “eventually they killed the recovery. That’s analogous to what will happen here.”
Here, Busch ran a movie clip from Sunset Boulevard. “The first time the Fed shoots the guy nothing will happen. He’ll keep walking. But the third time they shoot you, you end up face down in the pool.”
So far, they’ve not yet killed the global recovery but central banks everywhere “want all of us in this room to go as far out on the risk curve as possible.” The Fed “won’t screw up this year or the first half of 2016,” Busch predicted, “My guess is that by the second half of 2016 or first half of 2017, as Europe and China stabilize they will feel good enough to act more aggressively.”
The Single Best Investment: Creating Wealth with Dividend Growth, is the title of a classic investment book first published in 2006 by Lowell Miller, who heads Miller/Howard Investments.
It came to my attention via Wes Moss, who I interviewed for an upcoming MoneySense column, whose book You Can Retire Sooner Than You Think we reviewed here at the Hub. I mentioned the book in passing last week in this MoneySense blog last week. That blog focused on asset allocation but provided a big hint about Miller’s philosophy: there’s no place for bonds in Lowell’s investment worldview.
The book’s first chapter sets the tone in its title: Say goodbye to bonds and hello to bouncing principal. Like many stock believers and bond haters, Miller takes it as a given that the investing environment generally includes inflation. Since “safe” investments like t-bills, bonds, money market mutual funds and CDs (Certificates of Deposits in his native USA; known as GICs in Canada) are all “poor investments because what they give is less than inflation takes away.” Read more
I recently delivered my debut “Ice Breakers” talk at the local (Port Credit) chapter of Toastmasters, an organization I highly recommend for anyone who wants to polish their public speaking and leadership skills.
I began by pulling out a $5 bill and dropping it at my feet. I asked how many audience members would pick one up if they saw a stray fin on the sidewalk. Most would, but also admitted they probably wouldn’t bother to stoop to pick up a penny or a nickel. I also remarked that when you pull a green $20 bill out of your wallet and consider what it can purchase, your attitude to that bill’s value is probably about what it was to a purple $10 bill some two decades earlier. Inflation, it seems, is forever with us.
If this is inflation, bring it on!
But if you ever wanted a concrete demonstration of the value of a lowly blue $5 bill, then go the website fiverr.com. That’s FIVERR, a “fiver” with an extra R. You may even see ads for this site elsewhere here at FindependenceDay.com as well as at MoneySense.ca, where this blog may also appear.
FIVERR is a wonderful example of the global trend to technology-enhanced outsourcing of personal and business services. You search for some task you want performing and a bunch of people from anywhere in the world offer to take on the “gig” for as little as $5. They may want to upsell you, which is perfectly fine, but my experience with the site was it did exactly what I asked for the price offered. The cover of my new e-book released earlier this week, and shown below, was designed for $5 (US dollars, mind you!).
The other gig I needed to publish the e-book at Amazon was to format my Microsoft Word manuscript into the format required by the Kindle. This task too was performed for $5. I don’t know where in the world these people are located. I assume some are in the United States but for all I know — and as in the case with 99 Designs, which we looked at a few weeks ago — it could be half way around the world, where $5 may buy what $100 purchases in North America.
You can offer gigs as well as utilize them
It costs nothing to join fiver.com and of course you’re as free to be the provider of services for $5 a gig as you are to be the purchaser.
In fact, if there are any services out there that readers think I could perform for $5, drop me a line at firstname.lastname@example.org.
Here’s my latest MoneySense blog, based on a Fidelity media briefing on Monday. Click on the blue type to go directly to the piece at MoneySense.
For one-stop shopping and archival purposes, here it is again below, with different photos and subheads.
By Jonathan Chevreau
You’re probably going to live longer than you think but it if you’re worried about outliving your money, planning to work in retirement is not a panacea, warns Toronto-based Fidelity Investments Canada ULC.
At a media briefing on Monday, Fidelity Canada’s Peter Drake, vice president, Retirement & Economics Research urged those still saving for retirement that they have to take more individual responsibility for their future after work. “You’re going to live longer than you think,” he said, citing steadily rising Life Expectancy statistics going back to 1921. Someone born in 1921 would have a Life Expectancy of about 58, a figure that passed 70 for someone born in the mid 1950s and which passed 80 shortly after the new millennium.
Can an “Encore Career” bridge the gap?
Certainly, the latest data from the 2014 Fidelity Retirement Survey released at the event suggests those falling short of their retirement savings goals are counting on some kind of paying “encore career” to make up the difference. While only 20% of those already retired plan to rely on income from a full-time or part-time job, fully 47% of those still in the workforce expect to have some form of a paying “encore career,” said Drake.
Many will rely on Savings and Housing
Non-retirees also put their hopes into Savings and Housing as a way to make ends meet in Retirement. While only 58% of current retirees say they will rely on income generated from savings in an RRSP or RRIF, fully two thirds of non-retirees (66%) plan to do so. Similarly, while only 36% of retirees believe their home equity will help boost their retirement income, half of non-retirees are counting on it.
Clearly, something has to give and that something appears to be the fond notion that people can just keep working past the traditional retirement age of 65. “Planning to work in retirement is not a retirement plan,” Drake cautioned.
Saying you’ll “just keep working” is of course easily said. Indeed, I’ve given that advice to anyone who’s not quite sure whether they have enough money to retire or not. As I quipped on the radio the other day, it’s better to arrive at the train station five minutes early than five minutes late: similarly, when it comes to saving for retirement, it’s better to oversave than undersave. Your children and the government will thank you for over-saving.
“Just Keep Working” not always possible
Unfortunately, Fidelity’s research shows you can’t count on working in retirement. The poll of some 1,400 Canadians found that of those not working, fully one in five retirees would like to work if they could. However, 15% can’t find a job and 23% say employers aren’t interested in employing retirees.
Then there are health and health care issues. Drake says 38% of retirees not working have health issues that prevent them from doing so. And even for those who are themselves healthy, 12% have to care for another family member. Out-of-pocket health care costs are an important consideration for retirees, Drake said. Even though this is Canada, 30% of health costs are not funded publicly, putting more pressure on finances the older you get. Citing per capital public health care expenditures, the big blips are right after birth and then after 65. The per capita annual expenditure is well under $5,000 from age one to age 64 but hits $5,828 between 65 and 69, passes $10,000 between 75 and 79 and really starts to spike after age 85 – past $20,000 –hitting a peak of more than $24,000 after age 90.
Drake noted that generally speaking, women can expect to outlive men, but the longer they do, the more the problems of dementia – especially Alzheimer’s – can arise.
Challenges of Longevity
Another byproduct of extended longevity is that inflation really starts to bite into the purchasing power of a typical retirement nest egg. While inflation has been low and consistent since the early 1990s, it could rise in the future, Drake warned. And even low inflation can reduce purchasing power. A nest egg of $50,000 today would have the purchasing power of just $30,479 25 years from now even with relatively benign inflation of 2%. If inflation were 3%, the purchasing power of that $50,000 would fall to less than half 25 years later: $23,882. And at 4% inflation, it would have the spending punch of just $18,757.
Jonathan Chevreau is Chief Findependence Officer for www.financialindependencehub.com.
Today’s blog title comes from Chapter 14 of The Upside of Aging, a book we mentioned several weeks ago. This is recommended reading for anyone nearing the traditional retirement age. It consists of 16 essays from various experts, all of whom look at the topic of longevity through various lenses: urban planning, global demographics, healthcare and pharmaceutical research and so on. For example, Ken Dychtwald of Age Wave pens an interesting essay titled “A Longevity Market Emerges.”
Pictured is Dan Houston, president of Retirement, Insurance and Financial Services for the US-based Principal Financial Group, who wrote the chapter I flagged in the title.
Retirees can expect one spouse to reach 90
Houston begins by observing that because of longer expected life spans, the mind-set around retirement is evolving, and for the better. “Couples age 65 now have a 45 per cent chance that at least one will live to age 90,” Houston says, citing the Society of Actuaries, “This may be the first time in history where someone spends more years in retirement than in a traditional working career.”
The downside is of course financial: living another 20 to 40 years after leaving the workplace comes with a “substantial cost,” Houston says, “one that has to be funded. It’s an increasingly challenging prospect given inflation, the high cost of health care, and the risk of outliving savings.”
Try living on $400/month
The statistics, at least in the U.S., are not encoring. Fewer than four in ten pre-retiree households (aged 55 to 70, not yet retired) have financial assets of US$100,000. And even if they did have that amount on the nose, it would generate guaranteed lifetime income of just $400 a month.
Many think they’ll need less income in later life than recommended and many plan to draw down on assets at such high rates (9% a year on average) that assets will be depleted within 13 years. The recommended “safe” annual withdrawal rate is closer to 4%. They underestimate the cost of unreimbursed health care costs: in the U.S. Houston estimates a moderately health retired couple will need US$250,000 just to cover health care expenses and premiums throughout retirement. This is one area that Canadians may be ahead because of our universal health care system.
Don’t count on working in retirement
I’ve said before that the solution to this is to “just keep working,” but of course this may not always be an option. It’s a sad fact that agism still prevails in the workplace and costly older workers may be asked to leave before they’re ready to do so; and eventually body or mind may not permit full-time work even if one can find a willing employer. Houston says pre-retirees tend to overestimate their ability to work for income in retirement: more than two thirds expect to be able to supplement retirement income with some work but in reality, only one in five retirees actually works. That statistic, Houston observers, “reflects availability of work, as well as ability to work.”
Just as disturbing is the fact that 55% of American workers, and 39% of retirees, report having a problem with their level of debt. And those who do manage to save are not saving enough: 43% of workers report that neither they nor their spouse is currently saving for the future, while 57% report the total value of savings and investments is under US$25,000.
Four key investment risks
Even where there is ample savings to invest, Houston lists for key risks: inflation, market volatility, income and longevity. These are all linked: the longer you live, the more inflation can cut into your income. Consider this alarming stat on inflation’s power to erode savings: a dollar invested int he S&P500 in 1971 grew to $2.27 by 1982 but on an inflation-adjusted basis, that dollar depreciated to 96 cents. Houston notes that even annual inflation of 3% will cut a retiree’s purchasing power in half.
This calls for investments that have a fighting chance against inflation: Houston mentions Treasury Inflation-Protected Securities (TIPS, known in Canada as Real Return Bonds or RRBs); commodities, global REITs, natural resource stocks and Master Limited Partnerships.
As if that’s not all enough to keep a retiree awake at night, Houston reminds readers that the “insolvency” date for America’s Social Security system keeps moving closer: 2033, according to Washington’s May 2013 estimate. Meanwhile the over-65 population will double between 2010 and 2050.
As has been noted elsewhere, every day 10,000 baby boomers turn 65. While Canada’s combo of CPP and OAS seems on relatively solid ground, I continue to believe the best way to prepare for a long-lived retirement is to spread your income sources around: employer pensions, savings in RRSPs, TFSAs and non-registered plans, the government plans mentioned above, some part-time work or business income and perhaps rental income from investment real estate.