Not just another (Canadian) financial blog
Here’s a video I would like to share of Ron Paul (R-Texas) speaking to the US House Financial Services Committee. It starts off with “In the midst of the great optimism of monetary policy and how the economy is doing I still have some concerns…”
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I am going to be buying a US ETF (like an S&P 500 ETF) and an international ETF (like an MSCI EAFE ETF) in the near future in my or my wife’s E*Trade self-directed RRSP account. I was just wondering if anyone out there has some good advice on whether I should buy the US dollar ETFs, like VTI (Vanguard Total Market) or EFA (iShares ISHARES MSCI EAFE ETF), or the Canadian-dollar hedged versions, like XSP (iShares S&P 500 ETF) and XIN (iShares MSCI EAFE ETF). Currently I have no USD investments.
Here’s the advice I have to go on so far. This might be of interest to others who are asking the same questions.
I am leaning towards going with the USD versions since I have no US currency exposure, and to avoid the extra cost associated with the currency hedging on ETFs like XSP and XIN. Also, as Martin Gale said, the Vanguard ETFs are very low-cost, and there is more variety, compared to what we have available in Canada.
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The hot labour market just got even hotter. Check out these recent numbers from the Vancouver Housing Blog.
Wow! Check out the leap in the employment rate and the sharp drop in the unemployment rate. With seasonal adjustments, weird weather, etc., it’s hard to know what to make of month-to-month jumps in these figures. But still. Unprecedented.
What do I mean by unprecedented? Check out the graph going back to 1976.
Since things on the national front look similar, I think you can kiss good-bye to any hopes for B-o-C cuts anytime soon.
Canadian Financial Stuff had a post a while ago about unemployment numbers going up in Canada. I don’t think that small upward blip in January is an indication of an upward trend. If you look at his graph the trend is clearly downward and there are upward blips (some larger than the January one) all over the place. If the numbers were taken every 5 months instead of every month, his headline would be the opposite, “Unemployment down in January.”
The discussion quickly turned to housing. I’ll copy & paste a few interesting comments below:
lj - yep, I hear you. OTOH it’s worth remembering what happened to Isaac Newton during the South Sea Bubble. He saw the crash coming and sold in time, making some good coin. But when everyone else continued making money he bought back in, and of course got nailed in the crash. The crash is happening now in some of the previously hot markets south of the border. The early warning signs are everywhere else, including in Canada. Will it be different in Vancouver? Heck, anything is possible. But it isn’t that likely, especially given BC’s boom/bust history.
Remember, there IS a huge demand for RE “ownership” but NOT for shelter. There is a big difference there. Real rents have been stagnant for years. That tells me there is no true demand for shelter above new supply. The huge demand for ownership based on the thinking that it’s the greatest-can’t-lose-investment-ever is what the boom has been all about (and its a global phenomenon). Price/rent ratios are way too high. It costs nearly twice as much to own than to rent. This disparity can’t last. People have been making more money on their homes than in their jobs! This is what’s been fueling this bubble. It amazes me that even rational analysts are predicting long term RE price growths of 5% a year. What the heck for? Are rents going up by that much?
I have a friend in Sacramento who owns 4 houses. He is obsessed with RE. He intends to buy more since the prices there have dropped a tad. I urged him to sell but he thinks I am retarded. He quotes the usual myopic RE bull arguments, “they are not making enough land anymore…etc”. I said to him, if there is such huge demand for housing, how come rents haven been stagnant. He just can’t fathom that. He equates price increases with demand for housing. In fact one of his houses has been empty for a year. He doesn’t care because its been going up far more than the carrying costs.
Renters, stay cool. Don’t make the mistake Isaac Newton did. After his investment loss he was quoted to have said “… I can predict the motion of planets and stars but not the madness of men…”.
I must say that I don’t fully understand the despair of the reluctant bulls. If purchase prices belong where they are, then rent and get the deal of the century, and put your money in another investment. No skin off your nose.
alpha_bear said in reply to betamax’s comment:
“…i would be more miffed at waiting on the sidelines for 10 years for the perfect moment to buy (saving a $100,000 in the process) and putting my life on hold in the meantime. life is short.”
I don’t understand why the bulls equate renting with sitting on the sidelines. It seems to me that the bulls are the ones whose life is on hold, while they pray for housing prices to rise.
I’m so happy renting that I don’t care if it takes 10 years or more for the inevitable crash. I’ll buy back into the market when prices are more justifiable. In the meantime, my capital is working for me, and I have more cash available than I did when I rented the money to “buy” my last house from the bank.
Life is too short to spend underwater in a large mortgage.
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Today I received a link to a Clearsight “market communique.” It starts off with a little technical charting stuff that I’m not too fond of:
After rebounding nicely from its June lows through the first week of September, the TSX Composite Index has fallen over 4%. As in previous setbacks, the index now stands at a key valuation level that if held might lead to another bounce. In the most recent rally and ensuing downturn however, there has been a general absence of many signals at key price breakpoints for the leading stocks in the index.
See what I mean? I’m not a big fan of “valuation levels”, “signals”, or “price breakpoints”…load of crap if you ask me. No offense to them, I just don’t get off on technical analysis (of stock price charts at least :-)).
Apparently a US slowdown has begun, “For over a year, economists have sounded an alarm that a U.S. economic slowdown would begin, as an unprecedented bull-run in residential housing comes to an end. This forecast has now become reality.”
No big surprise, economists can’t agree on what will happen (haven’t they invented crystal balls yet?):
Some economists and market observers are now predicting an outright recession, while others call for a ‘mid-business cycle slowdown’, i.e., soft landing to occur. Even the more optimistic admit however, that this slowdown will feel like a recession to many people.
There final advice is a bit mixed:
On balance, there appears to be a reasonable likelihood that the economy will avoid recession, at least in the near term. This in and of itself however, may not be enough to spark a genuine rally in the markets. Even so, abandoning one’s investments completely at this point would generally not be advisable for long term investors, not to mention impractical. But, cash is not a four letter word, and finding opportunities to take profits and increase cash holdings in markets such as the current one can help add comfort and stability for long term investors
In essence they provide some optimism, or hope for those who are worried about a downturn, and give some very sound advice, 1) to not sell the farm, but 2) hold some cash, and if you are a bit underweight right now, selling a few equities wouldn’t be a bad thing to do.
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Here’s a really old article, flagged it a long time ago, and just got to it now: “Bill Miller on Commodities.” How true is that? To make some money by buying things at the right place and the right time (if that is your fancy) you have to be buying things that are in the dumps, things that no one has made money on in a really long time, things that are cheap. It is funny how most humans never figure this out. Part of the reason why this happens is that bull markets can be so prolonged. The other reason I think is that when the big crashes hit, no one has any spare cash around to invest in the cheap stuff because, well, it was all invested, and now you’ve lost it.
One final reason could be that humans seem to have Newton’s 1st law of motion hard-wired into their brains. The law says that an object will not change velocity until a force acts upon it. Humans have a slightly corrupted version of this law programmed in their brains, however. A version that ignores the “until a force acts upon it” part. People forget so easily that there are forces that can cause markets to “change velocity” from upwards to downwards, instead thinking that the velocity will stay upwards (as if the world was frictionless). Inflation, rising interest rates, commodity shortages, natural disasters, a huge shift from the historical mean, war, stupidity, corruption, routine market correction, etc… In fact, in another analogy with physics, you could probably say that the magnitude of the restoring force involved is proportional to how far away from the mean the market has travelled, just like a spring (see Hooke’s Law). In other words, the bigger they are the harder they fall.
I’m curious, what has done really badly in the past few years anyways? What has performed the worst? I did a quick check of index funds using globefund.com’s fund filter and sorted them by worst performers over the past 3 years. It looks like tech stocks/nasdaq, bonds, and US equities (due to US dollar decline) have been the worst performers in increasing order of better performance. We also can’t forget about cash which also hasn’t performed too well (in never does, but it doesn’t do that badly either, just losing a few percent every year due to inflation). 
What has performed the best over the past 3 years? Well just about everything, energy stocks, gold, Canadian equities, REITs, international equities, European equities, in decreasing order of performance. Anyways, don’t read too much into that, it’s just me playing around. I have a hunch though, that those investments that have performed well over the past 3 years are probably less likely to perform as well going forward.
Aside: Newton himself famously lost 20,000 pounds (in 1720, worth 1.9 million pounds in today’s dollars) on the South Seas bubble.
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According to this article, Harper’s win could cost voters their homes. The author describes how Harper’s policies could end up causing some people to lose their homes, as increased government spending on military campaigns by the Harper government will lead to higher interest rates.
Both Reagan and Bush Jr. sharply cut taxes, particularly for the rich. Both of their administrations also went on military-spending binges. The combination of reduced revenues and higher military expenditures created whopping deficits. The Bush administration’s shortfall approaches a half-trillion dollars.
Harper has promised to increase military spending and cut taxes. He also plans to redo the fiscal framework to ensure more money goes to the provinces.
The Liberals claimed during the recent campaign that this would blow a huge hole in Ottawa’s finances. The Conservatives vehemently denied it. However, given the record of socially conservative U.S. Republican administrations, it’s easy to imagine that Harper’s approach could result in a large deficit.
Whenever a government collects less than it spends, it competes with the private sector to borrow money. This puts upward pressure on Canadian interest rates.
Vancouver already has the highest housing prices in the country, with many people carrying large mortgages. This makes them especially sensitive to rising interest rates, which can occur when a government rings up a huge deficit.
During the 2004 federal election, Liberal candidate Kwangyul Peck, an economist, claimed that Harper’s flawed fiscal policy could cause some voters to lose their homes.
I am not so worried about some voters losing their homes. I do not think interest rates would increase so dramatically that people who were not already at a high risk of losing their homes would lose their homes. And the point is a bit moot. If you ever lose a home (or anything) you can always blame someone. Blaming the prime minister seems a bit ridiculous. But I think the threat of increased government deficit is very real, especially after what I saw on the news last night. Harper talking about how Canadian forces will not “cut and run,” and that “the Canadian Forces need to be in Afghanistan for 10 years or longer to help rebuild the battered country.” Peter Mackay said “the length of Canada’s commitment to Afghanistan remains an ‘open question.’” We could see our federal surplus and/or federal spending in various areas drop dramatically.
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I’ve seen a lot of criticism about Alan Greenspan as he hands over the throne of the US Federal Reserve to Ben Bernanke. Here are some of the articles that I have seen (I haven’t read all of them):
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I just read three articles from The Big Picture about market inefficiency that I found interesting:
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The yield curve on US Treasury yields inverted today, as reported in this Globe & Mail article an event which has frequently signalled the beginning of a recession:
“Here is the historical record — we have endured eight Fed tightening cycles in the past three decades: the Fed has inverted the curve on five of those occasions, and out of those five Fed-induced inversions, the economy slipped into recession a year later all five times,” said David Rosenberg, North American economist for Merrill Lynch & Co. Inc.
The Big Picture quotes Alan Greenspan, who says “it’s different this time”:
Fed Chairman Alan Greenspan has noted that “its [sic] different this time.” He has challenged the view that “inversion signals economic trouble, pointing out that the shape of the curve is less predictive than it once was.” [emphasis theirs]
Others agree:
“[The inverted yield] has been taken as a negative omen, but I think you have to be cautious in today’s circumstances,” said Andrew Busch, global foreign exchange strategist for BMO Nesbitt Burns Inc. The yield has inverted at relatively low levels of interest rates and not the normally high levels of rates when the Fed tightens to subdue inflation, he said.
and
During the past 20 years, 10-year yields have exceeded two-year yields by an average of almost one percentage point, according to Bloomberg.
“This clearly suggests we are very close to the end of the tightening cycle … and it is not an indication of a recession,” said Michael Rottman, a strategist at Germany’s Hypovereinsbank.
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This Fortune article, “Investors Are in for a Shock,” talks about some recent comments issued by Alan Greenspan: “Investors, the Fed chairman intoned, normally demand a substantial ‘risk premium’—a high return in exchange for taking a chance that they may lose money. Now, though, investors ‘accept increasingly low compensation for risk.’” The author goes on to explain:
Greenspan’s argument rests on the idea of the risk premium—the extra return (over a supersafe investment like Treasury bills) that investors have traditionally received for putting their money in peril. For stocks, the risk premium equals the expected real (inflation adjusted) return on a broad portfolio of shares, minus the real interest rate. To calculate the risk premium that stock investors are getting today, we turned to Asness. For expected return, Asness uses the earnings yield on the S&P 500—earnings per share divided by price—adjusted for cyclical swings in profits. Asness pegs today’s earnings yield at 4.3%.
To derive the real interest rate, Asness takes today’s ten-year Treasury yield of 4.6% and subtracts the average inflation rate over the past five years, 2.7%, to get a real rate of 1.9%. So today’s risk premium is the 4.3% expected return minus the 1.9% real interest rate, or 2.4%. That’s about half the 5% margin that stocks have delivered for the past 80 years. So investors aren’t getting the usual extra bang for holding equities.
This will lead to two possible outcomes. At best,
people who buy at today’s levels are in for a sustained period of subpar returns, perhaps 4% or 5% annually, after inflation. That’s because the best predictor of future gains is the price you pay. “High prices and low risk premiums today mean low returns tomorrow,” says Cliff Asness, an economist who runs AQR Capital, a $17 billion hedge fund.
and at worst, “the more dire alternative is a steep fall in prices that makes everything from the S&P 500 to homes what they aren’t today—that is, great investments.”
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