Archive for the 'Economics' Category

Doom and Gloom

Published
by
Dave
3 years ago
in Debt/Credit Cards, Economics, Investing, RRSP, Real Estate/Housing and Stocks
. 0 Comments

There is an interesting chart here, “Asset Class Performance” (got the link from here) showing the performance of various asset classes since 2000 and giving several predictions. One comment said: “I believe all will fall, while bonds will soar. special thanks to debt deflation depression.” The poster leaves no website to track him down unfortunately.

While digging around in Google for the term “debt deflation depression,” I found found this article: “Will the Latest Oil Price Shock Lead to a U.S. and Global Recession?”

Interesting article with some interesting comments as well. The comment that Google picked up was this prediction:

I don’t understand how you can face two decades of real wages lagging productivity world wide, and still not be 100% convinced that a major depression is guaranteed in the coming years. The only way for consumers to absorb higher oil prices would be to take on more debt. As long as debt can be piled on, growth can go on, but there is no doubt that debt growth is the one and only fuel of the present growth.

Take away the US and european overindebted consumers, meaning, take away housing boom asset wealth induced spending… And the world falls into 30’s like debt deflation depression.

And if there’s one way out, I’d like to see it. Apart from aggressive monetising of public deficit, and aggressive policies in favor of higher wages (and I see none of them coming in the coming years), I can’t think of any.

So ?
So is there a question ?
Of course higher oil prices and lower house prices, will force the world into depression. Higher oil prices may indeed speed up the top of the debt-housing boom.

Talk about doom & gloom. Also no website provided for that comment either. No one really knows exactly what will happen in the next few years, but I have certainly seen a lot of doom & gloom predictions popping up lately regarding the stock market, real estate, and the US economy. I try not to let any predictions I read dictate my behaviour. I am invested for the long term and realize that market fluctuations are a fact of life. I am prepared to stay invested no matter happens and to invest consistently in my RRSPs year after year (especially when markets are down).

Popularity: 7% [?]

The Flattening Yield Curve

Published
by
Dave
3 years ago
in Bonds/Fixed Income, Economics and Real Estate/Housing
. 0 Comments

What started making me look into bonds (which spurred me to write the last article) today was this article on Bill Cara’s site, “It’s all in the slope, folks,” which suggests that the yield curve in the US is starting to look like it did in 1999, and that it is getting close to being inverted, which has often signaled the start of a US recession in the past. He used this really neat applet to look at the yield curve at any point in the last 7 years. Here are his predictions:

Note the similarity between the yield curve of today and as at year-end 1999.

If yields of today jumped to those of 1999-2000, by roughly +150 basis points across the board, then I believe that the present housing market bubble would pop, rather than have the air let out slowly as is now happening.

Should the Treasury continue to print money the way it has, and the way it must in order to meet the fiscal deficit of government, then there will be inflationary pressures.

And should the Fed continue to raise rates the way it has, and the way it must in order to stabilize prices (i.e., combat inflation), then the more downward pressure there will be on economic growth. These are also deflationary pressures.

As long as the U.S. Treasury continues to reflate, and the Fed continues to tighten, the yield curve will continue to flatten, and will soon invert, similar to what happened in 2000.

According to the Wikipedia article on Yield Curve:

An inverted curve occurs when long-term yields fall below short-term yields. Under this abnormal and contradictory situation, long-term investors will settle for lower yields now if they think the economy will slow or even decline in the future. An inverted curve may indicate a worsening economic situation in the future.

Popularity: 5% [?]

Bond Values and Interest Rates

Published
by
Dave
3 years ago
in Bonds/Fixed Income and Economics
. 0 Comments

I have to admit that until a little while ago, I did not completely understand the reason for why bond prices rise or fall depending on the prevailing interest rates. Although it made sense to me that a bond earning a lower coupon rate than currently available bonds should fall in market price because it will be less desirable than the currently available bonds, I knew there were some concepts I was missing. Once I started reading more about the basics of bonds, I realized that bonds are a lot simpler than most people think. Here are some interesting articles that I have looked at recently:

  • This article, Bond Values and Interest Rates, does a pretty good job at explaining the effect interest rates have on bond values. That web page also features an animated cat!? (if anyone can explain the cat’s relation to bonds I would be grateful). That site also has a few articles about bonds vs. stocks which I would like to comment on one day, but I need to think about it some more.
  • Investopedia’s bond basics tutorial is a great introduction to the basics of bonds.
  • Investopedia’s advanced bond analysis tutorial is excellent from what I have seen so far. I have just looked at the section about “duration” because that’s what I was interested in and I really liked the diagrams and explanations.

Popularity: 4% [?]

The Three Worst Reasons to Buy a House

Published
by
Dave
3 years ago
in Economics, Personal Finance, Real Estate/Housing and Stocks
. 4 Comments

I just came across an excellent article, “The Three Worst Reasons to Buy a Home.” It is actually a summary of “this MSN Money article.”

(1) Real estate is better than the stock market. While the real estate market has been red hot in the past few years, with a national average increase of 50% over the past five years, and prices in some markets doubling during that same timeframe, it’s important to keep in mind that past performance is no guarantee of future results. Major real estate recessions are a very real possibility, and it can often take a long time to recover. Moreover, real estate appreciation over the past 40 years has only topped inflation by 1%, as compared to 7% for the stock market. Over the long run, the law of averages has a funny habit of evening things out, so look before you leap.

The MSN article provides further information about past market declines:

Ask homeowners in Boston, Dallas, Houston, Anchorage and Southern California — all of which suffered major real estate recessions in the past 20 years. After dropping more than 20% in the 1990s, Los Angeles home prices took almost 10 years to regain their peak, says real estate expert John Karevoll, an analyst with DataQuick Information Systems.

Two articles at the van-housing blog: here and here show that Vancouver has had drops as well. This should all be no surprise to most people. Yet 3 weeks ago one of my in-laws claimed that “real estate is the best investment ever.” Just last week someone (a recent condo buyer) said to me “you think it’s going to go down?” with complete disbelief. And this week someone else told me they didn’t think prices were going to fall but that they might “level-off.”

The final nail-in-the-coffin for the “real estate is better than the stock market” argument comes from the MSN article: “In the past 40 years, the average appreciation for homes has exceeded the inflation rate by only a percentage point or so. Compare that to stocks, which have bested inflation by 7 percentage points in the same period.”

(2) Rent is the equivalent of throwing your money away. Renting is often cheaper than owning, especially in overpriced markets. Also, you’re not really throwing your money away when you write a check to your landlord — you’re exchanging cash for a place to live, and you’re buying flexibility, freedom, and a lack of homeowner headaches.

The Wealthy Barber provides some excellent commentary against the “rent is throwing your money away” argument:

Paying rent is no more throwing your money away than is buying food or clothing. You need shelter. It’s one of the three basic necessities of life. Renting is one way to acquire that shelter, and in some cases, it’s a very intelligent way.

The last reason to not buy a house, is one that applies to those in the US:

(3) The tax deduction makes it all worthwhile. While it’s true that your mortgage will get you a tax break, it’s not like you’re going to end up profiting. Deductions such as this are like giving someone a dollar for the privilege of receiving 35 cents (or less) in return. While this helps to offset the cost of ownership, it’s by no means a justification for buying a house. Moreover, the other costs associated with home ownership (e.g., insurance, repairs, maintenance, etc.) aren’t typically tax deductible. On top of all this, recent legislation seeks to place a cap on the mortgage tax deduction, meaning that the tax benefits of buying a home may shrink substantially.

Canadians have no mortgage-interest deduction. So this is irrelevant. Not without doing something crazy like The Smith Manoeuvre. One less reason to buy a house for the wrong reasons!

Popularity: 5% [?]

ETFs, the Inflation Fighter

Published
by
Dave
3 years, 1 month ago
in Asset Allocation, ETFs and Economics
. 0 Comments

The article, ETFs, the Inflation Fighter, talks about how sectors such as energy, utilities, and health care can help your portfolio during periods of high inflation. Historically, these sectors have done well during these periods. Sectors which are worse off during periods of “inflation acceleration” are consumer-discretionary, financial, industrial, and information-technology. My own advisor has recommended I overweight my portfolio in the energy markets (which does well during periods of high inflation and rising interest rates), especially since the S&P TSX indexes are heavily weighted in the financial sector (which does poorly during periods of high inflation and rising interest rates).

I have no idea why the title was “ETFs, the inflation fighter.” ETFs are just one way of investing in the stock market, and clearly not ALL ETFs are inflation fighters. Well, Ghosh works for Standard & Poor, so that might explain the bias towards an ETF rather than a managed mutual fund or individual stocks.

Popularity: 2% [?]

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