In Canada and the world around us, employment, retail sales, manufacturing and productivity are all exceeding expectations. US productivity just broke an all-time record set in 1984. With covid we are not out of the woods yet especially in Ontario, with admissions to ICU pressing new highs every day. Yet our investing is not limited to Ontario or Canada, but globally which includes regions which continue to move ahead more quickly against covid. Virginia and I got our shots last week: almost a third of Canadians will have their first shot by this weekend, and vaccinations are accelerating daily. Despite the stress of lock-downs and sadness of delayed family visits, we will celebrate vast improvements over the next three to four months.
What is working especially well?
Our investment strategies have succeeded as account values felt only a fraction of last year’s downturn, and have risen by double-digits to new record values. Included here is our ongoing combination of old- and new-economy, or income-value versus growth. Fundamentally we invest in the wider economy, here and globally, where firms evidence rising and resilient revenues, expanding enterprise values, responsible management, lower debt, with firms which are strategically superior in their supply/demand chains, offering products and services the world considers as essential.
What areas could give us pause?
Bonds for sure, now at the end of a prolonged 40-year cycle. To prevent worse economic collapse during covid, governments poured on record stimulus which has pushed interest rates to zero and below. 2021 opened with ten-year bonds yielding just 0.70 in Canada and 0.93 in the U.S. By March, recovery and possible concerns of inflation doubled those rates to 1.46 (Canada) and 1.67 (US). When bond rates rise, it sends bond values down (see italics in next paragraph). Spring 2013 exemplified such a “tantrum” where fixed-income securities drop as % rates rise. In the next few years we will see times like that again. For now and this coming summer, inflation looks timid enough: rates are easing off a bit so bond values are up a little. Recall that zero-based interest rates only exist to combat twin threats of global pandemic and economic anxiety: as covid diminishes and economies rush forward, interest rates will seek more normal levels nearer 3% to 4%. As that happens we avoid owning long term bonds, enjoying a greater safety of shorter-duration securities and commercial loans, combined with higher-yield, for a more dependable return through such times. Let’s explore further here with a metaphor …
- It’s a story I share to illustrate very simply why bonds gain value when % rates fall, and lose value when % rates rise. Imagine you have a secret drawer in your desk and when you open it on a given day each year you find $10,000. Rain or shine, old or young, whatever is happening in life, that desk drawer keeps paying $10,000 every year. But the key question is: what is the desk drawer worth? When interest rates were 5% — ie. the world invested in things that would pay 5%, the drawer was worth $200,000 because it would pay out $10,000 each year and that is 5% of $200K. As time passed and interest rates fell to 2% nothing changed except the value of the desk: when the world invests at 2%, and this desk drawer paid $10,000 behold the desk itself became worth $500,000. Yes, your desk value grew from $200K to $500K while paying $10K annual benefit. BUT now what happens if over the next two, three, five years, interest rates rise to say 4%? The desk drawer still pays $10K, but the world expects 4% on any investment, so your valuation now falls to $400,000. And if we ever see 6% rates again the drawer’s market value drops to only $167,000. Note that in all these events nothing changed the desk, the drawer, nor the payment … but only the outer world changed in regard to the expected interest rate: that alone caused the drawer’s value to shift up and down so remarkably. … This can clearly help us understand the value of long term bonds as interest rates change. It also underlines why bonds that paid handsomely over the past 40 years with declining rates, can cause significant risks and disappointment over the coming years and decades.
Keeping an Ear on Fraud Awareness.
While March was fraud prevention month, too many are fooled each day by scams, hacks, and frauds of all types. If you google “fraud” and your “city name” you’ll find 5 million hits and articles in under a second. That’s how deep and desperate is the damage of fraud these days. Eye-catching recent news includes a $740 Million scam in Singapore, the massive $20 Billion humiliation at Archegos, and last week’s death of Bernie Madoff who made-off with $60 Billion before his life imprisonment.
What new schemes are catching people these days? Too many! Have you heard of the “delayed disconnect” scam where someone posing as your bank (or the CRA) calls about your accounts (or a SIN # being canceled). You hang up and dial the correct # for CRA or your bank, but the trick here is that your original caller never disconnected. Due to an outdated feature of telephony, the caller is still on your line, so when you dial out on the same phone, you end up talking with the original caller who is now acting, sounding, and pretending to be your bank or the CRA… They briefly ask personal details and account information to confirm identity, and soon have all they need to pirate your wealth and wellbeing.
Fraud is always on our minds so we are continually adapting our security procedures. Among these is updating your KYC (know your client) forms which our office is sending for confirmation and update to our clients this season. It used to be we could accept client instructions by email but if there is any uncertainty at all we confirm by phone or in person. Whatever the situation or request, we must ensure the true account-holder is the one giving instruction and that they’re doing so of their own free will and volition. When someone is acting on behalf of our client who due to injury or illness needs trustee care, or in Hollywood terms perhaps a sudden new spouse is vying for the children’s estate (also termed a “predatory marriage”) we take clear precautions to avoid potential fraud.
Our Horizon this Season, this Year…
We keep an enduring focus on protecting and building wealth, to ensure a healthy income and strong resources for life. Markets have broken the ceiling to new highs but that’s not our full story because markets are a broad collection of “everything.” We don’t invest in everything. With clear and specific mandates as I mentioned above, we focus on “rising and resilient revenues, expanding enterprise values, responsible management, lower debt, firms which are strategically superior in their supply/demand chains, offering products and services the world considers as essential.” Whether markets rise, fall, or pause, we remain firmly focused on the net results we can achieve and the trust we can sustain through all the seasons of this journey together.
Federal Budget and Central Bank this week:
This week’s federal budget with nearly ¼ million words (739 pages) is expansionary and highly stimulative to help Canadian homes and businesses get safely past the pandemic. There was some rampant speculation it could touch areas deeply unpopular with most Canadians but we avoided that. The massive increase of federal debt is offset by realizing the Covid-19 Recession would have been at least three-times deeper and devastating all around if the government had not turned on the taps (memories of 1930 ff). Canada is shifting more debt into 10-, 30-, even 50-year bonds at this most opportune time: this smooths our exposure to future interest rates. Such rates meanwhile are broadly expected to remain flat into 2023, with the Bank of Canada affirming no change until at least second-half 2022. Economic growth is the ultimate (and only) answer to all such debt: if we remained an aging population with shrinking production the debt would entirely strangle our national prosperity. All reasonable hope is through increasing our population, our education and training, our employment and innovation, our productive capacity and positive trade with the wider world.
Happy Springtime.
We’re getting through covid: in the time it took me to finish this letter many more Canadians have been vaccinated. We’ll soon have the warmer weather to enjoy the outdoors and be creative in our gardens. Let’s also keep in touch with people nearby who need a cheerful word and encouragement every day. We wish you and your dear ones absolute health, resilience, happiness, this month and season, and always.
Yours in Financial Security for LIFE!
Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500
627 Guelph Line, Burlington, Ont. L7R 3M7. 1-877-937-3500
Brian@SovereignWealth.ca.
Certified Financial Planner, Certified Retirement Coach
Author: A Lifetime Of Wealth — And How Not To Lose It (2013). Protecting Life, Loved Ones, and Future Dreams (2013). Your Business, Your Retirement: Halton Retirement Study (2015).
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to Canada Life, CIBC, Dynamic, Mackenzie Financial, RBC / PH&N, and more. Opinions in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to coordinate with your legal and accounting advisers to further your financial goals in home and business. We are grateful always to receive your comments and questions.