Dear friends . . . much can be said life's moments which are “between”. Perhaps you know a toddler who is between crawling and confident walking. Or imagine early retirement when work has reduced in some way (not totally) and an expanding lifestyle is emerging. Today much of our world is “between”. It’s not a bad time really, for markets have been nearly flat over the past year but our accounts have risen. In fact our clients’ accounts have risen 4% to 5% year-to-date. But we may wonder, what about next week? ..next month? What’s next in this sultry-summer “between” time and the seasons ahead?
- Between up and down interest rates.
- Between rising/falling energy costs.
- Between “in” versus “exit” (UK/Europe)
- Between outgoing/incoming US presidents.
- Between falling/rising corporate earnings.
- Between stagnant/growing economic markets.
- Between stratospheric debts and …what then?
And the real question is how these events impact our personal lives on a season-to-season basis. What steps are we taking to reduce risks while sustaining strong financial growth we can continue to enjoy for our future?
Take debt levels.
We’re not at the level Germans experienced before the second world war but debt to GDP in our largest economies (US, China, Europe, Japan) are astonishingly high. If we lived on fear we could put every dollar into cash ….or gold ….but those choices could be disastrous. US debt is >200% of its gross domestic product. Chinese debt may be nearing 400% of GDP. The only sensible response we can find on this include allowing some inflation to gradually erase the debt burden, while continued innovation in robotics, artificial intelligence, etc, eventually lift corporate earnings beyond the debts. So as investors our conviction is to steer toward lower risk while focusing on Mandates that drive growth. An example of this is our “life income mandates” which at the worst of times drop near ¼ of wider markets, while recovering 4-times faster.
I haven’t heard many people cheering their economic fortunes over the past 10-15 years. The 1990s allowed 10% to 16% annual returns in a vivid time of technological change. Since then we’ve had five major meltdowns in the following sectors & years: technology (2000-2002), metals/materials (2007), banks/financials (2008 ff), national debts (2010 ff), oil/energy (2014). That’s a lot of crisis. It included the worst meltdown in over 200 years. As a result many people find over the past 15 years that their incomes have been flat, or purchasing power has fallen, and concern of running out of money has reached 50-year highs.
In this environment, our time together to build your financial planning (including specific investment strategies to secure your goals) is as vital as ever. We help younger investors use the natural volatility of markets to help rocket their investments to higher levels (corollary – don’t let a good crisis go to waste!). We help more advanced investors to bridge the risks, or reduce the waves that would otherwise threaten retirement …so wealth can continue to support your lifestyle and needs to age 95 and beyond!
No mistake, we’re due in the next decade to see 4, 5, maybe 6 years of double-digit growth, and this will work strongly for us – yet no crystal ball can say which years those will be or which troughs may hit in the "between" periods. So safety through good and bad times will continue to arise from our “mandates” that protect growth while muting risks along the way. See again our “Bridge Over Troubled Water” published last month (link).
Corporate Earnings ... rising.
Earnings season for this quarter started a few days ago. So far things are looking far more cheerful than initial estimates. Consider what our Bank of Canada issued this week, paring estimates for 1st half yet maintaining a strong forecast of growth for 2nd half 2016. There are many strong reasons to focus on economic acceleration in the coming 3rd and 4th quarters ...as all our analysts and partners agree. Growth means rising earnings, stronger market-ratios, rising dividends …all of which puts money in our pockets.
U.S. Presidential race.
A certain "hilarious trumpery" (???) in the U.S. affects market sentiment and may accentuate a political cycle south of the border which touches Canada and other markets as well. Some 40% of Americans, or more, don’t like either choice for president. This could prove as chaotic as the recent Brexit vote and the only one laughing may be Vladimir Putin. Frankly though, troubles in Washington are often irrelevant to financial markets. Shut-downs in Washington often coincide with market jubilation. So no one can forecast financial results of a presidential race …or guess the actual character of a presidency that arises from this year's campaigning.
Theresa May is building the team to exit Europe with the least possible damage. “The future’s not ours to see, que sera sera.” Troubles will seed new opportunities both in the UK and Europe. I'm grateful we avoided the 10-20% drop that hit Britain and Europe in June, but as I offered in my late-June supplement, new upside can come quickly.
Our funds held positions that would benefit from such events. Our accounts are higher today than on June 23rd, and easily 2% higher than July 1st. If you missed the Brexit news (could you?) your accounts have grown regardless!
Since OIL Slipped so badly ...
Energy prices have certainly impacted Canada in a big way. We have three predominant sectors in Canada: banking, energy, metals. Banking has been utterly stagnant (despite rising dividends) over the past 12 months. Metals and Energy troughed in January and have risen considerably, with OIL now nearing $50/barrel compared to $25 in the darkest days opening 2016. Earnings are still meagre so many energy producers still are not paying dividends but they will.
Forecasts put oil near $60 to $70 per barrel in 2017 and the total dividend pay-out of energy producers as a whole may be 200% to 400% higher than they are now. Meanwhile enjoy visiting the gas-pumps +/- $1/litre and when prices rise, enjoy the good feeling that your dividends will be rewarding you generously.
Interest rates are the greatest conundrum and potentially the biggest risk in our world today. Canadian 30-year bonds now pay only 1½%. US 30-year bonds are 2%. In Switzerland you can now guarantee 0% for fifty-years …which means the bond investor can lose 50 years of inflation or purchasing-power just to get back 2016 dollars!
To put this risk in perspective, imagine interest rates rose merely 1% and an investor saw their account value fall by 10%, or if rates rose 2% and account values may permanently fall 20% with zero hope of recovery! This is what I wrote last year about fixed-income as Dr. Jekyll and Mr. Hyde (http://guaranteedincome4life.ca/blog/fixed-income/) and you can see there why we’re so cautious about fixed-income (bonds) and why we’re so particular about how we steer this portion of any portfolio.
Connecting this Summer...
As you’re enjoying the summer take a moment to think of your money, and we can discuss any changes occurring for your family, work, even next steps on your horizon. Some of today’s topics may open questions you want to discuss. Or whatever you have in mind ...let me know and we'll focus on this together.
Beyond investing particularly, how are your life/health insurances, family-cottage and estate-planning needs, or eventually converting home-values into life-income and elder- / personal-care. Have you arranged your charitable gifts? Have we taken the steps to reduce your tax burdens? Do you, or someone you know, have any questions of how we fit and align Financial Security to one's desired Lifestyle? ...for what is money unless it's serving the life and values you hold most dear!
Vacation alert: Reach me directly at your leisure so we can arrange time together. And always remember you can include Ben here or reach him directly (ext. 222) for anything needing immediate attention, especially when Virginia and I are vacationing in “la belle province” from the Townships up to Saguenay PQ between August 1st-10th.
I always welcome your thoughts and questions! How can we increase/improve our service for YOU this month, this season? We are grateful to serve and protect your Financial Security for LIFE!
Yours in Financial Security for LIFE!