Inflation

Inflation

Debt lifts Gold

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By Nick Barisheff

Special to the Financial Independence Hub

The world is awash in debt, an immense, unfathomable ocean of financial obligations. The stack of IOUs is so enormous, the balances so large, they will never be fully settled without dreadful consequences to the global economy. This tsunami of debt was unleashed in 1971, when Nixon ended the backing of the US dollar with gold.

Since 1971, US debt and gold prices have increased greatly. Traditionally, rampant increases in US debt occur when trying to pull the economy out of an economic downturn as displayed in the spikes that occurred in 2008 and 2020.

Considering the amount of debt that has already been taken on to combat the pandemic — combined with the rising uncertainty involving vaccinations and new strain variants — it can be anticipated that the worst is yet to come. As Democrats push towards passing an additional US$1.9 trillion stimulus package, governments are willing to take on previously unforeseen levels of debt to prop up the economy during the pandemic. This could lead to a promising future for the price of gold.

Manipulation of Precious Metals markets

This divergence has been caused by manipulation of precious metals. A great deal has been written about this and one of the best books on the subject is Rigged – Exposing the Largest Financial Fraud in History, by Stuart Englert.

Price manipulation never lasts, and when it ends there always tends to be a reset to inflation-adjusted levels. The biggest questions are: when and how high will gold and silver prices rise?

However, even with manipulated markets precious metals have outperformed traditional financial markets and have generated over 10% returns in all currencies over the last 20 years.

How soon precious metals rise to normalized levels depends on how rapidly governments and central banks inundate the world with debased dollars and other fiat currencies, and how quickly individuals and institutions lose faith in those increasingly worthless debt-based currencies.

The US national debt alone is nearly US$28 trillion. This doesn’t include the $159 trillion of unfunded liabilities, which brings the total to US$187 trillion or about US$480,000 per American citizen. This number also doesn’t include the $21 trillion in unaccounted federal expenditures discovered by Prof. Mark Skidmore and his economic students at Michigan State University.

Global debt hits 365% of World GDP

Global debt hit $277 trillion last year, or 365% of world gross domestic product (GDP). Public debt as a percentage of GDP has soared to unsustainable and perilous levels. The US debt-to-GDP ratio hit 136% last year. Canada’s debt-to-GDP ratio increased by nearly 80% through the third quarter of 2020, the highest rate among developed nations.

When you translate these incomprehensible and burgeoning debt totals into per capita obligations, it is obvious that they will never be repaid. They can only be inflated away.

Combined with hundreds of trillions in unfunded government liabilities, swelling debt and unregulated financial derivatives form a bottomless abyss that eventually will engulf nations and swamp the entire financial system. Little wonder that in 2002, billionaire investor Warren Buffett dubbed derivatives — which essentially are debt instruments used as collateral to take on more debt — “financial weapons of mass destruction.” At that time derivatives totaled $100 trillion, whereas today they are in excess of $1 quadrillion.

Socialists maintain public debt is acceptable when borrowing is for the common good, and Modern Monetary Theory (MMT) advocates claim unlimited government spending is not a problem. They believe governments can create an infinite amount of currency to fund social services and public works projects. They fail to recognize that debt is not wealth and increasing the currency supply decreases its value and produces price inflation.

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Another emotional reason to take CPP early

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By Michael J. Wiener

Special to the Financial Independence Hub

 

For some reason, people seem wired to want to take their CPP and OAS benefits early, myself included. They grasp for reasons to justify this emotional need even though a rational evaluation of the facts often points to delaying the start of these pensions to get larger payments. I recently read about another emotional reason to justify taking CPP and OAS early.

We can choose to start taking CPP anywhere from age 60 to 70, but the longer we wait, the higher the payments. Less well known is that we can start taking OAS anywhere from age 65 to 70 with higher payments for waiting loger. It’s hard for us to fight the strong desire to take the money as soon as possible, and we tend to latch onto good-sounding reasons to take these pensions early.

But the truth is that most of us have to plan to make our money last in case we live long lives. Taking CPP and OAS early would give us a head start, but the much-higher payments we’d get starting at age 70 allow us to catch up quickly. If we live long lives, taking larger payments starting at age 70 is often the winning strategy.

Here I examine reasons to take these pensions early, ending with a longer discussion of the reason newest to me. Many of these reasons are inspired by other writing, such as a Boomer and Echo article on this subject. However, you’ll find my discussion different from what you’ll see elsewhere.

Let’s start with the best reason.

1.) You’re retired and out of savings

This is a good reason to take pensions early if you’re really running out of savings other than a modest emergency fund. However, just wanting to preserve existing savings isn’t good enough on its own. It makes sense to do a more thorough analysis to see what you’re giving up in exchange for trying to preserve your savings.

2.) You have reduced life expectancy

If you’re sufficiently certain that your health is poor enough that you’d be willing to spend down every penny of your savings before age 80, then this is a good reason to take pensions early. This is very different from “I’m worried I might die young.” If as you approach age 80 you would try to stretch out your savings in case you live longer, this has repercussions all the way back to how much you can safely spend today. Almost all of us have to watch how we spend now in case we live a long life. In this case you need to do a thorough analysis to see what you’re giving up in exchange for taking pensions early.

3.) You have long periods before age 60 with no CPP contributions

If you don’t work after age 60, but delay taking CPP until 65, the 5 years without making CPP contributions can count against you. Everybody gets to drop out the lowest 17% of their contribution months in the CPP calculation. So, if you never missed a year of CPP contributions from age 18 to 60, you can just drop out the years from 60 to 65, and you won’t get penalized. But if you had many months of low contributions over the years, then having additional low months from 60 to 65 will reduce your CPP benefits.

I am in this situation. However, from 60 to 65 you go from receiving 64% to 100% of your CPP plus any real increase in the average industrial wage. Taking into account all factors, I expect my CPP to rise by about 47% by delaying it from 60 to 65. This is less than it could have been without the penalty of not working from 60 to 65, but it is still a significant increase.

Delaying CPP further from 65 to 70 is a simpler case. There is a special drop-out provision that allows you to not count the contribution months between 65 and 70. CPP benefits increase from 100% of your pension at 65 to 142% at 70.

CPP benefits rise significantly when you delay taking them. Even if you can’t use your 17% drop-out for all the contribution months from age 60 to 65, you may still benefit from delaying CPP.

4.) You want to take the CPP and OAS and invest

People don’t generally get this idea on their own. It often comes from a financial advisor. You’re unlikely to invest to make more money than you’d get by delaying CPP and OAS, particularly if you pay fees to a financial advisor.

5.) The government might run out of money to pay CPP and OAS

The government might introduce wealth taxes on RRSPs too. Despite what you might have heard from financial salespeople, CPP is on a strong financial footing. Many things may change in the future. It doesn’t make sense to overweight the possibility of cuts to CPP or OAS.

6.) You want the money now to spend while you’re young enough to enjoy it

My wife and I are retired in our 50s. When I analyze how much we can safely spend each month, the number is higher when we plan to take both CPP and OAS at 70. That’s right; we can spend more now because we plan to delay these pensions. It works out this way because CPP and OAS help protect against the possibility of a long life. Continue Reading…

Retired Money: Should Retirees speculate?

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My latest MoneySense Retired Money column has just been published, and looks at whether speculation has any place in the portfolios of retirees or those almost retired. Click on the highlighted headline to access the full column: Should retirees speculate? 

As I confess in the piece, even at the ripe old age of 67, Yours Truly has been known to indulge in the odd speculative investment, not always with positive results. You may have seen the oft-used distinction between “Serious Money” and Play Money, aka Fun Money or Mad Money. Mad Money typically means investing money you “can afford to lose,” which usually means relatively small amounts in individual stocks.

No one wishes to lose money, of course; on the other hand, the inevitable trade-off is risk and return. These days, young Millennial day traders congregate at the Robinhood platform: since the Covid crisis hit many of the most popular trades there would strike retirees as unabashed speculations: betting, for instance, that depressed airlines, hotels and cruise line stocks will soar once a Covid vaccine is available. The operative word with this cohort seems to be FOMO: Fear of Missing Out.

The advisors consulted in my MoneySense column say no more than 10% of your total equity portfolio should be allocated to speculations like penny stocks, marijuana, cryptocurrencies or other flyers. To me, speculations should be managed just like a venture capital fund approaches investing in risky startups: Of five specs, they figure one may go to zero, three break even and you hope the fifth results in the proverbial 10-bagger or even 100-bagger, assuming you’ve identified the next Apple, Amazon or Netflix.

Analogy to Las Vegas

While being governed by the 10% rule — which means the more you have the more you have available to speculate — personally I imagine myself in Las Vegas and set limits on what I intend to gamble with. (Let’s use that word, for in a way that’s what it is). Continue Reading…

Does your Balanced Portfolio need a Remix?

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By Michael Greenberg and Wylie Tollette

(Sponsor Content)

The 60% stocks and 40% bond (60/40) balanced portfolio ― or 70/30 depending on your risk tolerance and time horizon ― has helped many investors build wealth over the past 20 years. It’s a simple recipe for success that has relied on four basic market expectations:

1.) Positive longer-term returns for stocks, driven by underlying economic growth

2.) Falling ― but still positive ― yields on bonds, particularly sovereign bonds

3.) Low and contained inflation

4.) Negative correlations between stocks and bonds (move in opposite directions), particularly during recessions

This last expectation has been especially important. When equity markets are under stress, central banks traditionally have been able to reduce short-term interest rates, increasing the value of nominal bonds. Investor flight to safe-haven assets and quantitative easing (QE) programs initiated by central banks also provide a price boost to the asset class. This helps offset the decline in equities and provides portfolio managers with “dry powder” to reinvest in newly cheap stocks.

But the world has changed. With sovereign bond yields approaching zero in many countries, does this basic equation still hold?

Four Strong (Head)Winds

Today, the 60/40 portfolio faces four formidable headwinds:

  1. Low bond yields – for the past 35 years, yields have fallen and stayed near historic lows. Investors have offset those declines by increasing equity risk; but in a balanced portfolio, more risk means more volatility.
  2. Reduced negative correlation impact – with such low yields, the sought-after negative correlation between bonds and stocks may diminish.
  3. Waning disinflation –increasing pressures on inflation from aggressive monetary and fiscal stimulus, increased protectionism/nationalism, and supply chain disruption/re-shoring could lead to higher yields, which would hurt bond prices.
  4. Limited monetary tools — near-zero/negative interest rates and bloated balance sheets mean less ammunition for central banks to fight the next economic downturn. A move to heavier fiscal policy and resulting increased government bond issuance would also hurt bond prices.

The Real Price of Risk

At this point, taking on more risk may not be worth the incremental return. If your cash flow is negative, you won’t be able to rely on equity risk to carry the load. To fund those cash flows, you would need to sell securities periodically, which introduces timing risk. At the worst, you could be forced to sell a long-term asset during a bad short-term stretch in the markets.

Evolve, don’t abandon

Do these changing conditions mean the trusty 60/40 portfolio should be completely scrapped? We don’t think so. Here are some ways to bring your balanced portfolio up to speed:

  • Adjust your return expectations. Yes, the contribution to returns from bonds will be much lower. On the other hand, we think there is likely a cap on how far and fast yields could rise. That will limit the downside. We suggest a long-term return of 4-5% is a reasonable expectation for a 60/40 portfolio (excluding potential value add from dynamic asset allocation and active security selection).
    . Continue Reading…

Lower for Longer interest rates and Implications for Public Policy

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By John De Goey, CFP, CIM

Special to the Financial Independence Hub

In the second half of August, the two countries that share the bulk of the North American continent independently signaled that they are shifting their economic courses and pursuing a public policy initiative which had been considered somewhat heretical until very recently.  We are now left to reflect upon what it all means and how it will play out in the coming months.

Let’s re-cap.  In mid-August, Bill Morneau resigned as Canada’s Minister of Finance and was swiftly replaced by the Prime Minister’s main political fixer, Deputy Prime Minister Chrystia Freeland.  Concurrently, we learned that Trudeau had taken to seeking advice from Mark Carney.  Carney has been the Governor of both the Bank of Canada and Bank of England, a senior consultant at Goldman Sachs, a Chairman of the Financial Stability Board and currently acts as the United Nations special envoy for climate action and finance.

He’s smart, connected and has shown repeatedly that he concurs with the thesis in Minister Freeland’s 2012 bestseller Plutocrats, which spells out just how rapidly income inequality has spread.  There is now a wide consensus that first-world monetary policy has contributed greatly to this phenomenon.  See my thoughts on the Cantillon Effect in a previous blog for more on why that is.  For better or worse, Freeland, Trudeau and to some extent, even Carney are looking to craft a made in Canada policy response.  Their perception is that the COVID-induced slowdown coupled with shockingly low rates has created a once in a lifetime opportunity to be bold.

To that end, the Prime Minister prorogued the federal legislature and, along with his newly-minted Minister of Finance, indicated that when the House resumed sitting, the Throne Speech would put major emphasis on the economy transitioning to a modern economy that is far greener than anything that has ever been seen in Canada previously.  Parenthetically, this transition would also take pains to address growing inequality.  Remember that the Trudeau government was first elected in 2015 with a mandate to look out for and champion ‘people in the middle class and those working hard to join it’.

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