For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).
Canadian economist David Rosenberg is known as a perpetual bear. That framing is a little unkind. Let’s just say Mr. Rosenberg is always cautious and is more than aware of the many risks. But certainly he will dwell or concentrate on those risks. We might think that it is the job of the economist to ‘beware the negatives’. In a recent interview Mr. Rosenberg revealed what was in the big bear portfolio.
Here’s the link to the Financial Post interview that was posted on their YouTube page. It’s an engaging video I would encourage you to watch it.
But I will certainly outline the key points and takeaways for you. And yes, we’ll get to the big bear portfolio.
Mr. Rosenberg sees a dreadfully slow economic recovery. He uses the word ‘sclerotic’. And it’s all about the consumer and consumer demand.
Maudlin Economics reinforces that on the consumer front, unemployment is the driver. Here is a must read and a must follow.
That post references the following Tweet, and follows up with some shocking charts.
Based on the consumer and more, Mr. Rosenberg sees a fishhook shaped or L-shaped economic recovery. And here’s more bear piling on. From a recent Globe and Mail article –
Economists at the UCLA Anderson School of Management stated in a report that the pandemic had “morphed into a Depression-like crisis.” They estimate that the economy declined at a 42% annual rate in the second quarter and predict that the lost ground will not be made up until 2023.
The stock market is not the economy.
Of course don’t tell that to the stock markets. They’ll do whatever they want. As we continue to learn, the stock market is not the economy. Those Robinhooders still love their stocks.
And on the simplicity front, the more traditional Balanced Portfolio barely felt a thing.
The more bearish economists will suggest that the stock markets may learn to count again, one day. And many economists and investment gurus feel that the traditional balanced portfolio might not get the job done. Mr. Rosenberg is shaping his portfolio for a period of stagflation. He feels that could arrive in 2-3 years. Continue Reading…
For nearly half a year now, pundits have been offering their viewpoints on what the Coronavirus means for both investors and the broader economy. Many have taken to offering prognostications regarding the shape of the eventual recovery. While I find these viewpoints amusing (my personal favourite is the “square root” shaped recovery), I cannot help but note that they are virtually all about the economy writ large. Economic growth. Output. Change in GDP. Employment and unemployment. Basically, these forecasts are about the big-ticket indicators of economic well-being. The thing is – as has been noted by me and by others – the economy and the market are very different things.
The question that one might ask therefore, is about the shape of the performance of capital market indicators going forward. Looking back from about Valentine’s Day, there’s a giant ‘V’ to depict both the TSX and the S&P 500 (and various other benchmarks, too). Is that it? Do we go essentially sideways from here and carry on as if the storm has passed? Is this story five months long … or are other letters on the horizon?
The dominant narrative as of late July is that the story is essentially over. There’s little more to say. The virus will be with us for the remainder of 2020 and well into 2021 at least, but the impact on capital markets HAS BEEN felt and HAS BEEN addressed through a swift, effective public policy response: both in fiscal and monetary terms. In short, the dominant narrative uses the past tense. I beg to differ.
We are only into the third or fourth inning
While there can be no doubt that the globally coordinated policy response has indeed been swift and effective, it remains an open question as to whether or not the story has ended. If this was a baseball game, I’d guess that we are now moving into the third or fourth inning. In my view, this is not even close to being over. Continue Reading…
Popular ETFs like GLD are perceived as providing investors ownership of gold bullion. But is this is an illusion?
By Nick Barisheff
Special to the Financial Independence Hub
Gold-backed exchange-traded funds (ETFs) and similar products account for a significant part of the gold market, with institutional and individual investors using them to implement many of their investment strategies without considering the true risk associated with many aspects of holding non-tangible assets.
Gold ETFs are units representing physical gold in paper or dematerialized form, which is very different from owning physical gold. According to the World Gold Council, global gold-backed ETFs added 298 tonnes, or US$23 billion, across all regions in the first quarter of 2020[1]. Total ETF holdings amounted to 3,296 tonnes, representing US$179 billion. The largest ETF is SPDR Gold Shares (GLD) with 1,048 tonnes.
Many investors and financial advisors may be surprised to learn that owning shares in a gold ETF is not the same as owning physical gold. As one of the largest ETFs, GLD states in its prospectus: “ … designed to track the price of gold.” Is it wise to choose convenience over holding physical gold?
Since their introduction in 2003, gold-backed ETFs have transformed the gold investment market into an illusion, diverting attention from ownership of physical gold. This is like a magician that has you focused on a distraction while they perform a trick.
When you buy a physical asset, such as real estate, a car or a boat, a great deal of effort is made to ensure that legal title to the asset is transferred to the buyer. This generally involves a specific description of the asset – the make, model, colour and serial number, in the case of a car. In addition, the seller typically warrants that they have free and clear title, that there are no encumbrances and that they have the legal right to convey title to the buyer.
Surprisingly, when it comes to acquiring gold, investors tend to ignore these basic fundamentals and instead focus on the storage costs and management fees; they don’t give a second thought to actual legal ownership. What good is it to save money on the storage costs if you don’t have legal title to the gold? Many gold transactions, such as futures contracts, certificates, and ETFs, are nothing more than paper proxies or derivatives of gold. They do not represent legal ownership of gold. These proxies may work as planned during normal market conditions but may fail under stress, when investors need the safe haven of bullion the most. I have always said that if you aren’t paying reasonable insured storage fees for allocated bullion, then in all likelihood you don’t own any gold at all.
For example, if we were to place a bet on tomorrow’s gold price, and we agreed to settle in currency, then we wouldn’t need any actual gold as long as each of us had the ability to pay if he/she lost the bet. However, this isn’t an investment, and is totally dependent on the credit worthiness of the counterparty. It defeats one of the most important attributes of allocated bullion: NO COUNTERPARTY RISK.
ETFs have significant counterparty risk on many levels
In the marketing materials of the GLD ETF, the first thing to note is that it is referred to as a “Tracking Vehicle.” There is nothing mentioned about owning gold. On the GLD website, it clearly sets out the objective of the Trust. Unlike physical gold, ETFs have counterparty risk, because there’s a possibility that the other parties, such as the Authorized Participant (AP), the trustee or others, may default or fail to uphold their part of the agreement.
I have spent many years with lawyers, drafting prospectuses and legal agreements. As everyone can appreciate, lawyers are always careful and precise with the specific language in all legal documents. As a result, it is important for each investor to carefully read all the documents associated with a transaction in order to understand the objectives of the ETF.
Pay strict attention to the wording in the Regulatory Documents
With the recent increased popularity of ETFs, many investors assume they are like open-end mutual funds, but with much lower management fees. They never question why the fees are lower; they simply assume that Wall Street has become generous and wants to provide cost savings to public investors.
In an open-end mutual fund trust, such as the BMG mutual funds, the fund manager receives the investor’s contributions and then purchases the appropriate bullion according to the mandate of the fund. Similar to a stock transaction, the Custodian (Scotiabank, in BMG’s case) issues a Trade Record Sheet, specifying the bar being transferred to the fund by refiner, serial number, exact weight and purity to three decimal places. Every month, the Custodian provides a list of bars held in custody for each fund by refiner, serial number, exact weight and purity. This monthly document is signed by an officer of the bank and is posted on the BMG Group Inc. website.
The holdings are audited annually by the BMG Funds’ independent auditors (RSM Canada LLP).
While open-end funds have to incur a number of expenses, as mandated by regulatory authorities, the investors will benefit from the economies of scale in both purchasing the bullion and storing the bullion on a fully insured basis, as well as the reduced legal and accounting costs. Continue Reading…
I’ve often posted blogs about the perils of trying to time the market or pick individual stocks. I hope these posts have helped you stay invested as planned during this year’s uncertainties. But what about the risk factors in your stock portfolio: especially the value factor? Should you try to time these? Or are you also maintaining a disciplined allocation to them, also according to plan?
Value-added, with a catch
First, what is the value factor? Value stocks seem undervalued compared to their growth stock counterparts, as measured by stock price vs. various valuation metrics (such as book value, earnings, or cash flow). Historically, investors who have held a heavier allocation to value stocks have earned higher returns, beyond what broad markets have delivered.
But to capture the value premium over time, investors have had to tolerate the sometimes-lengthy periods when value underperformed growth.
The catch is, value investors have had a tough go of it during the past decade and in particular the past 3 years. Although very short-term, some are wondering if the tide is starting to turn, given some moderate value outperformance in the US and some significant value outperformance in Canada and non-US markets since mid-April. Even so, the long stretch of underperformance has led some investors to question whether the value premium still exists.
Value glasses, empty and full
Without diving too deep, there are two broad ways we can view the value premium today. A “glass half empty” analysis might conclude a decade-plus pattern of underperformance means it’s gone for good. However, a “glass half full” type knows there is plenty of logic and evidence to suggest that rumors of the value premium’s demise are probably premature.
Still as risky as ever:
Ever since Nobel laureate William Sharpe came up with the capital asset pricing model in the 1960s, it’s been pretty clear that investors demand extra compensation for taking on extra investment risks. As risky as value stocks have felt lately, it’s certainly still logical to expect them to eventually pay off in higher returns.
Like a swinging pendulum:
Put another way, will returns that have swung to one extreme eventually revert or swing closer to their long-term averages? As Dimensional Fund Advisors describes, “It’s reasonable to expect that securities with lower prices relative to fundamentals should have higher expected returns.” In other words, the riskier (lower-priced) value stocks become relative to growth stocks, the more (not less) likely a correction will eventually occur.
The bigger they are:
Some say huge tech stocks have now become the best source of expected return. Continue Reading…
In Canada, tax on capital gains is at a lower rate than tax on interest. You can take advantage of that — and substantially cut your tax bill — by structuring your investments so that more of your income is in the form of capital gains.
You have to pay tax on capital gains, specifically on the profit you make from the sale of an asset. An asset can be a security, such as a stock or a bond, or a fixed asset, such as land, buildings, equipment or other possessions. However, you only pay tax on capital gains on a portion of your profit. The “capital gains inclusion rate” determines the size of this portion.
About 20 years ago, the Canadian government cut the capital gains inclusion rate from 75% to 66.6% and, within a few months, to 50%. This cuts tax on capital gains, and had the effect of lowering the overall rate you pay on capital gains to one-half of what you would pay on income or interest.
By The Numbers: Tax On Capital Gains
For example, if you buy stock for $1,000 and then sell that stock for $2,000, you have a $1,000 capital gain (not including brokerage commissions). Continue Reading…
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