Tag Archives: inflation

How (In)credible is the Transitory Inflation argument?

Posted By |

By John De Goey, CFP, CIM

Special to the Financial Independence Hub

If there’s one thing we’ve all learned in the past two years, it is that central bankers mean business: both literally and figuratively.  In other words, when central bankers say they ‘have our backs’ in both extending the business cycle by promoting fuller employment and doing so without causing meaningful inflation, we should take them at their word.

As such, central bankers “mean business” literally (meaning they will promote business interests) and figuratively (meaning they are serious, determined and dedicated to their mission).  Then again, for the past two years, those two objectives have been mostly aligned.  What if new circumstances were to make them mutually exclusive?

Looking south of the border, we had a modest yield curve inversion in the spring of 2019 and within a few weeks, then President Trump applied some considerable political pressure (something arms-length central bankers are supposed to be immune to) in order to get the federal reserve to cut rates, which they did in three successive meetings that autumn.

At the time, inflation was benign and tellingly, unemployment was at its lowest level in a generation.  In other words, by any reasonable standard, the fed had done a superb job to that point and no interventions or adjustments seemed necessary.  Despite this, there were changes and a purportedly imminent recession was averted.  Or not. After all, there’s no reliable way of knowing what might have happened had rates not been lowered that autumn.

These days, the narrative coming from central banks is that the recent spate of above-average inflation is ‘transitory,’ meaning it will likely normalize around more traditional levels once the artificially low data of the post COVID year (basically Q2 and Q3 of 2020) falls out of the data set.

Skeptical of the Central Bank line on inflation

Of course, no one knows for sure if the inflation we’re seeing now is genuinely transitory or the harbinger of a more prolonged period of elevated prices. There’s a Chinese proverb that states, “to be uncertain is to be uncomfortable, but to be certain is ridiculous.”  I’m not for a moment suggesting that inflation is or is not transitory. Rather, I am respectfully skeptical of the central bank line.

It may indeed be true that the inflation fear will dissipate into nothingness before the end of the year. Then again, Deputy Prime Minister and Minister of Finance Chrystia Freeland has boasted that the fiscal support offered to Canadians over the past 15 months can act as a sort of ‘pre-loaded stimulus’ that will keep the economy humming long after the government cheques stop coming.  What if Freeland is understating the impact?

Specifically, what if Canadians are so euphoric about the economy re-opening that they start buying things and experiences like never before?  Wouldn’t that kind of spike in purchasing activity risk a spike (or at least prolongation) in inflation?

Higher for Longer

There are some who think central banks are managing expectations about inflation being higher for longer to buy time and provide cover for an anticipated period of deliberate bank inactivity.  In essence, what if central banks don’t act to control high and prolonged inflation because doing so (i.e., raising rates significantly and sooner than expected) would destroy both the economic recovery and the bull markets so many are currently enjoying? Continue Reading…

Projected Inflation and investment returns

Posted By |

FP Canada issues guidelines every year to help financial planners make long-term financial projections for their clients that are objective and unbiased. The guidelines include assumptions to use for projected inflation and investment returns, wage growth, and borrowing rates. It also includes “probability of survival” tables that show the life expectancy at various ages.

The 2021 Projection Assumption Guidelines were of particular interest because, well, a lot has happened since the 2020 guidelines were published last spring. How should we project inflation and investment returns as we get to the other side of the pandemic and economies start opening up again?

Will we see sustained higher inflation? Should we expect any returns at all from bonds or cash? Should we lower our expectations for future stock market returns?

Remember, these are long-term projections (10+ years). That’s very different than guessing the direction of the stock market for 2021, or predicting whether we’ll see a short burst of inflation in late 2021, early 2022.

The inflation assumption of 2.0% was made by combining the assumptions from the following sources (each weighted at 25%):

  • the average of the inflation assumptions for 30 years (2019 to 2048) used in the most recent QPP actuarial report
  • the average of the inflation assumptions for 30 years (2019 to 2048) used in the most recent CPP actuarial report
  • results of the 2020 FP Canada/IQPF survey. The reduced average was used where the highest and lowest value were removed
  • current Bank of Canada target inflation rate

The result of this calculation is rounded to the nearest 0.10%

Projections for equity returns were set by combining assumptions from the following sources:

  • the average of the assumptions for 30 years (2019 to 2048) used in the most recent QPP actuarial report
  • the average of the assumptions for 30 years (2019 to 2048) used in the most recent CPP actuarial report
  • results of the 2020 FP Canada/IQPF survey. The reduced average was used where the highest and lowest value were removed
  • historic returns over the 50 years ending the previous December 31st (adjusted for inflation).

Equity return assumptions do not include fees.

Unlikely that bonds can replicate their projections of last 50 years

Projections for short-term investments and Canadian fixed-income returns included the assumptions from QPP and CPP, the results of the 2020 FP Canada/IQPF survey, but the 50-year historical average rate was removed in 2020 as a data source. This makes sense given that interest rates were significantly higher than they are now and so it would be impossible for bonds to replicate the performance of the last 50 years. Continue Reading…

A discussion about Value and Small-cap Factors with Avantis Investors’ CIO Dr. Eduardo Repetto

Posted By |
Avantis Investors’ CIO Dr. Eduardo Repetto (Link to YouTube clip is in text below)

Over the years, I’ve encountered several financial advisors who liked to use the mutual funds of Dimensional Fund Advisors or DFA, which was founded by alumni of the University of Chicago and based on research on the long-term return premiums offered by small-cap and Value stocks around the world. Even today I own a DFA International Equity fund that was a legacy of my time with a fee-only advisor: that’s generally the requirement for accessing DFA funds.

So I was intrigued when certified financial planner Mike Bayer [CFP, CIM, FCSI) asked me to help him interview two senior executives of Avantis Investors (a unit of American Century Investments) which for the past 18 months has been marketing Avantis ETFs, which take a similar approach with small-cap and value factors and are more accessible to do-it-yourself investors who can buy the ETFs at discount brokerages, just like any other ETF.

Regular readers of the MoneySense ETF All-Stars may recognize the name Avantis. As you can see here, the Avantis US Small Cap ETF [AVUV] was a Desert Island pick of PWL Capital’s Ben Felix and Cameron Passmore. We are about to publish the 2021 edition and as mentioned in the video interview also linked below, that pick is back along with another Avantis selection, which you can learn by watching the video.  In addition, Felix has just released a 15-minute video covering Avantis: https://youtu.be/jKWbW7Wgm0w

In the end, possibly influenced by the arrival of Avantis, DFA itself brought out three of its own ETFs: https://us.dimensional.com/etfs

Bios

Dr. Eduardo Repetto is Chief Investment Officer of Avantis Investors. Previously he was Co-Chief Executive Officer and Co-Chief Investment Officer of Dimensional Fund Advisors. He earned a Ph.D. degree in Aeronautics from the California Institute of Technology, an MSc degree in Engineering from Brown University, and a Diploma de Honor in Civil Engineering from the Universidad de Buenos Aires.

Phil McInnis is also a DFA alumnus, where he was Head of Portfolio Solutions. Today he is director of investments at Avantis Investors®, responsible for marketing content development surrounding Avantis’ investment approach.

Mike Bayer, CFP, CIM, FCSI, is a Toronto-based financial planner with Strategic Analysis Capital Management and blogger at Free Speech Media.

Highlights from the transcript

So without further ado, here is a link to the full interview, which runs almost an hour. However, you can click on a “transcript” link within YouTube, for those who prefer reading and skimming. Below are some highlights:

Continue Reading…

Debt lifts Gold

Posted By |

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.

Continue Reading…

CPP timing: A case study for taking benefits at age 70

Posted By |

By Michael J. Wiener

Special to the Financial Independence Hub

There are many factors that can affect your decision on whether to take CPP at age 60 or 70 or somewhere in between.  Here I do a case study of my family’s CPP timing choice.

Both my wife and I are retired in our 50s and had periods of low CPP contributions because of child-rearing and several years of self-employment.  So, neither of us is in line for maximum CPP benefits.  If we both take CPP at age 60, our combined annual benefits will be $11,206 (based on inflation assumptions described below).

The “standard” age to take CPP is 65.  If you take it early, your benefits are reduced by 0.6% for each month early.  This is a 36% reduction if you take CPP at 60.  If you wait past 65, your benefits increase by 0.7% for each month you wait.  This is a 42% increase if you wait until you’re 70.

However, there are other complications.  If you take CPP past age 60, any months of low CPP contributions between 60 and 65 count against you unless you can drop them out under a complex set of dropout rules.  If my wife and I take CPP past age 65, we won’t be able to use any dropouts for the months from 60 to 65, so we’ll get the largest benefits reduction possible for making no CPP contributions from 60 to 65.  Fortunately, CPP rules don’t penalize Canadians any further if they have no contributions from 65 to 70.

Inflation indexing

Another less well-known complication is that before you take CPP, your benefits rise based on wage inflation.  But after your CPP benefits start, the payments rise by inflation in the Consumer Price Index (CPI).  Over the long term, wage inflation has been higher than CPI inflation.  So, when you start taking CPP benefits, you lock in lower benefit inflation.

In this case study, I’ve assumed 2% CPI inflation and 3% wage inflation.  These assumptions along with the CPP rules and our contributions history led to our annual benefits of $11,206 if we take CPP at 60.

If we wait until we’re 70, our combined annual CPP benefits will be $29,901.  However, don’t compare this directly to the figure at age 60 because they are 10 years apart.  If we take CPP at 60, it will grow with CPI inflation for those 10 years.  The following table shows our annual CPP benefits in the two scenarios: early CPP at 60 and late CPP at 70.

Age Early CPP Late CPP Age Early CPP Late CPP
 60    $11,206  75    $15,081   $33,013
 61    $11,430  76    $15,383   $33,674
 62    $11,658  77    $15,690   $34,347
 63    $11,891  78    $16,004   $35,034
 64    $12,129  79    $16,324   $35,735
 65    $12,372  80    $16,651   $36,449
 66    $12,619  81    $16,984   $37,178
 67    $12,872  82    $17,324   $37,922
 68    $13,129  83    $17,670   $38,680
 69    $13,392  84    $18,023   $39,454
 70    $13,660   $29,901  85    $18,384  

 

$40,243
 71    $13,933   $30,499  86    $18,752   $41,048
 72    $14,211   $31,109  87    $19,127   $41,869
 73    $14,496   $31,731  88    $19,509   $42,706
 74    $14,785   $32,366  89    $19,899   $43,560

It would certainly feel good to start collecting CPP benefits when we’re 60, but by the time we’re 70, we’d never notice that our payments could have been 119% higher.  That’s why we plan to wait until we’re 70 for our CPP benefits. Continue Reading…