Tag Archives: 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.

Continue Reading…

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

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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…

Q&A on the new Harvest global bond ETF

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By Bradley Komenda

(Sponsor Content)

Harvest Portfolios Group launched a global bond ETF in January 2020 to complement its equity ETF offerings.

The  Harvest US Investment Grade Bond Plus ETF (HUIB:TSX) is managed by Boston-based Amundi Pioneer Asset Management, a subsidiary of Amundi Asset Management, a leading global manager based in France. In a Q&A, Bradley Komenda, the ETF’s portfolio manager, discusses how Amundi’s value investing approach helps guide its strategy. Mr. Komenda joined Amundi Pioneer in 2008 and is also Senior Vice President and Deputy Director of Investment Grade Corporates at the firm.

Financial Independence Hub: What is the demand for these bonds for the Canadian investor?

Bradley Komenda:  Canadian bond market opportunities are pretty narrow and heavily weighted towards energy and financials. Because there is a lot of demand for these bonds, yields are less attractive than in the US.

This bond ETF gives you breadth. It is Canadian dollar hedged, but with access to top quality US, European and Global issuers.  Expectations of further fiscal stimulus will all be supportive of the corporate bond market, so we think that this is where we want to be.

Q: What is Amundi Pioneer’s approach?

A: We are value investors. We invest in credits that we think over a one to three-year time horizon are going to generate a superior return. By value investing, I don’t mean buying the cheapest securities. It means trying to identify the securities that have the best risk adjusted return potential.

Q: How do you assess risk?

A: We look at risk in three ways. We look at nominal risk, which is how much we have invested in a single issuer. Then we look at the maturity of the bonds. We know that if we buy a one-year bond, it is a lot less risky than buying a 30-year. And then we look at duration times spread, (DTS) which is a way to measure the credit volatility of a bond.

Q: Where is the Harvest US Investment Grade Bond Plus ETF on the risk spectrum?

A: From an overall portfolio perspective, this bond ETF is rated low risk, and within the fixed income universe, I’d say it’s medium.

If you want lower risk, you can do a couple things. You can buy government bonds, but after inflation your purchasing power will be eroded even with longer duration bonds.

If you go for a short-term ETF, or cash, you’re going to struggle to get a yield similar to inflation. So, this ETF is for someone with patience, a one to three-year time horizon and a willingness to accept short-term volatility but with the expectation of attractive returns relative to risk-free or very short bonds.

Q: What about bond quality?

A: HUIB is concentrated in the Triple B space (BBB) or higher. The breakdown is roughly 60% BBB, 30% A or higher and 10% Non-rated.

Q: Who is the core investor for this bond ETF?

A: Anybody who wants exposure to fixed income. That’s because it has a negative correlation to stocks which means they move in different directions.  If you buy a high yield fund, you’re going to get more yield, but you’re going to have a positive correlation to stock market movements.

 

Q: Investors worry about liquidity. How easy is this ETF to sell?

A: It’s highly liquid. We had a liquidity crisis in the corporate bond market in March of this year. The Fed stepped in and now is backstopping things by purchasing bonds as needed. It means the draw down we saw in March and early April is unlikely to occur again.

Q: What is the relative advantage of this ETF?  

A: This ETF is part of our investment grade corporate bond strategy. Continue Reading…

Playing with the Box: Re-reading Nick Murray

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Author and Advisor’s advisor Nick Murray. NickMurray.com

By John De Goey, CFP, CIM

Special to the Financial Independence Hub

I was on a cross country flight recently and I re-read a book called “Simple Wealth, Inevitable Wealth” by Nick Murray, a former rock star speaker who was beloved by the financial advice industry – mostly because he constantly told his advisor audiences that they are great, do important work and are worth every penny they make.  The book was written 20 years ago and, unlike the other books by Murray, was written expressly for investors.  Reading it again provided both a nostalgic stroll down memory lane and an enlightening insight into how much the financial services industry has changed in the past generation.  Some parts of the book have held up well.  Others… not so much.

The risk of outgrowing your capital

I’ll begin with the positive.  The good news is that I still find it refreshing to read Murray’s perspective on the perverse way the media defines risk.  He simply, compellingly and eloquently walks readers through the very real risk of outliving your capital as a result of a reliance on the quaint notion that bonds are “safe”.  Safety, according to Murray, is having a pool of capital that you cannot outlive – and putting a significant portion of your life’s savings can significantly impede that outcome becoming a reality.  I was also heartened by his acknowledgement that there are false dichotomies and that the real decision in the ongoing ‘debate’ between active and passive approaches is really a choice between the more relevant considerations of product cost.  Murray also writes persuasively about the need for specific, measurable, time-bound goals that help to focus the mind and guide in principled decision-making.  Best of all, Murray names and blames what I believe to be the biggest culprit in most peoples’ failure to meet their financial goals: themselves.  More specifically, their own behaviour.

There are also a few things that cause me to shake my head in disbelief, however.  The most obvious of these are the return assumptions that he puts forward as being reasonable.  Granted, the numbers he uses are based on historical data, but he does relatively little to explain that real returns are fairly constant and that a portion of all nominal returns is inflation.  While he doesn’t expressly tell people what inflation rate to expect, he does note that there is historically about a 5% premium for stocks over bonds.  He uses 11% as a proxy for expected stock returns and 6% for bond returns.  To put that in perspective, I currently assume inflation to be 2% with a 5% real return for equities (7% nominal) and a 0% real return (2% nominal) for income.  How times have changed, now that everyone has re-calibrated their expectations toward a low-growth, low-inflation environment for the foreseeable future.

Sustainable withdrawal rates

Then there’s the related question of a sustainable retirement withdrawal rate.  Murray uses 6%.  Many years ago, I remember people talking about the real rate being 5%.  For the past number of years, I’ve been using 4%.  Note that my current withdrawal rates are actually more aggressive/ less forgiving than Murray’s.  You’re much more likely to not run out of money withdrawing 6% from something that’s earning 11% than to withdraw 4% from something earning 7%.  Financial planning is easy when your assumptions are based on a rose-coloured past rather than a murky future.

The thing that struck me the most, however, was his admonition to readers (remember, Murray is writing to ordinary investors here) to focus on first principles.  Everyone knows the old ‘life’s like that’ story about getting a young child an expensive present for Christmas or a birthday only to have that child spend more time playing with the box that the gift came in than with the gift itself.  Continue Reading…

How fast will your portfolio shrink in Retirement?

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By Michael J. Wiener

Special to the Financial Independence Hub

 

Once you’re halfway through retirement, you’d expect about half your savings to be gone, right? This turns out this is very wrong when we don’t adjust for inflation. The return your portfolio generates causes your savings to hold steady for a while and then fall off a cliff.

I read the following quote in the second edition of Victory Lap Retirement:

“A recent Employee Benefit Research Institute study found that people in the U.S. who retired with more than  $500,000 in savings still had, on average, 88 percent of it left eighteen years after retirement.”

Frederick Vettese provided further detail. This 88% figure is the median rather than the average.

This statistic was used as proof that retirees aren’t spending enough. After all, if you planned on a 35-year retirement, half the money should be gone after 18 years, right? Not even close. Below is a chart of portfolio size based on the following assumptions.

– annual portfolio return of 2% above inflation
– annual withdrawals of 4% of the starting portfolio size, rising with inflation each year
– inflation of 2.12% (the average U.S. inflation from 2001 to 2018)

 

So, to be on track for a 35-year retirement, your remaining portfolio 18 years into retirement should be 83% of your starting portfolio size. This is a far cry from an intuitive guess that about half the money should be left.

Still, the earlier quote said the average retiree who started with at least half a million dollars had 88% of their money left 18 years into retirement. Further, thanks to a reader named Dave who found the original EBRI study online, we know that the 88% figure is inflation-adjusted. Continue Reading…