Wiggle Room

Photo by Nadine Shaabana on Unsplash

HBO’s Bill Maher was on-point in the New Rules segment of this past weekend’s season premiere. “To me,” he said, “the real lesson of this government shutdown is that we found out that federal workers – quintessential middle-class jobs – can’t afford to miss one paycheque.”

No doubt that line resonated with more than a few Canadians. New data from the MNP Consumer Debt Index, a quarterly study conducted by Ipsos, shows that almost half (46%) of adult Canadians are $200 or less from insolvency at the end of the month. Almost a third (31%) say they can’t pay their bills.

Both results are up significantly over the September report. At that time, 40% said they were that close to going broke at month-end and 24% reported having difficulties paying their bills.

“Many have so little wiggle room that any increase in living costs or interest payments can tip them over the edge,” says MNP Ltd.’s president Grant Bazian. “For most, the cause of trouble appears to be long-term accumulated debt. … They just can’t carry it any longer at higher interest rates.”

Much has been written about the value of an emergency fund. Recommendations vary, but it’s not uncommon to hear professionals suggest three to six months in savings for a rainy day. What’s most important is that you make decisions based on your own ability to save and your current financial situation.

If you might lose your job this year, factor that in. How much severance are you likely to receive? The standard benchmark is one month of pay for every year you’ve been with the company, but you can’t count on that.

How much money do you need to get through the month and how long do you think it will take you to find a new job. It’s not uncommon for middle-managers and executives to be out of work for six months, a year or even more.

If consumer debt is piling up, pay that down as quickly as you can. Identify the rate of interest you’re being charged by each of your lenders, and pay down the highest interest rate debt first.

Kevin Press

Unforced Errors

Photo by Samuel-Elias on Unsplash.

U.S. President Donald Trump tabled a new proposal today, aimed at ending that country’s longest ever government shutdown. That he did so on television as opposed to in a White House meeting room doesn’t bode well for public-sector workers smarting from a lack of pay.

In return for Congressional approval of border-wall funding, Trump is promising to protect those who fall under the Deferred Action for Childhood Arrivals (you’ve heard it referred to as DACA) and Temporary Protected Status programs. The deal is meant to reopen the federal government and at the same time limit the political damage all of this is causing the Republicans and Democrats.

A deal along these lines has been previously suggested, more than once. It all speaks to the less-than-ideal state of U.S. politics and in particular of this presidency.

Washington’s latest unforced error comes as U.S. growth is slowing. That has mostly to do with economics, but not entirely.

As yesterday’s Focus report from BMO Capital Markets Economics notes, U.S. political risk is alive and well. “Prepared for the January 29-30 [Federal Open Market Committee] FOMC meeting, the Fed’s regional report should reflect some moderation in economic activity, while underscoring concerns about trade protectionism and labour shortages.”

Elsewhere in the same report, BMO senior economist Sal Guatieri writes: “In light of more dovish talk from policymakers and the minutes of the December FOMC meeting, we have both delayed and reduced the amount of expected rate hikes by the Federal Reserve. We now see increases in June and December – one to three months later than previously thought – and no longer expect a final move next year.”

That could have a direct effect on mortgage rates, which are driven more by U.S. rather than Canadian interest rates. This week, Royal Bank of Canada cut its five-year mortgage rate from 3.89% to 3.74%. Watch for other banks to make a similar move.

Political risk is a fact of life for investors. But while it is seldom associated with the U.S., it cannot be ignored as long as Trump is in the Oval Office.

Kevin Press


Jobs Jobs Jobs

Photo by Sam Bark on Unsplash.

A few years back, I was invited to deliver the commencement address to graduates in the faculties of Applied Science and Technology and Continuing and Professional Studies at Sheridan College in Mississauga, Ont. My goal was to deliver a practical message, hence the speech’s impossibly catchy title: “Success in an era of personal responsibility.”

“Canada’s beloved social safety net is wearing thin,” I said, trying my best not to sound like the voice of doom. “Our aging population — about 1,000 Canadians retire every day — will put unparalleled pressure on government-funded healthcare and other programs. This will transform Canada. You will be responsible for your financial well-being in ways previous generations of Canadians were not.”

That was conventional wisdom at the time. It was not uncommon to hear experts predict that baby boomer healthcare expenses, as they entered their high-use years, would so dominate government spending that our reliance on Ottawa and the provinces for virtually everything else would be significantly diminished.

Some still argue that (and they may be proven true). But increasingly, there is a recognition among policymakers that government will have to do more, not less, in the years ahead. Last month’s release of the latest Organisation for Economic Co-operation and Development (OECD) Jobs Strategy signals an emerging view that leaving citizens to fend for themselves is a bad idea.

The strategy laid out three needs:

  1. Promote high-quality jobs. Two keys here. Well-designed, quick-hit work programs can make a positive difference when economic growth slows or turns negative. The financial crisis made that clear. A high-functioning education/training system is also a must. From the report: “To better match skills with labour market needs, it is important to develop stronger links between the world of education and the world of work and have robust systems and tools for assessing and anticipating skills needs.”
  2. Put an end to labour-market exclusion. Where there are barriers to quality work, address them proactively. “To reduce the risk of workers becoming trapped in low-quality jobs or joblessness, they should have continuous opportunities to develop, maintain and upgrade skills through learning and training at all ages.”
  3. Adapt to the evolving labour market. Prepare for tomorrow. It’ll look less like today than you think. This is on both policymakers and individuals, as anyone close to the car industry knows too well. “Skills policies, social protection and labour market regulations will need to be adapted to the new world of work to achieve greater job quality and inclusiveness. … A first challenge is to equip workers with the right skills in a context where the demand for skills is likely to evolve rapidly and people continue working at a higher age, with an increased emphasis on science, technology, engineering and mathematics as well as soft skills.”

There’s a lot of detail in the report’s nearly 400 pages. More generally it represents a step back from the idea that developed world governments will download additional responsibilities to their citizens.

The assumption that Canadians would have to rely less on government has been a staple of financial advice in recent years, for good reason. But if this new OECD report is an indication of where policymakers are headed, it bears revisiting.

Kevin Press

What Happened to Global Stocks?


I was in to see an old friend from the wealth management business yesterday. Historically, global equities have been an important part of his firm’s investment focus. But the sector’s consistent poor performance is having exactly the effect you would expect.

“I’ve got this big leaky boat,” he said to me. That can only mean one thing in the money management business: clients are withdrawing their money and taking it elsewhere. Redemptions.

“We’re busy building a new boat inside the leaky boat.” That means his firm is developing new investment strategies to attract investors burned by global stocks.

What happened? The numbers below from The Wall Street Journal Market Data Center highlight how broad-based the downturn was in 2018. Keep in mind these are year-to-date numbers. Long-term investors (which includes anyone saving for retirement), should never overreact to one-year returns.

screen shot 2019-01-12 at 9.21.16 amscreen shot 2019-01-12 at 9.21.33 am

Still, it’s important to understand what’s going on. A lot of this negativity came up in the fourth quarter of last year. Does all this red ink signal an incoming global recession?

Opinions are split. Some believe this correction has brought stock prices down to a more reasonable level. In fact, we have seen signs of a turnaround since the holidays. It stands to reason that stock valuations would come down as central banks push interest rates up.

Others are worried about weakening manufacturing numbers and the nearly inverted yield curve. That’s a measure of the difference between the U.S. 10-year and 1-year Treasury Notes.

Typically, investors demand a higher yield on 10-year notes because they have to wait longer to cash out. When investors lose confidence in the short-term economy, that gets turned upside down. They have less confidence in short-term bonds so they demand a higher yield. We watch the U.S. Treasury Notes because recessions in that country have such a consistent impact on the global economy (particularly ours here in Canada).

In a note to investors yesterday, RBC Wealth Management’s Jim Allworth wrote: “We would point out that the yield curve has not yet inverted … and it is not a forgone conclusion that it will in the near future.”

The bank predicts that the U.S. will “go on growing into and perhaps through 2020.”

Yesterday’s edition of Scotiabank’s Global Outlook struck a similar tone. “Our forecast currently calls for global growth to slow from 3.7% in 2018 to 3.5% in 2019. However, the evolution of equity markets through the fall, along with movements in the yield curve suggest a much greater markdown in growth is anticipated, including possibly a recession in some countries. … Our own recession probability model for Canada, which considers a range of economic and financial variables, suggests the risk of a recession remains very low.”

The report goes on to note that there would have to be some kind of “trigger,” such as a worsening of the U.S.-China trade relationship to make recession likely.

So while stock markets are flashing warning signs, there is no consensus that a recession is around the corner. And again, one-year returns should never drive dramatic changes in a diversified investment portfolio designed to achieve long-term goals.

Just the same, keep an eye out. This is a good environment to be managing your expenses carefully and giving some thought to an emergency savings fund.

Kevin Press

Welcome to Today’s Economy

image 2019-01-09 at 6.18 pmHere’s a promise.

I’m going to do my best to help Canadians understand what’s happening in the economy – at home and around the world. I’m not here to sell you anything. I have no agenda beyond wanting to help readers understand the world just a little bit better so that they can take care of the ones they love.

A bit about me. I’ve been writing about economics, household finances and retirement planning since the mid-1990s. I was a journalist initially, and then joined one of the country’s top insurance companies as a marketing/communications leader. Both experiences taught me the value of learning and the feeling of confidence that comes from having even a rudimentary understanding of how money works.

You’re going to see a few key themes covered in this space:

  • Expect a recession sometime soon. This year marks the 10th consecutive year of economic growth in Canada. Yes, we’ve been mired in an extended period of slow growth since the financial crisis. Just the same, we’ve seen positive numbers every year since 2009. That’s not normal. The C.D. Howe Institute reports that economic expansions have averaged about half a dozen years each since The Great Depression.
  • Interest rates matter more than ever. Low rates began to emerge as an issue for long-term investors in the 1990s. But that was nothing compared to the super-low rates implemented by central banks around the world to spur growth after the financial crisis. The Bank of Canada announced today that it will maintain its target for the overnight rate at 1.75%. Like other central banks, they’ve been working to inch that rate up. (Canada’s key rate hit a low of 0.5% in 2009.) But they have to tread carefully. Rising rates slow economic growth, so of course the risk is that they will tip the economy into recession. But if/when a recession does occur, central banks need to have room to lower rates in order to help the economy recover. You can’t do a lot of cutting when your starting point is less than 2%.
  • Navigating all this means understanding risk. That goes beyond traditional investment risk. Canadians are living longer than ever. That means longevity risk, which is to say that you might outlive your savings. In a connected world where government decisions often have global implications, political risk is significant. Canadians who invest in the U.S. market are well aware of currency risk. There is much to consider.
  • All of this is affecting how Canadians plan for the future. That’s especially true for long-term savings goals like retirement. Don’t be surprised if you’re still working at 70. And don’t be put off by that. It may be the best thing for you.
  • More than ever, it’s up to you and me. Employers have been stepping back from the old-school, paternalistic approach they’ve historically taken with retirement, life and health insurance benefits. Much has been written about the move from defined benefit to defined contribution pensions for example, which puts the onus on individuals to make investment decisions. The discontinuation of retiree benefits is another big story. It’s not clear how this will play out as baby boomers continue to enter retirement. Few expect governments to fill the gap, but it’s too early to make bold predictions on that. Obviously though, we have to be prepared to take care of ourselves to an extent that our parents weren’t required to.

If you’d like to see something covered, please shoot me a note. And if you know someone who will value Today’s Economy, please share.

Kevin Press