Hot Off the Web- March 9, 2010

Personal Finance and investments

In the NYT’s “Learning how to hedge yourself, and not just your portfolio”Paul Sullivan discusses the difference between human capital (HC i.e. earning power) and financial capital (FC i.e. assets), and the importance of insuring adequate diversification and even hedging to protect one’s overall total assets (HC+FC).

Eleanor Laise in WSJ’s “Earlier retirement: Beating back the high fees”reports on a big push in the U.S., including lawsuits, to insure that funds held in 401(k)s are not exposed to high management fees. Ms. Laise includes some red flags to look out for: “your plan is run by the boss’s golfing buddies”, “your billion dollar plan…still pays retail prices” and “you can’t follow the money” (lack of transparency as to what are the actual fees/charges levied to your funds and possible revenue sharing agreements with the sponsor/employer!)

The Globe and Mail’s Roma Luciw in “Preparing for the what-if scenario” discusses preparations for a catastrophic event when one of the spouses/partners dies and income drops and financial management skills might disappear. “Communication and a contingency plan are key to making sure this does not happen to you. Couples should list and share detailed financial information with one another, ensure each one has met the financial adviser, lawyer, and accountant, and establish an emergency plan that includes looking at how much the family’s income will fall once one spouse dies and whether it is possible to maintain the same lifestyle on that income. “

Some readers might be interested in Canada Revenue Agency’s Seniors page containing many useful links including Going down south? For those so inclined. Thanks to Rob Carrick for bringing this to my attention.)


The rape and pillage of Nortel pensioners continues. Nortel bonds with claim only on the Canadian estate trade at $0.3/dollar whereas the bonds with a claim on the U.S. estate trade at $0.7/dollar (see This indicates that unless Canadian pensioners’ claims, unless can secure some priority, are likely to recover only about $0.3/dollar of claims. Judge Morawetz, in charge of the Canadian CCAA proceedings, after listening to objections primarily from LTD-ers will pass judgement on the Settlement Agreement sometime this week. I have tabled my written objection to the court but I have yet to see any indication that it was even considered since I was not there in person or represented by a lawyer. Amazingly, despite the fact that the settlement Agreement provides only about a total of $2,000 value to pensioners in exchange for giving up the right to sue the Nortel and its Board of Directors and give up the fight for priority for underfunded pension plan, only seven (7) pensioners (out of almost 5,000 on non-negotiated pensions) tabled an objection to the agreement. (“Nortel plan may be heading for a stalemate, judge says” “Ruling on Nortel settlement due in a week”) The throne speech, from which I was somewhat naively expecting some miracle announcing specific planned legislative changes to BIA (Bankruptcy and Insolvency Act) to protect Canada’s pensioners in case of bankruptcy of their employers, the only cheap/throwaway sentence delivered was “Our government will also explore ways to better protect workers when their employers go bankrupt”. The following day “Budget 2010 contained no sweetening of either the RRSP or TFSA pot, or indeed the hoped-for transformation of the pension regime. Nor were there significant tax cuts or tax increases” (from Chevreau’s “Adding up the millions of new spending”). Mr. Flaherty mentioned more pension consultations (“Harper to ask Canadians for input on pension reform”) with the public; this is a cruel joke to Nortel, and other, pensioners who are about to be robbed in Canada’s courts. What’s needed is action, not more consultations, studies or reports.

In Benefits Canada’s “Two perspectives on pension reform: Crisis? What crisis?”Mercer’s Paul Forestell (incidentally one of Nortel pension plan’s actuaries) looks at Canada’s pension crisis and half-heartedly admits that a problem though “likely not as dire as it has been portrayed in the headlines, but it still exists”. He mentions Jack Mintz’s Whitehorse reports but fails to mention the Baldwin report tabled at the same meeting which came to different conclusions. He agrees that the “cost concerns” about the fees paid by individuals in DC plans are real and large scale employer independent plans would have cost advantages though he is careful not to endorse government run plans proposed by BC and Alberta. He mentions the stock market plunge as a primary reason for the seriously underfunded state of Canada’s private sector DB pension plans, but fails to mention the major contribution to the pension disaster played by the actuaries with their aggressive practices to endear themselves to pension plan sponsors (their employer), which resulted in lower pension plan contributions by sponsor/employer; the actuaries should take credit where credit is due, as key players in Canada’s private sector pension fiasco.

In the Financial Post’s “Watch out for a tsunami of retirees” Bill Hanley looks at the coming impact of “nine million Canadian Boomers” some of whom are starting to receive Old Age Security payments next year. “Unfortunately, there has been no rehearsal for what might transpire when the long wave of Boomers begins to flood into official old age and puts unprecedented pressure on the public purse and on the private pension plans of corporations and individuals. Fortunately, the pensions crisis has landed full square in the public conscious. It is no longer a “looming” crisis. It is here. Now. Unfortunately, it is a massive, complex problem that will test the will power and ingenuity of people and institutions at all levels.”

In the Financial Times’ “Need to slow changes in pension industry” Lindsay Tomlinson discusses rapidly changing U.K. pension landscape with: fewer and fewer employees benefiting from DB pension plans (“The concern is that future pension provision will prove inadequate, precipitating a crisis in 20 to 30 years’ time.”), the continuing shift from DB to DC (“members can make the most informed and best choices possible to suit their retirement needs. Overlaying this is the need to ensure that contributions from both employers and employees are adequate”), and the immediate impact on U.K. stock market and the U.K. economy due to regulatory changes on pension accounting resulting in “no natural domestic buyers of UK equities. The fundamental problem can be traced back to changes forced upon the long-term investing institutions that have precipitated a move out of equities at a quicker pace than necessary.” (Doesn’t sound much different from Canadian pension scene except the U.K. already has pensioners’ income protected up to about $50K/year in case of sponsor bankruptcy, and the U.K. is launching a major government run DC pension plan; all this while Canada’s Mr. Harper is only planning consultations.)

Real Estate

Mort Zuckerman in the Financial Times’ “America must do more to help its homeowners” argues that the U.S. housing crisis is getting more severe and that due to excess inventories a further 10% decline beyond the 30% drop to date can be expected. “There are an estimated 7m homes empty today, and an estimated 7.7m houses and condominiums behind on their mortgage payments. This is tantamount to a shadow inventory. More than 4m of those are now delinquent and going through some form of foreclosure or related procedures that will put them on the market in the next year or two….Home sales are depressed, too, by competition from some 6m rental vacancies, or 11 per cent of total rental supply. Median asking rents have been declining by an estimated 3.5 per cent over the past year – and that is accelerating. There is no cheer in the new residential numbers either. January’s new home sales plunged by more than 11 per cent month-on-month….Roughly one in four mortgages today exceeds the house’s value – approximately 10.7m homes…. An additional 2.3m homes had less than 5 per cent equity.”

As to Canada, Barry McKenna in the Globe and Mail’s “Bringing down the house”discusses a recent IMF report on developed country mortgage market differences which suggest some of the reasons why Canada’s boring markets stayed boring are: “On the lender side, a clutch of institutions dominate the Canadian market. Mortgage brokers are rare. Most mortgages are held and serviced by the same institutions that offer the loans. Mortgages are typically backed by deposits and rarely turned into securities and sold off to anonymous investors. And most notably, government policy is neutral when it comes to owning or renting, with no tax incentive to take on debt. Banks have sweeping powers to tap mortgage holders’ future wages if they stop making their payments, making Canadians more cautious about borrowing too much. “

Things to Ponder

In the Financial Times’ “The challenge of building fixed income indices” Sophia Grene discusses the problems with bond indices. Some of the bond index problems are due to: bonds don’t trade on exchanges so are difficult to price, some indexes were not developed to be tradable, the conflict of interest inherent in an “‘over-the-counter’ nature of the asset class, the fixed income index world is dominated by groups either owned or closely affiliated with investment banks”, and most significant flaw id that “inherent flaw of corporate bond indices that the most heavily indebted companies are likely to represent a larger proportion of the index”.

Nicholas Timmins reviews a David Willetts book (The Pinch: How the Baby Boomers Took Their Children’s Future – And Why They Should Give it Back) in the Financial Times’ “Make the boomers pay their way” in which he argues that “The baby boomers have stolen the world and they should give at least part of it back.” What might have been perceived to be a disadvantage (more competition for everything), their “sheer weight of numbers refashioned culture. They have gained enormously from rising house prices; from the final salary pension schemes that are becoming non-existent for new workers but which will still pay out for them; from the higher education and skills that many gained as university provision expanded; from low inflation; and from dramatic rises in life expectancy.” (Well, not quite: who will buy their houses at peak prices? Private sector DB pensions are turning out not all they’d been drummed up to be and they apply to fewer and fewer workers.) Sounds like an interesting perspective and perhaps the book might be worth reading (I have not as yet done so.)

The Economist’s “East or famine” has an interesting graph showing that, despite the rapid Asian growth over the last few decades and the much faster Asian recovery after the recent market and economic debacle, “the figures suggests that the shift in economic power from West to East can be exaggerated”; in nominal terms Asia’s share of the world GDP dropped from 29% in the mid-90s to about 27% today, though it has increased at PPP from 28% to 35%. Still, Asia’s GDP is only half that of the West. The other even more interesting graph looks at GDP share over the last 1000 years. Asia’s share was >50% up to about 1800 then dropped to under 20% in the mid 20th century, but expected to rise to close to 50% again by about 2025.

The Welt’s “Nach dem Euro wackelt nun das britische Pfund”asks if the British Pound is next right after Greece? It also has an interesting (though difficult to read) over/under-valuation table of currencies in terms PPP (purchasing power parity); it shows that on a PPP basis the Euro +7.5% over-valued, US$ -11%under-valued relative to the Canadian dollar (thanks to Jurgen S. for pointing out the article). (The Canadian dollar has strengthened further since this article was written.)

In the Financial Post’s “Soros is right about capitalism” Diane Francis shares some interesting George Soros perspectives that she brought back from Davos:”Two forms of economic organization — state capitalism and international capitalism — are in competition with each other and neither is attractive,” he writes. “International capitalism is inherently unstable because it lacks adequate regulation. It is also highly unjust favouring the haves over the have-nots. State capitalism will lead to conflicts.” By state capitalism, Soros is talking about the Russian, Chinese or Venezuelan models, where governments are players/combatants not referees. Somewhere between the two lies a better capitalism, along with rules that impose moral behaviour.” Soros blames it all on Milton Friedman’s “market fundemantalism”.

And finally, the Economist’s “Race to the bottom” argues that “the lesson of all this is clear. If all the issuers of paper money want to see their currencies depreciate, then the only answer is to own an asset that central banks cannot debase—namely, gold. Part of bullion’s rise to more than $1,100 an ounce this year must be attributed to the conviction that governments will inflate away their debts.” However the article continues with questions about the likelihood of inflation given “the amount of spare capacity in the global economy”. For governments trying to deliberately debase their currencies, creditors will demand higher interest rates and ultimately the advantages of a strong currency will be seen. (Thanks to David Rosenberg for pointing out the article.)


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