Hot Off the Web- March 16, 2010

Personal Finance and investments

In the Financial Post’s “Loonie surge triggers hedging” Eric Lam discusses hedging of the rising Canadian dollar. (In retrospect, this would have been a great idea 12-15 months ago when the Canadian dollar was trading in the low-80s relative to the U.S. dollar, however today at >$0.98, it feels like closing the barn door after the horses are gone. The problem, as always, is that that we can’t predict the future, and currencies are particularly difficult forecasting area. My personal approach is to diversify geographically and use the currencies as just another dimension of diversification. But not everyone agrees and a few hedge most of their exposure, others take the middle road and hedge about half their foreign currency exposure. )

In WSJ’s “Investors tap into deathbed bond deals” Maremont and Saha-Bubna write that “In a little-known practice, investors can recruit a terminally ill person and together they can scoop up these bonds on the open market at a discount. When the ailing bondholder dies, the surviving co-owner can then redeem them at face value and potentially turn a quick profit.  Companies have typically included the macabre provision as a way to allay fears among ordinary individual investors—elderly couples who might worry that one spouse could die before the bonds mature, possibly exposing the survivor to a loss.“ (“Recruiting the terminally ill” sounds too macabre for my taste, but there may be other applications as well.)

John Heinzl in Globe and Mail’s “Suing an advisor is like mixed martial arts” discusses the challenges of going after an unscrupulous adviser after losing one’s assets. He refers to Small Investor protection Associationwhere a “volunteer-based organization helps investors navigate the often intimidating legal and regulatory maze they face when trying to recover losses.”

Brett Arends in WSJ’s “How to salvage your retirement”suggests some things under your control and you can do to “save yourself”: (1) delay your retirement, (2) scale back your retirement costs, (3) use an immediate annuity (and leave nothing to heirs)? (4) save, save, save

RD from Oklahoma wrote me about his experience with some of the Couch Potato Cookbookportfolios. He achieved a low cost implementation as a DIY investor using ETFs, rather than mutual funds. You might find it and interesting site to peruse.

The frequency and intensity of warnings about the high risk of (long) bonds is reflected in a couple of articles: Jonathan Chevreau’s “Bond ladders let you sleep easier” and David Pett’s “Bond market ‘highly vulnerable’” article where he is quoting Tim Bond “”For investors, the point here is that the historical odds do very much weigh on the side of this rise in yields occurring, which tends to suggest that we should determine our investments with the view that a large rise in government bond yields is not so much a risk as an absolute inevitability.”


Some of the interesting articles in the past week on the pending public pension system crisis in the U.S. include the Barron’s “The $2 Trillion hole” in which Jonathan Laing reports that there are “23 million state and local public employees” and 80% of these have DB pension plans. Estimates vary, but $2-3T (that’s Trillion not Billion) might be the right ballpark number for the shortfall; and bankruptcies are likely. On the same topic  the WSJ’s “California’s college dreamers” suggests that the root cause of 32% tuition hike at University of California placed at the doorstep of the generous public pension promises based on California legislature’s “reckless gamble that makes Wall Street’s bankers look cautious.” They assumed investment return of 8.25% in perpetuity. “If a firefighter started working at the age of 20, he could retire at 50 and earn 90% of his final salary, in perpetuity.” (As an American tax-payer told me, “we can afford to pay for one police department but not two or three.)

Scott Perkins, the president of the Association of Canadian Pension Management in a self-serving Financial Post article “Public pension myth” writes that our collective goal is “more retirement income choice for more Canadians”. Mr. Perkins, whose association is” the voice of Canadian retirement income providers”, who are significant contributors to the disaster that Canada’s private pension system has become, is mistaken; Canadians don’t need more “choice”, they need more “retirement income”. The easiest way to achieve that is to stop the drag of the high fees and active management of the retirement products sold by Mr. Perkins’s employers.

In the Financial Times’ “Reason to look again at CDC schemes” Kevin Westbrook suggests that the current DC plans rapidly replacing the rapidly disappearing DB plans need to replaced by Collective Defined Contribution schemes instead. The CDC offers: “First, a pension – not an account balance needing conversion into an annuity. Next, a pension that does not require complicated individual long-term investment decisions from the member. Those decisions can be taken collectively by professional money managers. Finally, the outcomes of these arrangements are higher (20-25%) and more stable (predictable) than the outcomes from conventional DC schemes.” “They do not share risk between the member and the company (to be blunt, the company doesn’t want to share) but rather they share risks between members of the schemes. There is a smoothing of outcomes that results in transfers between groups of participants – inter-generational sharing of outcomes to deliver benefits that are on average higher and more predictable. What happens in practice is that the increases attaching to the pension are not guaranteed in advance, but are adjusted in the light of current financial conditions to keep the overall scheme in balance. In extremis, even the basic pension could be cut to maintain the scheme’s stability.” (It sounds a little CPP-like. No question that new retirement income architectures are required, but while intra-cohort longevity risk sharing might be required, I not sure that intergenerational transfers are a requirement for a viable architecture.)

If I recall correctly, after last December’s Whitehorse conference to pensions there reference to more consultations this spring before additional reforms are tabled in May 2010. The only government consultations I’ve come across (thanks to a fellow Nortel pensioner DA) so far this spring is about Financial Literacy (not pension reform). The closest that pensions are mentioned is in Chapter 6 (Planning for Retirement) where it explains how wonderful Canada’s retirement income system is as compared to other countries. The way I read this document is that, if in fact there is a problem, the problem is that Canadians are stupid or financial illiterates and they don’t understand how to get the value out of Canada’s wonderful retirement income system, and this literacy program will solve the problem. So, while I suspect that pensioners could show up to these consultations and say that we disagree with the premise and the private sector pension system is broken (DB pensioners are not protected, DC pensioners are victimized by predatory financial services industry fees and often similar advice), the basic premise of these consultations is that the government going to the fix the financial literacy problem. Has anyone seen another federal government run pension related forum/consultations this spring? (Perhaps I just don’t recall correctly, and there was no plan for such consultations?) The Ottawa Citizen’s take of this Task Force can be read at “Money matters”.

Real Estate

In Florida, Jeff Ostrowski writes in the Palm Beach Post’s “Foreclosures: Housing defaults soar in Palm Beach County, Treasure Coast” that February Palm Beach County foreclosures are up 63% from January and 68% from previous year; these are much higher that Florida’s 15% increase and U.S.’s 2% dip over previous month. “There’s little question that Florida faces a flood of foreclosures that threatens to hold down home values for years. Florida’s rate of one foreclosure filing for every 163 households was the third-highest in the nation.”

U.S.-wide The Washington Post’s Renae Merle in “New round of foreclosures threatens housing market”reports that “about 5 million to 7 million properties are potentially eligible for foreclosure but have not yet been repossessed and put up for sale…As these foreclosed properties add to the supply of homes for sale, they could undercut housing prices”. “The percentage of borrowers, who are seriously delinquent on their mortgage, meaning they have not made a payment in at least three months, reached a record in the fourth quarter (2009)”; the delinquency rate was 9.67% versus the 2005-2006 average of about 2%! Banks have been holding back from putting foreclosed properties on the market, but sooner or later their growing backlog will force their hand.

Things to Ponder

In the Financial Times’ “The truth about speculators: They are doing God’s work” Paul Murphy argues that despite the daily attacks by politicians that “speculation is evil since speculators produce nothing of tangible value”, however they “make markets more efficient by providing the liquidity which makes trades possible and, ultimately, produce more accurate prices. They help us allocate capital as efficiently as we can.” Murphy quotes from Philip Carret’s 1930 book “The Art of speculation”that “the speculator is the advance agent of the investor, seeking always to bring market prices into line with investment values, opening new reservoirs of capital to the growing enterprise, shutting off the supply from enterprises which have not profitably used that which they already possessed.” The speculator is the “advance agent in seeking the most profitable channels of investment, increasing the marketability of investment holdings, helping to support the financial machinery which is designed primarily for the service of the investor”. Today ““advance agents” are telling us that there are problems with too much public debt in the western world, and simply legislating or regulating those agents out of the way is not going to fix things.”

In the Financial Times’ “How to handle the sovereign debt explosion” Mohamed El-Erian discusses how poorly we understand the systemic changes in progress as a result of sovereign debt explosion in the world. “Timely recognition is necessary but not sufficient. It must be followed by the correct response. Here, history suggests that it is not easy for companies and governments to overcome the tyranny of backward-looking internal commitments. Where does all this leave us? Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood. Yet, with time, it will prove to be highly consequential.” The Economist’s “Apocalypse, not now- The alarming future for Japan’s finances” looks at Japan’s specific situation with bonds yielding 1-2% and 20 year bonds still yielding 2.1%, despite the fact the government bonds “equivalent to 45% of the country’s GDP” are due to roll over this year. Yet for various reasons, e.g. most debt is sourced from domestic investors, the day of reckoning won’t come this year. In the Financial Times’ “S&P issues warning over America’s top-tier rating”the authors report that “The triple-A rating of the US is at risk unless the country adopts a credible medium-term plan to rein in fiscal spending.” There is also risk the U.S. dollar will lose its reserve currency status.

John Authers, in the Financial Times’ “World’s richest man”, looks at Mexico’s Carlos Slim, who was named by Forbes as the richest man in the world. “The secret of successful investing has always been to find inefficient markets and exploit them. Emerging markets, for all their development in recent years, still offer more market inefficiencies than the rest of the world. That is reason to entrust money to canny investors who understand the emerging markets. But it is not such good news for people who live in those economies.”

The Los Angeles Times in  “Connecticut attorney general sues Moody’s, S&P over debt ratings” reports that according to attorney general Blumenthal “Moody’s and S&P violated public trust — resulting in many investors purchasing securities that contained far more risk than anticipated and that have ultimately proven to be nearly worthless”. He said that the ratings process was “deceptive and misleading.” He said lucrative fees that Moody’s and S&P received for rating the investments affected their objectivity in assessing the debt. Companies issuing the investments paid Moody’s and S&P to rate them.” (This can’t be true- financial professionals in obvious situation of conflict of interest acting to enrich themselves at the expense of the public? No, not professionals like accountants, actuaries, investment managers, etc. Is this a movie that I’ve seen before?)

Jason Zweig in WSJ’s “When bubble burst: Companies won, investors lost” discusses the societal value derived technology investments despite individual investor’s losses. “Like most bubbles, the tech mania was rational and foolish at the same time. Investors foresaw a market opportunity that would be explosively profitable. Then, having no sure way to know who the ultimate winners would be, they bid up every company having anything to do with that opportunity. The Internet did change business forever, just as investors had predicted. And a handful of technology companies did strike it rich. But by far the biggest beneficiaries of the Internet boom were the companies that adopted the new technology rather than those that provided it.”

You might be interested to read the NYT story  “Investors who foresaw, and jumped on, the meltdown”and videos of last Sunday’s 60 Minutes- part 1 and part 2 about a few individuals who bet against the worthless CMOs; this is discussed in Michael lewis’s new book “The Big Short”. They did their homework, identified the garbage being peddled as AAA rated investments and then had the courage of their conviction to their money on the line and got huge payoffs. How the combination of Wall Street’s bonus culture and sense of entitlement continues even today, even though Wall Street insiders almost destroyed the financial system. The two videos are about 24 minutes in total. Also discussed is that there is still no reform and ”buying a credit rating” continues, “CDSs are an insurance product but not treated as such” and ”Wall Street lost any sense of responsibility”.(Thanks to RD for bringing this to my attention.)

And finally, you might be interested to look at some of the lectures of Yale’s Robert Shiller’s free online course on Financial Markets; I haven’t listened at any of the lectures but have perused some of the PowerPoint slides and you might find these interesting. (Thanks to’s Ken Kivenko for suggesting the link.)


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