Contents: Mass market advice, target-date funds suitable default? structured notes warning, Canada home prices decline, Toronto sales off 50%, Vancouver second least affordable in the world, Palm Beach County and Florida home sales and prices up, Ontario approves Nortel pensioners’ move to LIFs, Nortel creditors mediation-failed, required assets for retirement income stream, stagnant middle class? Inflation higher or lower than CPI-it depends? money glut to lead to asset bubbles, QE’s currency impact? currency wars? central banks losing war on gold? and “hurry up and die”

Personal Finance and Investments

In the NYT’s “Finding advice for more modest retirement investments” Ron Lieber discusses the growing field of services aiming at customers who have <$500,000 retirement assets, are unwilling/unable in “selecting the right mix of low-cost investments, rebalancing at the right time and not buying and selling out of fear or greed” and are unlikely to have access to first-class advisors. The latest entry mentioned is Rebalance IRA which provides access to advisors to discuss your goals and then implement a portfolio with low cost index based ETFs and rebalance portfolio as necessary; all this for an annual 0.5% of assets with a $500 minimum and a $250 start-up fee. (Not available to Canadians as you have to move your portfolio to Schwab or Fidelity.) The company’s investment advisory board boasts of luminaries like Charles Ellis, Burton Malkiel and Jay Vivian. The entrepreneur driving the service argues that “Most situations are well-handled by software…In the long term, that’s going to be the way most people get their advice. We’re replacing the investment adviser with software.” This service costs a little more than some other similar ones, but it supposedly offers more human contact. Lieber opines that eventually most discount brokers will offer this type of service. (Note the growing interest of trying to address the underserved mass market which I also discussed last week in reference to Robert Merton’s seminar.)

In WSJ’s “’Target’ Funds still missing mark on returns even as their popularity surges among investors” Jonnelle Marte reports the growing assets pouring into target-date funds in the US. These funds have now accumulated $460B because they are “among the few permissible “default options” in many retirement plans…”  Unfortunately target date funds are not one-size-fit-all and age is not the sole determinant of asset allocation. Pressure from lawmakers after the 2008 crash has led to a reduction to equity exposure, bellow to what might be appropriate to those who could bear more risk; the article suggests that those in that position could direct new contributions into all equity investments while leaving existing savings in target-date funds.

In Bloomberg’s “A devil’s bargain faces investors in popular structured notes” Lewis Braham discusses new structured notes from JPMorgan, Bank of America and Goldman Sachs promising “150 percent of the upside of the stock market but only 90 percent of the downside”. However the fine print then adds “The notes are designed for investors who seek a return of 1.5 times the appreciation of the S&P 500 Index up to a maximum return of 14.00% at maturity (about two years). Investors should be willing to forgo interest and dividend payments and, if the Ending Index Level is less than the Initial Index Level by more than 10%, be willing to lose up to 90% of their principal.” The article (correctly) argues that “The real costs of issuing these notes are difficult to measure because the cost of hedging and leveraging are baked in. That said it’s likely that diligent investors could get similar results more cheaply themselves.” (Buyer beware! Not only costs are difficult to understand, but you don’t get all the upside due to caps, and there is credit and liquidity risk.)

Real Estate

The December 2012 Teranet-National Bank House Price Index indicates a 3.1% increase in Canadian house prices in 2012 and it was the 13^th month of deceleration of annual price increases. “The 12-month gain exceeded the cross-country average in six metropolitan areas: Hamilton (7.4%), Toronto (6.3%), Halifax (5.6%), Quebec City (4.2%), Calgary (4.1%) and Winnipeg (3.9%). It lagged the average in three markets: Montreal (3.0%), Ottawa-Gatineau (2.6%) and Edmonton (1.5%). Prices in Victoria were flat from a year earlier and prices in Vancouver were down -2.0%.” The index declined -0.4% during the month of December. The prices were “down from the month before in eight of the 11 markets surveyed” with declines in Montreal (−0.3%), Ottawa-Gatineau (−0.1%), Halifax (−0.7%), Winnipeg (-0.7%), Toronto (−0.3%), Edmonton (−0.1%), Vancouver (-1.0%), Calgary (−0.9%); prices were up in Quebec City (1.7%), Hamilton (0.9%) and Victoria (0.9%).

In the Financial Post’s “Toronto housing sales plummet 50% in a year” Garry Marr reports a year over year drop of 52% in Toronto area real estate sales and a 29% rise in unsold inventory. The article adds that one must really separate the market between condo prices which were essentially flat for the past year and low-rise housing which increased by 16%, the problem being lack of availability of low-rise homes due to “land and constraints, regulatory requirements and a complex approval process”. Also the Financial Post’s “Vancouver housing ranked second least affordable in world” reports that “Vancouver ranks as the second least affordable major city in the world after Hong Kong when it comes to buying a house, according to an international survey released this week.”  The median home price of $621,300 in the city is 9.5 times the gross annual median household income”. The blame again goes to “urban containment policies” limiting the amount of land available in the city.

In her Palm Beach Post blog  “County home sales surpass peak market year of 2005” Kim Miller writes according to the Realtor Association of the Palm Beaches countywide there was a 10% increase in single-family home sales in 2012. While median prices at $229K were down 43% from $408K in 2005, volumes were the same as 2005. Palm Beach County inventory was at 5.9 months, a 31% decline from 2001. Florida-wide sales were also up 16% from previous year and median prices were up 14% at $154K. The article also reports that PBC condo/townhome sales were up 6% in December over 2011 and “The median sales price jumped 34 percent to $98,750 from last year’s $73,500.” (As indicated last week, many people on the ground in Florida have trouble digesting the numbers in the last sentence as being representative of their personal experience.)

Pensions and Retirement Income

The Ontario Regulation 10/13-Pension Benefit Act-Nortel Pension Plans which “…came into force…establishes the method for determining the commuted value for those retired members and other plan beneficiaries who are in receipt of a pension and decide to make use of the option to transfer the value of their pension entitlements to a Life Income Fund (LIF) as a result of the wind up of the Nortel pension plans.”

On January 24, 2013 Chief Justice Winkler announced (see Nortel Mediation Website) that the mediation effort has failed; he “concluded that further efforts at mediation are no longer worthwhile.”  (It’s not clear what the next steps might be, given the multijurisdictional nature of the claims. We are now already four years into the bankruptcy process. Perhaps the professionals, mostly lawyers and financial advisors, who over these past four years already collected about $650M in fees from the Nortel estate, have decided that the feast should continue since there is more money to be had. Some have suggested that resolution might take as much as another decade. Justice delayed is justice denied! As far as the >10,000 pensioners are concerned, given their average age in excess of 75, many will likely see no recoveries from the bankruptcy of their >40% loss of their pensions. The federal government has so far refused to modify the BIA/CCAA to give priority to pensions; if they acted on this required legislative change, the pensioners’ wait would be over.) For background you can read the Toronto Star’s Vanessa Lu report entitled “Nortel settlement talks extended a second time” which indicated that 100 lawyers and financial advisers are participating in person trying to agree on how to divide the $9B assets among creditors hailing from Canada, US, UK and “all continents except Antarctica”.

In the Economist’s “The rule of 28?” Buttonwood opines that the current (UK) 3.6% rate of an inflation linked annuity would suggest a multiplier of 28 to calculate the required assets to deliver a certain annual inflation adjusted income.

Things to Ponder

In the WSJ’s “The myth of a stagnant middle class”  Boudreaux and Perry challenge conclusions of some analysts that middle class has stagnated economically given the flat middle class wages over the past three decades. The authors table counterarguments such as “…spending by households on many of modern life’s “basics”—food at home, automobiles, clothing and footwear, household furnishings and equipment, and housing and utilities—fell from 53% of disposable income in 1950 to 44% in 1970 to 32% today… the dramatic fall in the cost (and rise in the quality) of modern “basics” is that, while income inequality might be rising when measured in dollars, it is falling when reckoned in what’s most important—our ability to consume.” Another argument is relating to the government measure of inflation arguing that “the CPI overestimates inflation by underestimating the value of improvements in product quality and variety”. And speaking of the CPI and arguing that it underestimates actual inflation, in the InvestmentNews’ “Why Krugman and his clan are dead wrong about inflation” Peter Schiff also argues that the CPI is a flawed measure, and the actual inflation has been much higher than suggested by the CPI as compared to 1970 because ““these measures (CPI) report not just on price movements, but on spending patterns, consumer choices, and product changes. This is fine if the goal is to measure the cost of survival. But that is not the purpose for which these metrics are meant to be used.” They arrived at this conclusion by creating a basket of basics such as “eggs, new cars, milk, gasoline, bread, rent of primary residence, coffee, dental services, potatoes, and electricity” In the 70s CPI rose 112% while the basket rose 121%, however during the decade ending in 2012 CPI rose 27.5% while the basket rose at almost double that rate by 52%. So “…while nominal price increases rose much faster in the 1970’s, the degree to which the prices rose relative to the CPI was much, much higher more recently.” (The nice thing about being an economist seems to be that if one looks hard enough then one can always find numbers/arguments to justify what one is trying to prove. As far as inflation is concerned my sense is that the cost of the stuff that I buy is increasing faster than inflation.)

In Reuters’s “Davos leaders uneasy over glut of easy money” Paul Taylor reports that some Fed dissidents fear “central bank’s stimulus actions risk a surge in inflation after this year”, other suggest that “the most immediate effect of a world awash with capital has been “to paralyse, confuse and distort investment decisions””, or that  “Large financial flows were creating dangerous pockets of excess capital in some places, while simultaneously cutting off access in other places”, and “Capital superabundance will increase the frequency, intensity, size and longevity of asset bubbles…”

In the WSJ’s “QE’s impact defying logic” Tom Lauricella writes that confusion reigns supreme in trying to explain why currencies don’t go into a prolonged decline when the financial markets are flooded with freshly minted money, but others suggest that so far there has been a “lack of meaningful inflation”, and as long as people believe that this will continue, QE-driven currency decline is unlikely. However in the Financial Times’ “Weidman warns of currency war risk” Michael Steen reports that the Bundesbank president warns that erosion of central bank independence will lead to competitive exchange rate devaluations. (So more currency swings are on the way, one way or another.) For example, it is reported in the WSJ that at Davos “German Chancellor Angela Merkel on Thursday stepped into a growing debate over the threat of a global currency war, taking a swipe at Japan’s recent moves to weaken the yen and warning that political leaders must not use central banks to clean up their policy mistakes.”

In Bloomberg’s “Buying gold is best bet in worst case scenario” Kasper Viita reports that Marc Faber of the Gloom, Boom and Doom Report recommends that “Everyone should keep gold in their portfolios as the precious metal will be able to offer value to investors even in a worst-case scenario… In the worst case scenario, in the systemic failure that I (Faber) expect, it would still have some value… Faber said that his “all-weather portfolio” consists of 25 percent stocks, 25 percent company bonds from emerging economies, 25 percent gold and 25 percent real estate.” Robert Shiller disagrees suggesting that gold might be heading lower but that the “US stock market currently offers a good investment case”.

In an IndexUniverse interview with James Turk entitled  “Central banks losing war on gold” Drew Voros reports Turk’s argument that the “central banks own a lot less gold than they say they do. They don’t accurately report on their balance sheet how much gold they have in the vault, and how much gold they’ve taken out of the vault and loaned to various participants in the bullion market. There’s a big difference between having physical gold in the vault and having somebody owe you physical gold. The fact that central banks don’t really report how much physical gold they really have creates a huge uncertainty in the gold market.” His view is that the total above-ground gold stock is 156,000 tonnes while the central banks claim that they own 30,000 tonnes; but Turk suggests only 15,000 tonnes. (Some might wonder should central banks start repatriating gold as reported of Germany last week, and should that in turn lead to a recall of borrowed gold say in US/France, what upward price pressure would be generated on gold?)

And finally, in the Globe and Mail’s “’Hurry up and die,’ Japan’s finance minister tells nation’s elderly” Adriana Barton reports that  in Japan “living to a ripe old age is becoming a source of shame”, because the elderly are increasingly dependent on the government and (even more startlingly) the new finance minister’s message to the elderly is to “hurry up and die”. Japan, “one of the world’s fastest aging societies”, with one-quarter of the population over 60, it’s social services have been “crippled by the financial and medical needs of the elderly”.