Contents: Beating the bond market, longevity insurance protects against outliving assets, don’t put US dividend stocks into TFSAs, protection against the return gap, Canadian bank deposits safe under bail-in{ yes and no, Canadian home prices up 0.4% in March, catering to Florida’s new renters-the foreclosed, multi-employer pension cuts? Gold/Bitcoin/money in a world of central bankers running the printing presses at the behest of politicians, labor crisis in eldercare, the root cause of high US healthcare costs are large employer health insurance plans managed by insurance companies on a cost plus basis, inventor/entrepreneur Ray Kurzweil on living forever?

Personal Finance and Investments

Jason Zweig reports in the WSJ’s “The bond market can’t be this easy to beat- can it?” that active intermediate bond funds beat the indexes by 1.8% the last 12 months, resulting in investors piling into these funds even as they are deserting active stock fund managers. But investors might be making a mistake by assuming that ”the laws of financial physics have been suspended”. The outperformance is largely due to managers taking more duration (interest rate) and credit risk, and Zweig recommends that you check out how the active bond funds performed compared to the indexed based ones in a bear market.

In Bloomberg’s “The calamity of so long life: How not to outlive your assets” Carla Fried discusses the implications of not just women’s longer life expectancy at age 65 (20 years vs. 17 for men) but also the less understood variability of individual longevity; 65 year old women in the top health quartile have a 62% and 42% chance of living to age 85 and 90 respectively. Coupled with their greater longevity, women also have more conservative portfolios, thus increasing the risk that they run out of money. Some of the suggestions to ameliorate the problem include: delaying start of Social Security payments and considering the purchase of a much cheaper longevity annuity (longevity insurance) where one buys a lifetime income stream starting at age 85 with a single premium at age 65,as a backstop against living too long. (e.g. see some of my longevity insurance blogs at Longevity Insurance )

In the Financial Post’s “Where should I hold U.S. dividend stocks” Jason Heath discusses asset location instead of asset allocation for Canadian investors. He discusses the trade-off between the placement of various assets in taxable/RRSP/TFSA accounts, as well as W-8BEN to reduce the withholding tax to 15% on US dividends which is then recoverable as a foreign tax credit on the Canadian tax return. “Dividends on U.S. stocks held in an RRSP are tax-free…however… U.S. dividends earned in a TFSA are subject to withholding tax. Since TFSA earnings aren’t taxable on your Canadian tax return, the withholding tax can’t be claimed as a credit and part of your potential investment return is forever lost… Other things being equal, I think U.S. stocks should be held in a non-registered or RRSP account,”

In the Financial Post’s “How to avoid the dreaded return gap” Michael Nairne discusses the well known phenomenon that typically the “average investor’s returns from their fund investments lag the returns earned by the funds themselves” because investors invariably get their timing wrong and end up “buying high and selling low”. He has four reasonable recommendations “to avoid inflicting this costly return gap on your portfolio”: define your strategic asset allocation, rebalance back to target allocation as allocation drift with market movement, don’t invest through the rear view mirror, and modify strategic asset allocation as your circumstances change.

In the Financial Post’s “Canadian deposits safe under bail-in, but no guarantee: Carney” Canadian Press reports that according to Mark Carney “the Canadian government has pledged not to dip into individual deposits. Carney did not answer whether there should be a total hands-off treatment to non-secured accounts as well, which in Canada would mean deposits over $100,000.”

Real Estate

Canada’s March 2013 Teranet-National Bank Home Price Index is up 0.4% during March and is up 2.6% over previous year. March is first up-month following six consecutive down-months. Victoria was the only city down in March while Calgary and Edmonton were the two cities showing increases in excess of 1% in the month. Ottawa, Toronto and Montreal had 0.1%, 0.2% and 0.7% increases during March, respectively.

In Palm Beach Post’s “New kid on the block: Corporate titans” Kimberly Miller reports that interest of major investors are diving into the Florida’s distressed real estate market with not just the intention of selling perhaps at a profit in 5-10 years, but also because “…there is a long term paradigm shift in the affordability of people to own homes. There is a definite portion of this population who will be renters for a while in nice communities…more than 109,000 Palm Beach County homes have been foreclosed since 2008-creating renters out of homeowners…”  The article also contains a table showing the “Homestead exemptions decline” indicating a drop of 172,045 fewer homestead exemptions in 2012 compared to the peak of 4,505,042 in 2007, as a measure of home ownership rates. (The silver lining of non-homesteaders, heavily discriminated against on property taxes, is that the fewer homesteaders there are, the more homeowners there are who pay their fair share of the property tax burden, thus decreasing the unfair share being carried by non-homesteaders.)

Pensions and Retirement Income

In WSJ’s “Union-employer proposal would hit some retirees” Kris Maher reports that “a coalition of unions and employers is proposing changes to the federal law that governs pension plans of about 10 million people…” Of these 1450 multi-employer plans funded by groups of employers in “construction, trucking and retail food…more than half are funded to at least 80% level of their liabilities…but 150 plans are headed toward insolvency”. For the plans in trouble the proposal is to change the law to permit reduction of benefits to those already retired to prevent deeper cuts later. The coalition is also recommending a new type of pension plan which offers less risk to employers but more security that offered by 401(k) plans. (A sign of things to come!?!)

Things to Ponder

Diane Francis in the Financial Post’s “It’s a mad, mad market world” discusses Bitcoin’s fall from $266 peak to $60 in a matter of days, followed shortly by the fall of gold prices to under $1,400 almost 30% off the peak of about $1,900. Francis finds surprising that given that millions of people are worried about “…the fact that governments continue to ruin their currencies by racking up debts, printing money and taking draconian action against taxpayers. In the past, the fearful have bought gold and driven up bullion prices to nearly US$2,000 an ounce in recent history. What’s curious is that gold prices have ebbed, the Bitcoin is not a viable alternative and yet fears remain.” She writes that gold bugs suspect a conspiracy of central bankers to “scare people away from gold and silver by driving down their prices. (Certainly possible but there is no evidence.) When gold hit $1,900, the Federal Reserve panicked because they realized with the dollar deteriorating so rapidly, compared to bullion prices, that soon it would also deteriorate its exchange value with other currencies. The Fed had to cap the price of gold and stop the rise.” In the WSJ’s “Gold on track for biggest one day fall since 1983” Shumsky, Freeman and Wallop also discuss the (April15) in day drop of gold of about 9% which they attribute to “a lot of margin calls being triggered” due to the drop of gold below $1,500. In Bloomberg’s  “Paulson loses more than $300M as gold declines” Katherine Burton reports that “Billionaire John Paulson lost more than $300 million of his personal wealth on his gold bet, as the precious metal fell to its lowest price in almost two years. “ And David Berman in the Globe and Mail’s “All that shine and no substance: the reality of gold” writes that the gold slump has left a lot of investors wondering “how this setback could possibly happen to an asset that has long been touted as a haven in a risk-filled world”. He opines that “Let’s be blunt: Gold has had nothing to do with safety over most of the past decade. During its 650-per-cent rise since 1999, whatever virtues it held as a hedge against economic calamity or inflation were pushed aside by speculative fervour… But gold has always had shortcomings as a haven. It pays no dividend, generates no profit and has little industrial use, making it impossible to value the metal in the same way as most other investments.” And Bloomberg’s “The price of gold is crashing. Here’s why” indicates that according to a JPM report global (30 countries representing >90% of world economic output) inflation has fallen from 4% in 2011 to 2.5% in February 2013 and is heading to 2% toward the end of the year.

Furthermore Terence Corcoran in the Financial Post’s “Gold versus Bitcoin” pulls it all together concluding “With Bitcoin, there appears to be nothing there. With gold, at least there’s the gold.” The article also contains a bankers explanation of Bitcoin “Bitcoin is ‘regulated’ by its peers and mathematics. And Bitcoin is not a currency like fiat money. It is a value transfer system which is given value only by its users. So the ECB, FED, etc. have no mandate to control a ‘virtual currency’ just because they call it (Bitcoin) that! It will just go underground. Bitcoin is like Light and Air. Free to use and transfer. Owned and issued by the people and NOT the State!” However, Corcoran reports that central banks already fired the initial salvo when “The ECB warns that bitcoins “could have a negative impact on the reputation of central banks” and are already technically subject to central bank regulation.” (And sure enough that Bitcoin basically puts in question not just the reputation of central banks, but through the central banks’ arbitrary currency creation/debasement actions puts in question the meaning of money which we have come to trust at least in the developed world as a store of value of assets one has accumulated for one’s retirement years. Some might say that it is a wake-up call on the house of cards we are building? Donald Coxe comments on the money vs. gold as a store of value point in a Globe and Mail interview where he concludes that “But that doesn’t mean gold won’t regain its status as the established store of value. Paper money might have replaced it if central bankers had remained central bankers and not major agents in national economic policies and priorities.” Those who are thinking about gold to speculate on its price I wouldn’t bother, but those who think of it as (a small) insurance against financial catastrophe might have a point…and the entry price is 30% lower than a few month ago.)

In the WSJ’s “As America ages, shortage of help hits nursing homes” James Hagerty reports on the on the worsening labor shortage of “one of the nation’s fastest growing occupations-taking care of the elderly and disabled- just as the boomers head into old age. Low wages (<$12/hr), high injury rates (5.3/100 full time workers, more than double the rate for manufacturing, construction and all industry average, and on par with animal slaughtering, and only 15 and 30% lower than sports teams and fire fighters!) and the “work can be unpleasant and physically draining”. However the need will grow in line with the exploding over age 65 population from 40M in 2010 to 73M in 2030 and almost 90M by 2060. The quality of care is generally negatively correlated with the turnover rate of nursing aides, which ranges between 43% and 75% a year!

In Bloomberg BusinessWeek’s “The reason healthcare is so expensive: Insurance companies”  Jeffrey Pfeffer reports that in the discussion about reasons for the high cost of US healthcare compared to other developed countries there is little mention of the chief culprit that 20 years ago “…health-care administration cost somewhere between 19 percent and 24 percent of total spending on health care…” but a decade later this has grown to 30% of the total cost while the percentage of people involved in healthcare administration has grown to 25% of total healthcare related workers. Pfeffer argues that the primary reason for this is that large employers typically hire insurance companies to administer the health insurance plan on a cost-plus basis so “Because insurers are paid a fixed percentage of the claims they administer, they have no incentive to hold down costs. Worse than that, they have no incentives to do their jobs with even a modicum of competence.”

And finally, in the WSJ’s “Will Google’s Ray Kurzweil live forever?” Holman Jenkins writes about prolific inventor and entrepreneur Ray Kurzweil who believes that “his chances are pretty good of living long enough to enjoy immortality.” He explains that people tend to think linearly and “They have a hard time grasping the “accelerating, exponential” change that is the nature of information technology… Mr. Kurzweil expects medical technology to be adding a year of life expectancy every year. We will start to outrun our own deaths.” He figures that while today “when hardware crashes (person dies)… the software dies with it”. In time “we will become software and the hardware will be replaceable”.