Contents: Scamming the elderly, tougher standards for advisers? retirement income considerations, money resolutions, housing wealth rebound less than perceived, US housing flat in October, shorting Canadian real estate?  rising retirement/pensionable ages, Nortel pensioners screwed again? hyper-inflationary threats not materialized (so far), income gap: widens in rich countries but narrows globally, academics for sale? imploding Japanese population.

Personal Finance and Investments

In the WSJ’s “Financial scammers increasingly target elderly Americans” E. S. Browning reports that “People 60 years and older made up 26% of all fraud complaints tracked by the Federal Trade Commission in 2012, the highest of any age group. In 2008, the level was just 10%, the lowest of any adult age group…Only 10% of such frauds are reported, investigators estimate. Older people often fear losing their independence if their children find out.”

In the Globe and Mail’s “Advisers, and rules they thrive by need to come out of the shadows” Brian Milner reports that “Canadian securities regulators have put off making a decision on whether to impose tougher rules on mutual fund commissions and other aspects of the relationship between financial advisers and their clients. Instead, they’re going to do some more nattering and weighing of the information they’ve been gathering.” Also in the Financial Post’s “Tougher standards for financial advisers still out of reach after years of debate” Barbara Shecter reports that the OSC has been at it for ten years, starting with “a “fair dealing model” for advisors and their clients” to now “a best interest” duty for advisors that would remove conflicts of interest by putting the client’s interests at the forefront of any investment decision.” But many doubt that this will become law of the land since “The industry has been successful historically in dominating the discussion. It will bring to bear very significant resources [and it’s clear] they’ve done that here”. (This does not violate the Golden Rule, mentioned below.)

In the WSJ’s “Rethink your retirement income” Kelly Greene looks at retirement income needs. Some observations included pertain to: the rule of thumb on the amount needed for retirement is 75-85% but it is heavily influenced by individual factors (e.g. savings rate before retirement, actual expenses in retirement), a withdrawal rule of “5% of assets” results in about the same probability of exhausting assets as the “traditional 4%- rule” (with annual inflation adjustments), statistics suggest that people’s spend rate actually decreases with age during retirement, lifestyle (people forget that some things are wants, not needs), planning for shocks (“illnesses, long-term care and extreme longevity”)

In the WSJ’s “New Year’s money resolutions to think about” Daniel Lippman lists the following money resolutions to consider: “make a budget and stick to it…pay down debts…make an estate plan…get serious about retirement (are you saving enough)…get an insurance checkup…review your portfolio (consider your risk tolerance, cost of funds)…create an emergency fund”.

Real Estate

In S&P Case Shiller report entitled “How the cities did in October 2013” David Blitzer has an interesting table which includes not just peak-to-through, peak-to-current and recovery from recent lows, but also includes a column indicating inflation since the peak. Blitzer explains that to get the actual decline in housing wealth, one must add the “2006 peak-to-current decline” to “inflation since peak”; therefore, for those interested in Florida numbers consider Miami, where peak-to-current is -38.2% while inflation is 15.1% for a decline in housing wealth since 2006 in excess of 53%. You can also see the monthly October 2013 Indices at S&P Case-Shiller Home Price Indices. The10 and 20 city indices had 13.6% YoY increases, but the month of October increase was just 0.2%, though Miami/Las Vegas/Phoenix/Los Angeles showed increases of the order of 1%. However in the Palm Beach Post’s “Palm Beach County housing market cools in November” Kimberly Miller reports that the Realtors Association of the Palm Beaches indicated that 19% fewer single family homes were purchased in November compared to October and prices remained unchanged compared to October at $252K.

Driven by Canada’s perceived housing bubble, in the Financial Times’ “Short-focused fund to launch in Canada” Camilla Hall reports that the Spartan/Libertas Real Asset Opportunities Fund will launch in Toronto in Q1’14 which “reflects broader investor interest in shorting or hedging risk to Canada after…Steve Eisman, featured in Michael Lewis’s The Big Short …and Robert Shiller…have raised questions over the challenges facing the Canadian real estate market.” The article further notes that the “Canadian housing market is one of the most overvalued in the world” and the OECD indicated that “Canada is one of the countries most at risk of a price correction”.

Pensions and Retirement Income

In the Financial Times’ “Retirement: Extended life cycles” Jacobs and Cohen report that many OECD countries are in the process of raising the retirement ages. Many of these national pension systems were designed at a time before the longevity increases coupled with fewer babies being born started straining them. New studies are emerging which indicate that not only is a later retirement necessary for financial reasons, it might even be good for your health. Studies have also shown that “the gap in life expectancy between rich and poor pensioners is growing… Geography also makes a difference”; so the question arises whether (government) pensions are priced fairly by treating everybody the same?

In the WSJ’s “Nortel US in ‘Milestone’ Settlement of UK, European Claims” Peg Brickley writes that “Representatives of the British pensioners left behind in Nortel’s collapse are still pressing their claims for payment against the Canadian parent company… However, the settlement reached Tuesday raises the possibility that European creditors that have been at odds with Nortel U.S. for years might present a united front with the U.S. division when it comes to the grapple for the cash… If approved, the settlement allows Nortel U.S. to shake nearly $2 billion worth of claims filed in its Chapter 11 bankruptcy case for a fraction of the amount asserted”. But in the Ottawa Citizen’s “Nortel U.S., European Pact Has Canadian Parent Company Worried” Bert Hill writes that what appeared to be good news at first blush, “…like so many earlier Nortel dead-ends, the deal could make life even tougher for 20,000 Canadian employees, pensioners and business suppliers who have $1 billion in claims against the one-time giant of the global communications industry. The reason is that there are several different Nortel estates scattered around the world, each with wildly varying amounts of cash and all pursued by hungry claimants. Rather than a single global settlement that shares the pain equally, the Nortel mess could leave a few big winners and a lot of losers, particularly in Canada.” Hill notes that “The Canadian creditors could face a squeeze play” if the European and American creditors gang up against the Canadian ones. This combined with the already $1 billion of the estate mostly wasted on legal/expert fees which are now further accelerating as we approach the May trial. Judge Winkler who attempted to mediate between creditors “warned that the courts can never settle this dispute because somebody will always have a reason — and a court somewhere in the world — to carry on the fight. The battles might last until the last of about $1 billion in cash in the Nortel estate is expended on legal costs of all the combatants.” (Now how pathetic is that, at least for Nortel pensioners and the long-term disabled!?!)

Things to Ponder

In the Globe and Mail’s “Hyperinflation: The worst investment call of the past five years” Boyd Erman discusses how many prognosticators have overhyped the risk of inflation and even hyper-inflation since the start of the Great Recession and how according to them “we in North America should be living in some sort of modern-day Weimar Republic”. Yet clearly the predictions have been wrong, and inflation so far has been limited. But he notes that one is never sure whether “events may prove yet that they were just too early. In investing, though, early and wrong are not that far apart”.  In IndexUniverse’s “Swedroe: An inflation reality check” Larry Swedroe also discusses inflationary expectations and writes that while “there’s a risk of inflationary spike, but it’s hardly assured”. He encourages the readers to focus not on forecasting but managing risk. He ends noting that “If you ever begin to think you can foresee the future in terms of the stock market—or pretty much anything else, start holding yourself accountable by keeping a diary of your forecasts. If you do, the odds are good you’ll quickly disabuse yourself of the idea that your crystal ball is clear.”

In the Financial Times’ “Capitalism: In search of balance” John Gapper argues that “While the income gap in industrialized societies grows inexorably wider, global inequality is shrinking”. The reason an economist notes is that “it’s about capital and labour and what has been happening is that recent changes have benefited capital.” This ”tends to equalize global wages (because capital travel much more easily than labor), which means reducing them in rich countries.” The article includes some interesting graphs showing “winners and losers” and rising inequality in advanced countries.

In CFA Institute blog by Usman Hayat entitled “Rewrite the Finance Textbook: Low Risk Offers High Return” he discusses a paper by Haugen and Baker that “Low Risk Stocks Outperform within All Observable Markets of the World”. The paper indicates that “low-volatility stocks don’t just outperform, they outperform by a wide margin, which becomes even wider when risk-adjusted returns are used…(this is) the biggest market inefficiency” and “a huge opportunity””. The paper concludes that “It is now clear to a greater and greater number of researchers and practitioners that inside all of the stock (and even some bond) markets of the world, the reward for bearing risk is negative. Greater risk, greater reward is a basic tenant of finance; thus its invalidation carries critical implications for the theories underlying investment and corporate finance. In our view, existing textbooks on both subjects are dramatically wrong and need to be rewritten.” (Something at least worth pondering; is it correct? Is it actionable?)

In the NYT’s “Academics who defend Wall St. Reap rewards” David Kocieniewski has an article describing how academics don’t disclose that they receive compensation from the financial industry. Specifically how a professor of finance at the University of Houston acted as “the hard-nosed defender of financial speculators” on the question of: “Do financial speculators and commodity index funds drive up prices of oil and other essentials, ultimately costing consumers?” The NYT has found that what the professor “has routinely left out of most of his public pronouncements in favor of speculation is that he has reaped financial benefits from speculators and some of the largest players in the commodities business…(and that) major players on Wall Street and elsewhere have been aggressive in underwriting and promoting academic work.”. The article mentions other numerous financial industry sources funding many university research sinks. (Money can buy almost anything. Remember the Golden Rule (which I mentioned above in the financial industry using its muscle to block changes to standards of conduct)? “He who has the gold, makes the rules”.)

And finally, the Economist’s “The vanishing Japanese” Buttonwood notes that Japan’s population fell by a quarter million in 2013 and depending on one’s assumptions there may be 30-37M fewer Japanese in 2050 than there were (about 128M) in 2010. The article discusses the impact of such a dramatic population decrease in terms of economic growth, sustainability of pay-as-you-go welfare/pension systems, housing prices, the impact of lower housing prices on people who counted their homes as part of the retirement nest-eggs, wages, as well as political impact.