Contents: Canada’s balanced budget on track, survivorship bias distorts fund returns, Canada/Toronto/Vancouver house prices still hot, U.S. homes affordability-depends on metric, 2013 good year for Florida real estate, Ontario pension reform expanded-CPP with flexibility points? improved Canadian pensioner longevity metrics drives up obligations, multidimensional measure of retirement readiness, emerging markets remedies, middle class stagnating or prospering depends on your metric, stock market an expensive place to find out who you are, Bitcoin hits the wall?

Personal Finance and Investments

In the Globe and Mail’s “Federal budget takes aim at erasing deficit by 2015” Bill Curry summarizes the latest Canadian federal government budget and indicates that the promised 2015 balanced budget is on track. However there are no real changes of substance being announced. (Perhaps they are being saved for the pre-election budget.) Jamie Golombek in the Financial Post’s  “Federal Budget 2014 targets wealthy’s tax breaks” ads that the budget includes the trust related changes: (1) the anticipated/pre-announced “elimination of graduated tax rates for testamentary trusts” except for disabled individuals, and (2) the surprise elimination of the immigration trust “to shelter investment income from Canadian taxation during the first five years of residency”. And not in the budget, but diverting attention from its merits or lack there-of are Mr. Flaherty’s comments expressing doubts about the government’s promised income splitting when the budget is balanced. (I won’t wade into this argument except to say that it is more complex than it appears on the surface, especially when you factor in the society should be countering the growing demographic issues resulting from increased longevity and fewer children; or current argument that child care may be a better choice than income splitting, or even whether traditional women’s work in the home “not only domestic work but care of the young, sick, elderly, handicapped and dying” should be recognized appropriately in payment, taxes, credits, pensions, etc which are all forgone when doing unpaid work. This discussed in Bev Smith’s “Invisible labour noticed at last”.)

In the Globe and Mail’s “Why you should be suspicious of funds’ returns” Norman Rothery explains fund survivorship bias, with an Olympic analogy; we like to focus on winners and burry the losers, yet often they are only separated by luck and level of risk they have taken. Fund firms tend to shut down low performing funds, thus only currently functioning funds distort fund family performance. Hedge funds are particularly prone to do this due to the fund manager compensation structure where being below high water mark prevent manager from earning performance fees.

Real Estate

Canada’s Teranet-National Bank House Price Index was up 0.4% to an all time high during the month of January, and it is up 4.5% from year ago; of the 11 metropolitan areas tracked only Toronto and Vancouver were at all time highs. YoY Toronto was up +5.8%, Vancouver +7.5%, Calgary +7.1%, Montreal +0.8% while Ottawa was down -0.6%.

In WSJ’s “Is U.S. housing unaffordable? It depends on how you chart it” Nick Timiraos looks at U.S. housing affordability as measured by the “ratio of median U.S. home prices to household incomes” and writes that one might conclude that we might be on the way to another bubble; this ratio between 1995 and 2002 was flat between 2.7- 3, then peaked above 4 in 2006 and dropped to 2.5 in 2011, and now it’s back above 3! However he also provides a better measure “monthly payment of mortgage principal and interest on a median priced home, as a share of household income”; this number was between 18-22% before 2005, peaked at 25% in 2006 and then dropped to between 12-15% in 2009 where it still remains. The latter sounds like a better affordability measure and by this measure there is no bubble.

The Palm Beach Post reports in “Florida home sales were strong on 2013” that according to Florida realtors the state in 2013 had “more closed sales, higher pending sales, higher median prices and a reduced inventory of homes for sale compared to the year before”. Median Palm Beach County single family home prices were 15% to $244K, homes sold were also up 15%, though condo sales were off 3%. Separate reports indicated that Palm Beach County foreclosures were 56% off in January 2014 compared to 2013, and new home construction was up 13% during 2013 compared to 2012

Pensions and Retirement Income

In BenefitsCanada’s “The great CPP debate: Key considerations for plan sponsors’ CARP VP of advocacy weighs in on pension reform debate and correctly argues that pension contributions are not taxes while “pension benefits are taxed and spent in the economy… and they actually offset OAS and GIS that government would otherwise pay”.  Also the way a fully funded expanded CPP would work this would only benefit the younger generation. Given the consensus expert opinion that Canadians are saving insufficiently for retirement, she argues that the Ontario pension reform thrust can be CPP like but being provincial there is room for more flexibility for example: “enrollment can be mandatory but with an opt-out for employee and/or employer”, there could be age/service related contribution increases, and employer/geographical portability should be permitted. (I would also like to see one-time lump-sum contributions permitted to purchase benefits by those near/in retirement who are unable to otherwise contribute since they are no longer working; furthermore one of the benefit options should be a pure longevity insurance payout which is the most cost effective form of longevity insurance. These additional features could provide fully funded benefits for those in/near retirement.)

BenefitCanada’s “New all-Canadian pension mortality tables, improvement scales released” reports that “Canadian pensioner mortality has improved significantly faster than projected by the commonly used U.S. standard tables in recent years”. For 65 year old males and females according to the new tables life expectancy is indicated at 22.1 and 24.4 years, respectively. The article notes that pension obligations could increase as much as 7%, but typical range will be 3-4%.

Things to Ponder

In DailyFinance’s “How I know, I am ready to retire” Dave Bernard explores aspects of retirement readiness: the job (ability and willingness to do it, its availability, its psychic rewards like interaction with co-workers), financial readiness (adequate savings, opportunity for part time work), priorities (family, travel while health permits), will I be bored/stimulated, creative activities, exercise or just occasionally kicked back and relax.

In Bloomberg’s “Smart money seizes Fischer’s notes amid emerging contagion” Simon Kennedy looks at, “likely next vice chairman at the Federal Reserve”, Stanley Fischer’s 2001 lecture notes on the steps he recommended during the 90s emerging market crisis “large depreciations, interest-rate hikes, strengthening the financial system, are painful but they remain key components of the response arsenal as we’ve seen over the past few weeks.”Other changes implemented making current situation much better are “Their external debt as a share of exports has fallen to 70 percent from about 160 percent in 1998; interest payments on foreign debt have declined to less than 3 percent of exports from 8 percent; and reserves as a percentage of total debt have doubled to more than 100 percent”.

In The Financial Times’ “Which middle class, which squeeze?” Gillian Tett argues that “from a global perspective, the middle class is increasing- not shrinking- and boosting growth”. Tett refers to an EY report which “concludes that during the next two decades, the number of middle-class people in the world will increase by three billion”; but it’s all a question of definition, as EY defines middle class as a family earning between $10 and $100/day, a level at which very few if any Americans who would consider themselves middle class. she opines that “middle class” might not be defined by some absolute dollars earned but is more of a directional state or “just a state of mind (say, about feeling optimistic, stable and surrounded by social cohesion)”. (Interesting article if you can read it.)

In the WSJ MoneyBeat blog post “Most expensive place to find out who you are” Jason Zweig recommends that you tune out the futile efforts of the talking heads and “instead, use the recent volatility to make an honest reassessment of what kind of investor you are and how much risk you can stomach”. Zweig quotes a financial writer known by the pseudonym “Adam Smith” that “If you don’t know who you are, this (the stock market) is an expensive place to find out.” Benjamin Graham categorized investors in two buckets defensive investors (want to avoid “serious mistakes or losses” and seek “freedom from effort, annoyance and the need for making frequent decisions.”) and “enterprising investors” (willing “to devote time and care to the selection of securities that are both sound and more attractive than the average.”); defensive investors, if not bothered by the recent market volatility, should not change course.

And finally, for those of you who have been following the Bitcoin saga, the latest chapter is not encouraging. In WSJ’s “Exchange halts Bitcoin withdrawals: Prices drop” Robin Sidel reports that Mt. Gox “One of the best-known Bitcoin exchanges abruptly halted customer withdrawals, a move that sent prices sharply lower and underscored the hurdles facing the fledgling virtual currency.” Sam Forgione in Yahoo Finance’s “Bitcoin plunges after marketplace indefinitely halts withdrawals” expands on the story that Bitcoin plunged 27% to about $500 over last weekend “after Bitcoin digital marketplace Mt. Gox said a halt on withdrawals it announced on Friday would continue indefinitely after it detected “unusual activity.”” Specifically they found that “someone on the network could alter transaction details to make it appear a transfer of Bitcoins from one digital wallet to another had not occurred when in fact it had”. And Bloomberg’s “The glitch that will help kill Bitcoin” argues that it should be viewed as an experiment… Other electronic currencies will rise, and be more widely accepted, after all the regulatory and technical issues are resolved.”