Contents: Mint interview, ready for possible sell-off? even low ETF fees are corrosive, scammers target >50 crowd, singles must save more, Bernanke refused mortgage refinance, 25% of Canadians’ retirement at risk if housing declines, IMF warns on Canadian housing, US Steel latest indicator of systemic private sector pension failure in Canada, Ontario’s small businesses unhappy with ORPP, Calpers/Stockton bankruptcy judge rules that all creditors should be equal, switching public sector pensions from DB to DC more expensive- real issue is benefit level (and who pays), liquidity an important factor for stock returns, next big crisis? inescapable waves of credit booms, US faces deflationary risk? bonds only asset class for deflationary world, retirement: satisfaction-high depression-low and money little impact on levels of satisfaction/depression.

Personal Finance and Investments

At “Expert Interview with Peter Benedek on Retirement Planning for Mint” you can read a recent interview by Mint.com of yours truly covering a wide range of topics: misconceptions around retirement planning (e.g. planning age for retirement, time diversification, active vs. passive, stocks in retirees’ portfolios, insurance, market timing), when to start saving for retirement and trade-off vs. debt reduction, investment for retirement.

In the WSJ’s “Are you prepared for a stock selloff?” Jonathan Clements recommends three steps to prep for a significant correction even if it won’t happen. These are: (1) “run a fire drill” verifying that your next five years of spending needs are covered from conservative investments and whether you are mentally ready to lose 25% of money invested in stocks (how about 50%?), (2) psychological readiness test “remember2008” when market declined over 50% “did you buy, sit tight or sell?” and (3) “draw up your battle plan” make sure you executed the required rebalancing to target asset allocation.

In ETF.com “How ETF fees eat away at your returns” Allan Roth discusses the corrosive effect of even the average of 0.44% ETF fees; with a fixed income portfolio earning 1% real returns that giving away 44% of the real return. He notes that emotions are also fees, indicating that over the past decade “Morningstar research demonstrated that the average investor earned a full 2.49 percentage points less annually than did the funds themselves”.

In the WSJ’s “If you’re over 50, you’re a scam target” Tom Lauricella discusses the heightened vulnerability of the 50-plus demographic to scams, primarily due to “their often sizable retirement savings” and some of the mechanisms used to take advantage of them (e.g. the grandparent scam), even when there are no cognitive deficiencies.  On the same topic in the NYT’s “Ways to protect yourself after the JPMorgan hacking” Tara Siegel Bernard discusses last week’s announcement that 76 million JPMorgan customers’ names, addresses, phone numbers and email addresses have been compromised. The bank advises customers to monitor their accounts as a routine matter. Interestingly, both articles recommend a credit security freeze (which might cost a small fee and might add some inconvenience as it will have to be explicitly thawed before you can get a new credit card for example) but is “one of the strongest tools against theft because it prevents someone from trying to open a new account in a consumer’s name. When you freeze your reports, the big three credit bureaus will not release your credit reports to any company that does not already have a relationship with you”. You should also review monthly all your credit card transaction statement and request your free credit report from each of the three credit agencies at AnnualCreditReport.com. (You remember the old Willie Sutton legend about “why do you rob banks?…because that’s where the money is”.)

In the WSJ’s “Retirement-planning tips for singles” Jane Hodges reminds readers that American singles should not assume that expenses are half of a couple. A new study “found that 20% of married couples won’t save enough for retirement, but that some 35% of single men and 49% of single women will enter retirement financially unprepared.”  A single person’s cost of living is 60-80% that of a couple. This is due to a combination of higher housing costs, fewer tax breaks, having to save more for long term care since they can’t assume that spouse partner will take care of them.

Real Estate

In Bloomberg’s “Why Does Bernanke Want a Mortgage, Anyway? Low Rates and Tax Breaks” Richard Rubin reports that Ben Bernanke was refused an attempt to refinance his house. If he can’t get refinanced “with a net worth of $1.1 million to $2.3 million, income of $150,000 to $1.1 million from textbook royalties in 2013…”, then you can assume that others trying to refinance or get a new mortgage might also be tripped up by the current eligibility requirements. This of course suggests that this may not bode well for home prices.

In the Globe and Mail’s  “How a housing market decline could put Canadian retirement at risk” Tara Perkins reports that Sun Life CEO recommends that Canadians pay down debt especially if they are approaching retirement, because at some point interest rates will go up and so will the cost of servicing the 164% of disposable income in Canada. (An even bigger concern should be that) “A recent Sun Life survey found that 24 per cent of Canadians said they plan to use their home as their primary source of retirement income.”

In Bloomberg’s “Canada May Need Measures to Slow Housing Growth, IMF Says” Greg Quinn reports that IMF warns that “High household debt and a still-overvalued housing market remain important domestic vulnerabilities, call for continued vigilance and may require additional macro-prudential measures.”  “The report said that house prices are 10 percent above “fundamental values,” and “housing market risks should continue to be closely monitored.””

Pensions and Retirement Income

 A couple of Globe and Mail articles “Ontario and union fight US Steel’s Canadian funding plan” by Keenan and Morrow and “What an Ontario win over U.S. Steel would mean for pensions” by Boyd Erman discuss the latest Canadian private sector pension fiasco. This time it’s US Steel, after taking its Canadian subsidiary into CCAA protection, is planning to provide Debtor-In-Possession (DIP) financing to its subsidiary; DIP financing would normally take precedence over all other creditors due to the super-priority it is given. This makes both the Ontario government and the unions very unhappy; Ontario “backed a $150-million loan that U.S. Steel Canada will have to repay by the end of next year and its Pension Benefit Guarantee Fund could be on the hook for as much as $400-million if U.S. Steel Canada’s pension plans are wound up”, while the union calls “the DIP financing proposal as “a thinly veiled loan-to-own strategy””. Erman’s article also notes that even if the Ontario government wins its argument in court, it won’t change the priority of pensions in other cases (e.g. Nortel) because this argument is about DIP financing is the circumstances of this very specific case. (Canadian private sector pension system is still systemically flawed, and absolutely nothing has been done to fix it.)

Benefit Canada’s “Small businesses worry about ORPP” reports that a survey of Ontario small businesses “finds that 77% of small business owners believe that managing the introduction of the ORPP could be their biggest business challenge to date. Further, 41% see the ORPP as a barrier to their business growth in 2015, second only to economic uncertainty (60%)…the ORPP is a mandatory provincial pension plan intended to complement the Canadian Pension Plan to help Ontarians save for retirement”. (As I have indicated before, while this expanded-CPP-like ORPP is not my preferred form of pension reform, Ontario deserves credit for doing something while others just sit and watch.)

In Reason.com “California public pensions put on notice” Steven Greenhut reports that according to a ruling by a federal judge in California in the bankruptcy case of Stockton “Public-employee pensions are not protected when a city goes belly-up…” In the past “CalPERS has argued successfully in many courts that municipalities cannot reduce pensions for public employees, even on a go-forward basis…” Furthermore according to the WSJ’s  “A Calpers comeuppance” “In 2011 Calpers adopted a policy of discounting the termination fee at a rate tied to 10- and 30-year Treasurys in lieu of the 7.5% rate it ordinarily uses to calculate unfunded liabilities. This sleight-of-hand blows Stockton’s $212 million unfunded pension liability up to $1.6 billion.”  (By the way, if judge’s ruling that it is unfair for Franklin Templeton to receive $4M for $36M of bonds while Calpers get 100% sticks, then it might also apply in reverse…in the Nortel pension case the bondholders are demanding and might receive 100%-150% while pensioners 11% in one scenario under consideration by the US and Canadian judges; this might also be struck down by the American judge, and perhaps would lead to at least a more equitable treatment of all creditors.)

In the Globe and Mail’s “Defined contribution plans more costly, study finds” Janet Mcfarland writes that according to new report sponsored by the Canadian Public Pension Leadership Council argues that “governments considering converting their traditional defined benefit (DB) pension plans would face higher administration costs because defined contribution (DC) plans cannot be run as efficiently”. Some of the reasons are a combination of: higher asset management costs, no risk pooling in DC, higher administrative cost to keep existing DB and a new DC plan going, The report author indicates that a better solution to cost containment of public pensions would be to just consider the benefit levels and whether they are inflation indexed or not. (I suspect that most would agree that the real issue about public pensions is the cost and who pays it, rather than is it DB or DC or target date.)

Things to Ponder

In ETF.com’s  “Targeting liquidity as a style” Larry Swedroe discusses a new Ibbotson and Kim report entitled “Liquidity as an Investment Style: 2014 Update”, which indicates that: “low liquidity quartile portfolio outperforms small-cap and momentum factor based portfolios”, they generate higher alpha that the Fama-French four factor models, but “migration cannot be known ex-ante” (and “as less liquid stocks become more liquid their returns increase dramatically and vice versa”). So “there is ample evidence that liquidity is an economically significant and unique factor in long-run stock returns”.

In Reuters’ “The next big crisis? Jim Rickards on financial panics” Chris Taylor looks at Jim Rickards’ book entitled “Death of money” in which he is predicting the  “coming collapse of the international monetary system” in just a couple of years. In this interview with Rickards in which he warns that during the 70s style inflation the value of the dollar was halved in five years and that the dollar (not Bitcoin) is the ultimate digital currency and thus “we could all be vulnerable during the next financial panic”. Since money is a confidence game, once trust is lost it is very difficult to recover; “Money is money up until the moment it isn’t.” To protect oneself he advocates hard assets: gold, land, fine art or stocks focused on “energy, transportation, natural resources, water and agriculture”. (I struggle with these books that periodically appear on the subject of impending doom or the euphoria; still it’s worth listening to the voices of doom and gloom, once we understand what might happen reduces the possibility that it will. As usual we’ll be struck by something unexpected.)

But Martin Wolf in the Financial Times’  “We are trapped in a cycle of credit booms” warns that waves of credit booms moving from county-to-country and region-to-region have increased public debt-to-GDP ratio by 46 percentage points. The impact is usually “permanent losses of output and growth”. The credit booms are the consequence of “of the policies adopted to sustain demand as previous bubbles collapsed, usually elsewhere in the world economy”. And like with drug addiction, always more and more powerful drugs are needed to achieve the same level of satisfaction; but how to escape this “relentless cycle”?

In the financial Times’  “US inflation measure proves headache for fed’ Michael Mackenzie writes that just as QE coming to an end, its stimulus value has decreased and another dose of quantitative easing may be required to prevent the US economy from falling into disinflation. “Deflationary risk is being passed around from Japan to Europe, emerging market economies and to the US.”

And if deflation will be a problem then according to ETF.com’s “The mixed record of inflation hedges” based Japanese history of returns, bonds may be the only asset class that is expected to appreciate to any significant extent. On the other hand, should inflation prove to be the problem, bonds will be the worst place to be invested in.

And finally, the Boston College Center for Retirement Research’s “Retirement: A good state of mind” reports that “a new study of the United States and 11 European countries finds that it improves subjective well-being, measured both in terms of satisfaction with one’s life and the incidence of depression…(and) income has relatively little effect on retirees’ levels of depression or their satisfaction with their lives.”