The Coming Retirement Burden

Posted on March 12, 2013 by Rob

The Coming Retirement Burden

This is a US article but the message and facts equally apply to Canadians.  CPP is, for the most part, a pay-as-you-go wealth distribution scheme, meaning your CPP deductions are simply transferred to a current retiree in forms of benefits.  Since 1997, a small portion is now actually invested and grown to fund the future but it is small (latest published numbers can be found in 2008-2009 CPP Financial Statements here).

In the past, there were many workers who would support a small number of retirees so small amounts taken off paycheques were sufficient.  As our population ages and enjoys greater longevity, there are fewer and fewer workings supporting an ever-growing number of seniors.  Currently, there are approximately 4.6 workers paying for each person over 65, and by 2031, there will be less than 3 workers paying for each recipient.   This would require a 53% increase in CPP premiums just to maintain the status quo!

A generational divide is growing and I think it has barely started.  The most shocking example of this growing divide was seen about three weeks ago in Japan when the government Finance Minister told the elderly to “hurry up and die” to relieve pressure on the economy.

Despite the Canadian government telling me the CPP plan is sound, I remain unconvinced.   I personally can’t see how any politician could say anything else and stay elected.  Furthermore, nobody can claim to know how future working will respond to more and more of their wages taken to support someone else.

I think the safest assumption is that – one way or another – we’ll pay higher taxes and receive lower benefits moving forward.  What seniors receive today is not likely to be what seniors receive in 10-20 year’s time.  It is not fun to think about and easy to ignore, but saving more during one’s working years is really the only plausible defense I see to this economic reality.

Excerpt from the article:

If one-third of the adult population is consuming without working, that is going to place a heavy burden on worker incomes–unless the retirees take sharp cuts to their living standards.

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The Future of Shopping

Posted on January 11, 2013 by Rob

The Future of Shopping

One of my favourite writers, Megan McArdle, writes about how shopping has changed with the emergence of ‘showrooming’.  Showrooming is where one visits a big-box store only to see the physical product.  They do not, however, buy from the big-box store.  Instead, the shopper scans the item’s barcode with their smartphone, an app immediately searches online for which seller offers the lowest price (this is usually an online seller – such as Amazon.com – who is not burdened by the costs associated with operating a large retail store), and the consumer then makes his or her purchase online.  So these big box stores are basically acting as free showrooms for online vendors.  It doesn’t take an MBA to know that this can’t work for too long.  The questions here are how do these large retail stores adapt and respond to this phenomenon, and will they adapt before coming insolvent.   A good read for sure.

Excerpt from the article:

Five years ago, in December 2007, a share of Best Buy was worth more than $50; today the company is trading just under $13. This may be some sort of record—from profit powerhouse to basket case in under five years.  Best Buy used to be the king of the “category killers”—the big-box stores like Blockbuster, Borders, and Toys “R” Us that dominated their market segments, driving out thousands of smaller retailers who simply couldn’t compete with each chain’s reach and buying power. But as that list suggests, it’s no longer a very safe kingdom to rule. The category killers are getting slaughtered by the competitive forces they themselves unleashed; the wave of relentless bargain hunters who once flooded their stores has now flowed onto the Internet, and especially to Amazon, where nearly anything can be purchased at bargain prices and delivered to your home in days. You might call them the “new window shoppers”: whenever they want something, from a flat-screen television to a 36-pack of toilet paper, they just open a new window in their Web browser. Their disappearance from stores has left mass retailers like Best Buy with a lot of expensive real estate that sales can no longer support. ………..

………….  How long can brick-and-mortar retailers afford to operate stores that serve as display cases for someone else? More importantly, will that be long enough to transform themselves into something less vulnerable to Internet competition?

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The Insourcing Boom

Posted on December 12, 2012 by Rob

The Insourcing Boom

An economic axiom has prevailed that America would  never again be able to compete for manufacturing jobs against rival countries with their rock-bottom labour costs.   This Atlantic article talks about General Electric and their storied Kentucky ‘Appliance Park’.  This manufacturing mecca from long ago is awakening as companies realize that their strategy to outsource everything to Asia is not as sound as once believed.

The key takeaway for me was that markets (including labour markets) have a remarkable ability to adapt.   Not only do markets adapt, but human beings seem hardwired to repeatedly underestimate the ability of markets to adapt.  Anything you can read to be reminded of markets ability to adapt is worth reading.  Make time for this article.

Excerpt from the article:

What has happened? Just five years ago, not to mention 10 or 20 years ago, the unchallenged logic of the global economy was that you couldn’t manufacture much besides a fast-food hamburger in the United States. Now the CEO of America’s leading industrial manufacturing company says it’s not Appliance Park that’s obsolete—it’s offshoring that is.

Why does it suddenly make irresistible business sense to build not just dishwashers in Appliance Park, but dishwasher racks as well?

 

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Khan Academy: The Future of Education?

Posted on December 6, 2012 by Rob

Recent postings have questioned whether college is a lousy investment and predicting that college would be free in ten years .   Along this topic, I feel Khan Academy is one of the coolest websites today.   Khan Academy offers online courses in Math, Science, almost every subject you would learn about in school – all for free.  They envision the future world of education to be one where lectures and homework are reversed.  In other words, the child receives the lecture by themselves at home (via these free videos), and they in turn work on problems (i.e. traditional homework problems) while sitting in the classroom with a teacher who serves to help them when they get stuck.  Brilliant in its simplicity and sure makes sense to me.  Change, particularly by those who profit by the status quo, is always fiercely resisted.  This video is a CBS 60 Minutes segment featuring Khan Academy.  It is only 13 minutes long and will give you a good idea of how it all works.  The website www.khanacademy.org is also worth visiting or sending your child to should their homework prove difficult.  Enjoy.

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Why College May Be Totally Free Within 10 Years

Posted on December 5, 2012 by Rob

Why College May Be Totally Free Within 10 Years

After a prior posting discussing “Is College a Lousy Investment” I thought this related to that and was interesting.  Some will look at this as a positive and some will say this is a negative.  It is positive to me, as I prefer more choices as opposed to less.  The other article discussed the cost benefit of going to college or foregoing college, this article shows how technology may bring the cost of an education to zero.   Amazing.

Excerpt from the article:
……there will always be students able and willing to pay for a traditional college experience and for them it will be a worthwhile investment. But for the vast majority, from a financial standpoint that kind of education makes no sense and is fast becoming unnecessary. He believes the higher education revolution is coming soon and will happen fast—perhaps fast enough to keep the next generation from finishing school with debts they may never be able to pay.

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Should We Worry About Rising Interest Rates?

Posted on October 15, 2012 by Rob

Should We Worry About Rising Interest Rates?

The math of bonds is as follows:  When interest rates go down (like they have now for such a long period) bond prices rise and investors can enjoy capital gains in addition to interest payments.  Conversely, when interest rates rise, bond prices fall and investors can incur capital losses often much larger than the interest they may receive.  The greater the number of years until the bond matures, the greater the risk. 

In other words, short-term bonds (2-3 years or less) will mature soon and therefore rising rates can’t affect prices all that much.  Long-term bonds, on the other hand, move dramatically when interest rates change.  

I worry that most retail bond investors today have no idea of the inherent risk in their fixed-income portfolios.  I feel they will be shocked and pained should interest rates rise. 

The last thing the government wants is for interest rates to rise.  So much so they are printing enormous sums of money just to keep interest rates low.  We could very well reach a point where the government loses control of bond prices and interest rates could sharply rise. 

This could happen soon, or it could happen a long time from now.  Regardless, we are very worried about this.  To protect our clients from rising interest rates, we have kept our client’s fixed-income investments very short-term.  

 Excerpt from the article:

But the Fed has only limited power to control interest rates. And sharply higher yields would be far from unusual. For instance, 30-year Treasury bond yields are currently under 3 percent. As recently as last year, they topped 4.5 percent, and in early 2000 they briefly exceeded 6.5 percent. Because of the long maturity, a single percentage point rise in rates would translate into roughly a 20 percent decline in the value of long bonds.

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The Costco Craze Inside the Warehouse Giant

Posted on October 11, 2012 by Rob

After so many doom and gloom postings of late, it is nice to finally post a positive message.  This video produced by CNBC describes my favourite retailer, COSTCO.   This video describes how – and more interestingly why – the typical COSTCO stocks only 4000 products (compared to WalMart’s 100,000), their strict 15% markup limit, and how they make almost all their money not on goods, but rather via selling annual memberships.  Finally, they highlight the efforts suppliers are put through to earn a coveted spot on COSTCO shelves. (fascinating to me).  If you like the store, you’ll likely love this video.

 

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Sponging Boomers

Posted on October 9, 2012 by Rob

Sponging Boomers

 This is a fantastic article. A reconciliation of economic realities and unsustainable government promises has barely begun; but it most certainly has started and will inevitably continue.  Make no mistake about it – it will happen. How this reconciliation exactly unfolds – i.e. via higher taxation, reduced entitlements, growth, austerity, inflation, or most likely some mix of each – will directly impact your investments, your home value, your income, and your social safety nets. Not too many articles are this concise and well written. This is, without a doubt, essential reading for anyone trying to make sense of where we are and, more importantly, where we are headed.

 Excerpt from the article:

The struggle to digest the swollen generation of ageing baby-boomers threatens to strangle economic growth. As the nature and scale of the problem become clear, a showdown between the generations may be inevitable. ……………….
………………….Boomers’ sponging may well outstrip that of younger generations as well. A study by the International Monetary Fund in 2011 compared the tax bills of a cohort’s members over their lifetime with the value of the benefits that they are forecast to receive. The boomers are leaving a huge bill. Those aged 65 in 2010 may receive $333 billion more in benefits than they pay in taxes (see chart), an obligation 17 times larger than that likely to be left by those aged 25.  Sadly, arithmetic leaves but a few ways out of the mess.

 

 

 

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Is College a Lousy Investment?

Posted on October 1, 2012 by Rob

Is College a Lousy Investment?

One of the more disconcerting consequences of the recent economic turmoil has been how it forces us to question things that previously seemed sacrosanct. Fortunately for us Canadians, tuition rates here are far less onerous than those in the USA. It is downright depressing to question something so seemingly pure as “education”. However, when the cost of any good rises sharply and the benefits become less certain, these types of questions should not be ignored. This article - written by one of my favourite writers - presents a well-thought-out analysis on the subject and makes unique comparisons between education spending and the recent US housing bubble. It isn’t short, but I found this to be a very interesting read.

Excerpt from the article:

I have certainly benefited greatly from the education my parents sacrificed to give me. On the other hand, that kind of education has gotten a whole lot more expensive since I was in school, and jobs seem to be getting scarcer, not more plentiful. These days an increasing number of commentators are nervously noting the uncomfortable similarities to the housing bubble, which started with parents telling their children that “renting is throwing your money away,” and ended in mass foreclosures………………….

……………….Just as homeowners took out equity loans to buy themselves spa bathrooms and chef’s kitchens and told themselves that they were really building value with every borrowed dollar, today’s college students can buy themselves a four-year vacation in an increasingly well-upholstered resort, and everyone congratulates them for investing in themselves.

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Friends in low places

Posted on September 24, 2012 by Rob

Friends in low places

This article will be too dry and boring to appeal to most readers, but those who are boring and dry like me may like it. There are two key takeaways: One, that interest rates and bond prices now operate in anything but a “free market”…..and two, this should cause nominal interest rates to stay artificially low and real interest rates (those measured after the effects of inflation) to remain negative for some time. As a result people need to save a lot more money to fund their retirement lifestyle (…and that’s no fun.)

Excerpt from the article:

First, it’s clear that central banks will be huge players in the asset markets for the foreseeable future. The Fed is buying mortgage bonds, not Treasuries, this time but both the ECB and the Bank of England are still in the bond-buying business. All suggest that in the long run they will unwind these purchases, either by selling the bonds or by not buying them when they mature (the effect is the same; the private sector will have to pick up the slack). But clearly we are nowhere near the point at which these programs can be reversed and unless the economy does become a lot stronger, it is hard to see how they can be.

So when we talk about the “market reaction” to economic news, we need to be clear that bond prices are not set in a free market; they are set, in large part, by a huge non-profit maximizing public sector buyer.

Second, nominal interest rates are going to be at historic lows for the foreseeable future as well; the Fed extended its outlook from 2014 to 2015. If you are a cautious saver, you will get a low nominal (and probably a negative real) return. If you are a retiree forced to buy an annuity or a pension fund hedging its liability with government bonds, you will need a much bigger pool of savings to meet your chosen retirement income target.

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