The Costco Craze Inside the Warehouse Giant

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.

 

Post to Twitter Post to LinkedIn

Posted in Behaviour, Businesses | Comments Off on The Costco Craze Inside the Warehouse Giant

Sponging Boomers

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.

 

 

 

Post to Twitter Post to LinkedIn

Posted in Economy, Government, Inflation, Taxes | Comments Off on Sponging Boomers

Is College a Lousy Investment?

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.

Post to Twitter Post to LinkedIn

Posted in Economy, Education, Inflation | Comments Off on Is College a Lousy Investment?

Friends in low places

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.

Post to Twitter Post to LinkedIn

Posted in Debt, Economy, Markets | Comments Off on Friends in low places

A contrarian moment

A contrarian moment

To be clear, I am not posting this article to give any opinion on European markets at this precise moment.  I felt this article was post-worthy for two reasons:  One, because it was different than everything else I have been reading about Europe.  Two, I felt this article was strong because it discussed how bad news is often fully priced in to a market or security.  Once news is fully priced in (or more than priced in),  a stock becomes an attractive and worthwhile purchase despite the bad news.  This price-to-value relationship is a critical investing concept but one that is difficult for many investors to reconcile in their minds.  For that reason, it is worth the read.

Excerpt from the article:

 But even if the European growth outlook is sluggish and no clear end to the debt crisis is in sight, there comes a point when all the bad news is reflected in the price, and contrarians should turn bullish. That point may have arrived…

…That is because what tends to matter most for investment performance is the initial valuation. When valuations are low, the odds shift in the investor’s favour. When they are high, the odds are against. That is clearest in the bond market (those buying German two-year bonds on a yield of zero are assured of exactly that return) but it applies to shares as well. Everyone was enthusiastic about equities in the late 1990s, so valuations reached giddy heights; subsequent returns have been low.”

Post to Twitter Post to LinkedIn

Posted in Economy, Markets, Stocks | Comments Off on A contrarian moment

Making no cents

Making no cents

Of all the articles I saw describing the Canadian Mint ceasing the production of pennies, I was surprised to see inflation was not mentioned anywhere.  It took 52 days and a UK publication to report on this in the context of inflation which I felt was the most important message in the demise of the penny.  The UK author cites his experience where an ice cream that cost him a penny in the late 60’s now costs 100X more.  My first encounter with inflation was in the mid-70’s when the corner Becker’s store suddenly doubled the price of a Popsicle from 5 cents to 10 cents.  With my allowance not being doubled at the same time, I found this early lesson in economics to be particularly harsh.  Those saving to finance their retirement should make no mistake about it… inflation is the number one enemy.

Excerpt from the article:

 Inflation killed the farthing just as it has killed the Canadian cent. Small coins are living on borrowed time once they become useless for buying individual items. A single penny could buy the first British postage stamp, the Penny Black, in 1840 and was still sufficient to buy a small ice cream for a short-trousered Buttonwood in the late 1960’s. Nowadays you would struggle to find a humble ice lolly selling for less than a pound.

 

Post to Twitter Post to LinkedIn

Posted in Government, Inflation | Comments Off on Making no cents

The Future is More Than Facebook

The Future is More Than Facebook

This is a very interesting article that looks at Silicon Valley’s innovation in social media, and asks whether America can innovate in other critical areas such as transportation, health care, water delivery, etc. This article is particularly timely, of course, with the media hype surrounding the Facebook IPO and those shares beginning to trade today on the NASDAQ.

Excerpt from the article:

The debate about whether America will own the global economy in the 21st century or else become a dude ranch for rich Chinese and Brazilians hinges on whether innovation can break out of the box. Can it go mainstream and transform the really big things: transportation, energy, electricity, food production, water delivery, health care and education? If it can’t do that – or if it is thwarted by high taxes and complex regulation – then welcome to the new normal of 2% annual growth. Our future will become sadly familiar. Just follow Spain, France and Great Britain down history’s sinkhole of lost status and influence. But America can do better than that, and it will. In fact, the seeds are being planted now.

Post to Twitter Post to LinkedIn

Posted in Economy | Comments Off on The Future is More Than Facebook

2012 vs. 1984: Young adults really do have it harder today

2012 vs. 1984: Young adults really do have it harder today

An interesting look back that compares the financial realities faced by young adults in 1984 vs. today.   An interesting and quick read.

Excerpt from the article:
All young adults who think they’re getting a raw deal in today’s economy, let me tell you about how it was back in my day.

Post to Twitter Post to LinkedIn

Posted in History, Inflation | Comments Off on 2012 vs. 1984: Young adults really do have it harder today

The Hyperinflation Hype: Why the U.S. Can Never Be Weimar

The Hyperinflation Hype: Why the U.S. Can Never Be Weimar

It is tough to read about inflation worries without reading the more alarmist and extreme predictions of hyper-inflation.   Like the article I posted on January 10th,  this article is a very brief history lesson on four country’s hyper-inflation experiences.  The authors then argue that the USA situation is different than was the case in these historical examples, and therefore hyper-inflation will not happen in the States.  Interesting enough to make it worth the quick read.

I do believe that governments everywhere have promised far more than can ever be delivered under the status quo.  Without the political will to reduce these over-promises or increase taxes to pay for them, inflation remains one of a few tools by which to “manage” this dilemma.

To be clear, I do NOT feel North America is headed for hyper-inflation.  I do believe we will experience regular 70’s-style inflation with continued bail-outs, quantitative easing,  money printing, etc…. and this will do plenty of damage.  Only once the voting public experiences the effects of this higher inflation, will the political will for true change emerge.

Excerpt from the article:

 There is a specter haunting our economic debate — the specter of hyperinflation. A depressing number of arguments the past few months (and years) can be reduced to the following exchange: “We need more stimulus!” “If we keep spending, we’ll just end up like Greece!” “Greece is mostly in trouble because they can’t print their own money.” “Great, you want us to print money and end up like the Weimar Republic!

Post to Twitter Post to LinkedIn

Posted in History, Inflation | Comments Off on The Hyperinflation Hype: Why the U.S. Can Never Be Weimar

Raiding the Coffers

Raiding the Coffers

Hard to make sense of this, but what is described in this article makes my head spin.

It is so backwards and ridiculous that you may need to read this more than once for it to fully sink in:  In many states, governments are actually borrowing from their own pension funds, to make their required annual contributions to the same pension plan!!!   Wow, where do I start?

This is akin to a client telling me “Rob, I do not want to eat cat food in retirement, so we have determined that I need to put $20K into my RSP each year.  This year I don’t have any money.  Fortunately, I have a solution:  Please pull $20K out of my RSP, put it in my chequing account, so I can write you a cheque to put $20K into my RSP.”    Obviously, this is not a solution to anything.

A recurring message I try to get across to clients is my strong belief that:

  1. Governments everywhere (yes, including Canada) have promised far more than can ever be delivered, under the status quo.
  2. Unwinding these unsustainable promises (or raising taxes to sufficiently fund them) will take several years and has, so far, proved to be politically impossible.
  3. Everyone wants changes to affect someone else.

It is not fun to think that the Canadian situation is no better, but we have an opportunity others do not:  That is, we get to watch how Greece/Europe deal with their problem, and see how the USA deals with their problem.  I feel this provides the clearest insight as to how Canada will eventually deal with our problem.  How this all plays out will affect various investment classes greatly.

In my opinion, there is no issue right now that affects your financial future more than this.

Excerpt from the article:

More fundamentally, the use of devices such as loans is a way of deceiving voters about the true cost of pension promises, which are similar to debts incurred by the government (i.e they are promises to make a stream of future payments). Voters may be willing to make those promises but the true costs should be made clear. Disguising the costs only creates the potential for a crisis when a) taxes will have to be raised very sharply, b) other government services will have to be cut or c)pension benefits will have to be reduced, leaving no scope for retirees to cushion themselves.

If you’re interested, this is the New York Times article that the above Economist article is referencing

Post to Twitter Post to LinkedIn

Posted in Debt, Economy, Government, Inflation, Pension Reckoning, Taxes | Comments Off on Raiding the Coffers