A slowdown in spending in Canada? What slowdown? Canadian’s continue to spend and find themselves with the highest household debt in history.
"Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates rise – and they will - a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes."
How will an 1% or 2% increase in borrowing rates affect you? How about a 5% increase? Run the numbers and make sure you’re prepared.
OTTAWA - Neither recession, global uncertainty nor growing joblessness appears to have stayed Canadians' appetite for spending money they don't have.
Julian Beltrame, The Canadian Press
A new report by the Certified General Accountants Association of Canada shows that household debt in the country kept rising through the recession and peaked in December at $1.41 trillion.
That's $41,740 on average per Canadian, or debt to income ratio of 144 per cent that is the worst among 20 advanced countries in the OECD.
"This report is another indication of Canadians' readiness to consume today and pay later," says association president Anthony Ariganello.
"The concern is do they understand the full cost of paying later?"
The Bank of Canada has also voiced similar concerns, with governor Mark Carney having repeatedly advised Canadians to ensure they will be able to meet their mortgage commitments once rates increase. Ottawa has put that cautionary principle into effect by stiffening the means test chartered banks must apply when issuing open-ended mortgages.
Most Canadians don't yet share that concern. The accountants' survey found that almost 60 per cent of Canadians whose debt had increased still felt they could manage it or take on more obligations.
But the accountants say many households could find themselves in difficulty when interest rates, as expected, begin to rise.
The report estimates that even a small two per cent increase in rates would mean that mid-income and higher income households would have to cut their outlays on non-essentials by between nine and 11 per cent.
The finding is similar to one reached by the Canadian Association of Accredited Mortgage Professionals in a survey results release Monday.
The survey showed that while Canadians appeared well positioned to absorb higher rates, there would be a significant number that would come under stress. The mortgage professionals estimated that 475,000 households would be challenged if mortgages rates rose to 5.25 per cent, and that 375,000 were already facing pressure paying their bills.
The most likely outcome for a debt squeeze is that households will stop spending on non-essentials, and that could ripple in a general slowing of economic growth.
Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates grow, a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes.
BMO Capital Markets economist Sal Guatieri says that is the flip-side to the Bank of Canada's decision to slash rates to historic lows during the recession.
"That's why we did not experience a great recession," he noted. "That was the intention all along of the Bank of Canada, to get people borrow and spend. The problem is if that continued, Canada eventually would have a debt problem."
But that is why the central bank is preparing to reverse course and start increasing the cost of borrowing, he added.
Most analysts believe Carney will start moving on rates on June 1 with a small quarter-point hike.
Wednesday, May 12, 2010
Thursday, May 6, 2010
Bonds and interest rates: false safety?
The question all investors have to ask themselves right now about their income-producing holdings: should I stay or should I go now?
Bonds and GICs maxed out with yields of about 4 per cent for five years just recently.
Many know the bond conundrum: Bond or Fixed Income funds fall in price – and will continue to fall in price - as bond yields rise. (Conversely, they go up as rates decline)
If you’re going to hold onto Bond or Fixed Income funds, get used to this sort of thing. Preferred shares behave more like bonds than stocks - they’re considered fixed income by some, but not all, advisers - and most types of bonds will fall in price as we continue moving through the rising rate cycle just begun.
Should you care as an investor about Bond or Fixed Income funds falling in price? If you’re tightly focused on generating income and can accept a price decline, then no. Bond or Fixed Income funds will continue to pay coupon interest commitments as rates rise, which means the income will flow.
The arguments for selling are that your prime goal is to preserve capital, or that it will drive you to distraction to see the value of CPD (and possibly other income holdings) in decline. After 2008, investors have every right to be sensitive about seeing their stocks fall in value. At the same time, however, one of the lessons of 2008 was that quality income investments continued to deliver cash to investors, even as they plunged in value.
Preferred shares were not immune to the carnage of 2008. You can see this in the fact that Bond or Fixed Income funds price is still down by almost 20 per cent on a cumulative three-year basis.
Expect another rally to begin when interest rates peak and everyone’s looking ahead to rate declines. Will you be around for the rebound of bonds and other income-producing securities? Depends on whether you’re all about income or capital preservation.
Material for this post was obtained from Rob Carrick's recent article
Bonds and GICs maxed out with yields of about 4 per cent for five years just recently.
Many know the bond conundrum: Bond or Fixed Income funds fall in price – and will continue to fall in price - as bond yields rise. (Conversely, they go up as rates decline)
If you’re going to hold onto Bond or Fixed Income funds, get used to this sort of thing. Preferred shares behave more like bonds than stocks - they’re considered fixed income by some, but not all, advisers - and most types of bonds will fall in price as we continue moving through the rising rate cycle just begun.
Should you care as an investor about Bond or Fixed Income funds falling in price? If you’re tightly focused on generating income and can accept a price decline, then no. Bond or Fixed Income funds will continue to pay coupon interest commitments as rates rise, which means the income will flow.
The arguments for selling are that your prime goal is to preserve capital, or that it will drive you to distraction to see the value of CPD (and possibly other income holdings) in decline. After 2008, investors have every right to be sensitive about seeing their stocks fall in value. At the same time, however, one of the lessons of 2008 was that quality income investments continued to deliver cash to investors, even as they plunged in value.
Preferred shares were not immune to the carnage of 2008. You can see this in the fact that Bond or Fixed Income funds price is still down by almost 20 per cent on a cumulative three-year basis.
Expect another rally to begin when interest rates peak and everyone’s looking ahead to rate declines. Will you be around for the rebound of bonds and other income-producing securities? Depends on whether you’re all about income or capital preservation.
Material for this post was obtained from Rob Carrick's recent article
Sunday, May 2, 2010
The Economy and Markets: time for prospective
Greece and Europe, interest rates on the rise, the stock markets up some 70% plus and the global economy moving along. What does this all add up to for our retirement and investment portfolios?
The following is an excellent, albeit somewhat technical, prospective on matters:
Macro Overview: Economy & Markets
It is time to take a big picture look at everything: This is a summation of everything we have discussed over the past month and quarter. Where are we in this particular cycle?
Macro-Economy: The economic backdrop seems to be confusing quite a few people. Perhaps its the psychology of the moment. I keep hearing weak, data free analysis. Here is our 7 point overview:
1. The Economy is recovering; The recession is over: Of that, we have no doubt, as the data is clear. The free fall of 2008-09 is over, and a gradual improvement is seen across the board. Industrial manufacturing, exports, autos, retail sales, durable goods, travel all confirm the economy is “healing.”
2. But, the recovery is “Lumpy”: — Part of the reason some people doubt the recovery story is how unevenly distributed the improvements are. Geographically, much of the country is still soft. In retail, it is pent up demand plus luxury goods. In technology, its mobile devices and consumer products. Financial firms are taking advantage of the steep yield curve and ZIRP to arbitrage profits, as opposed to actually lending. Profits are not evenly distributed either.
3. Government spending is only part of the story: In the midst of the crisis, Credit froze, the consumer panicked, and business spending looked to be going extinct. Uncle Sam temporarily bridged the gap.
But the argument that government spending is the only game in town is overstates the case. Private sector CapEx spending and hiring is improving (albeit slowly); Consumers have come out of their bunkers and are dining out, going to the movies, hitting the malls, traveling.
We have not returned to the Home ATM days of 2004-07 — and probably wont in our lifetimes — but the present environment is a massive improvement from the 2008-09 contraction.
4. Weak Improvement in Employment: The massive labour under-utilization is one of the two biggest drags on the economy (RE being the other). Near record low hours worked suggest that employers can simply increase hours rather than make new hires. Thus, I do not look for a V-shaped employment recovery — forget about 400-500k NFP data — anytime soon.
There are 15 million unemployed, and 8 million underemployed — it will take a long time for them to be re-absorbed into the economy. The 2001 recession took 47 months to return employment to pre-recession levels. This recession will likely take 65-75 months to achieve that goal — if not longer.
5. Real Estate (Commercial and Residential): We do not believe that residential real estate has found its natural price level yet. It remains over-valued. This is due to artificially low mortgage rates, foreclosure abatements and mortgage mod programs. We are probably 10-15% over valued, when measured by Median Sales price to median Income, Rent vs Ownership Costs, and Home Value as a Percentage of GDP.
Commercial real estate tends to lag residential by 18-24 months. It is still adapting to the downsizing of America, particularly retail. The over-investment in commercial real estate of the past decade will take at least another 5 years to resolve, if not longer.
6. Deflation? Inflation?: Well, as my pal Jeff Saut notes, we definitely have “flation.” Just not the type that everyone fears.
As of today, Deflation is a fact, inflation is an opinion. We are still living in a period of falling prices, heavy discounts, wage deflation, asset depreciation and lack of pricing power. The S&P500 is below levels seen in the 1990s; Wages are flat for a decade.
The risk going forward is that the Fed fails to remove the accommodations in time. But they have Japan as an example of Zirp with no inflation. So long as labor under-utilization is near record levels, they can take their time in tightening.
7. The rest of the world: Europe is a disaster, and is likely to remain that way for a while. Asian economies are doing very well, helping to pull the rest of the world along — but China’s market is at 6 months lows, something few people are discussing. The risk in China’s real estate and stock markets has been mostly ignored,. Commodity regions and emerging markets still have strength.
~~~
Market Overview: Unfortunately, most of the commentary we see about markets have been unusually ignorant, myth driven, and based on rationalizing bad decision making.
Our views:
1. Cyclical Bull, Secular Bear: The secular bear market collapse of 55% was right in line with other such debacles. The collapse was faster and more furious than typical, but the depth was normal. The snapback is also well within the range of bear market rallies — cyclical bull runs that last 6 to 24 months and range from 25% to 135%.
While it is possible that we are witnessing the start of a new 1982-like Secular bull market, the valuations argue against it. Stocks most likely simply did not get cheap enough — or despised enough — to initiate a multi-decade bull run. My best guess about that bottom is its likely 3-7 years away.
2. Snapback: The 75% bounce over a year seems like a lot — until you put it into the context of a six month 5,000 point collapse. we call that the Armageddon trade — Dow 5000! 3000! We’re going to zero! – was a spasm of panic. It has been mostly unwound the past year.
3. Correction coming (eventually): The cyclical bull tends to end with ~25% correction that lasts about a year. So we are always looking for signs that this run is over. Despite the recent turmoil, we have not found confirmation that the bull run is over — yet.
We look at many factors to help identify that inflection point:
4. Liquidity: Institutional fund managers seem to be all in (only 3% cash), while Investors are at only median levels of equity exposure. Liquidity is still abundant, free money abides. Money flow for the past few months have gone into US equities — that is a new element — at about $2B per week.
5. Internals: The market technical/internals remain constructive: Breadth and momentum are positive. New 52 week highs are also strong. Earnings are supporting some of the move, as year over year comparos are absurdly easy. The uptrend remains in place, and until it is broken we maintain an upside bias.
6. Sentiment: The biggest risk is the unusually high level of bulls. Note however that event hat has moderated over the past week. We are not at the sorts of extremes yet that make the contrarian in us scream SELL.
Source: Barry Ritholtz
The following is an excellent, albeit somewhat technical, prospective on matters:
Macro Overview: Economy & Markets
It is time to take a big picture look at everything: This is a summation of everything we have discussed over the past month and quarter. Where are we in this particular cycle?
Macro-Economy: The economic backdrop seems to be confusing quite a few people. Perhaps its the psychology of the moment. I keep hearing weak, data free analysis. Here is our 7 point overview:
1. The Economy is recovering; The recession is over: Of that, we have no doubt, as the data is clear. The free fall of 2008-09 is over, and a gradual improvement is seen across the board. Industrial manufacturing, exports, autos, retail sales, durable goods, travel all confirm the economy is “healing.”
2. But, the recovery is “Lumpy”: — Part of the reason some people doubt the recovery story is how unevenly distributed the improvements are. Geographically, much of the country is still soft. In retail, it is pent up demand plus luxury goods. In technology, its mobile devices and consumer products. Financial firms are taking advantage of the steep yield curve and ZIRP to arbitrage profits, as opposed to actually lending. Profits are not evenly distributed either.
3. Government spending is only part of the story: In the midst of the crisis, Credit froze, the consumer panicked, and business spending looked to be going extinct. Uncle Sam temporarily bridged the gap.
But the argument that government spending is the only game in town is overstates the case. Private sector CapEx spending and hiring is improving (albeit slowly); Consumers have come out of their bunkers and are dining out, going to the movies, hitting the malls, traveling.
We have not returned to the Home ATM days of 2004-07 — and probably wont in our lifetimes — but the present environment is a massive improvement from the 2008-09 contraction.
4. Weak Improvement in Employment: The massive labour under-utilization is one of the two biggest drags on the economy (RE being the other). Near record low hours worked suggest that employers can simply increase hours rather than make new hires. Thus, I do not look for a V-shaped employment recovery — forget about 400-500k NFP data — anytime soon.
There are 15 million unemployed, and 8 million underemployed — it will take a long time for them to be re-absorbed into the economy. The 2001 recession took 47 months to return employment to pre-recession levels. This recession will likely take 65-75 months to achieve that goal — if not longer.
5. Real Estate (Commercial and Residential): We do not believe that residential real estate has found its natural price level yet. It remains over-valued. This is due to artificially low mortgage rates, foreclosure abatements and mortgage mod programs. We are probably 10-15% over valued, when measured by Median Sales price to median Income, Rent vs Ownership Costs, and Home Value as a Percentage of GDP.
Commercial real estate tends to lag residential by 18-24 months. It is still adapting to the downsizing of America, particularly retail. The over-investment in commercial real estate of the past decade will take at least another 5 years to resolve, if not longer.
6. Deflation? Inflation?: Well, as my pal Jeff Saut notes, we definitely have “flation.” Just not the type that everyone fears.
As of today, Deflation is a fact, inflation is an opinion. We are still living in a period of falling prices, heavy discounts, wage deflation, asset depreciation and lack of pricing power. The S&P500 is below levels seen in the 1990s; Wages are flat for a decade.
The risk going forward is that the Fed fails to remove the accommodations in time. But they have Japan as an example of Zirp with no inflation. So long as labor under-utilization is near record levels, they can take their time in tightening.
7. The rest of the world: Europe is a disaster, and is likely to remain that way for a while. Asian economies are doing very well, helping to pull the rest of the world along — but China’s market is at 6 months lows, something few people are discussing. The risk in China’s real estate and stock markets has been mostly ignored,. Commodity regions and emerging markets still have strength.
~~~
Market Overview: Unfortunately, most of the commentary we see about markets have been unusually ignorant, myth driven, and based on rationalizing bad decision making.
Our views:
1. Cyclical Bull, Secular Bear: The secular bear market collapse of 55% was right in line with other such debacles. The collapse was faster and more furious than typical, but the depth was normal. The snapback is also well within the range of bear market rallies — cyclical bull runs that last 6 to 24 months and range from 25% to 135%.
While it is possible that we are witnessing the start of a new 1982-like Secular bull market, the valuations argue against it. Stocks most likely simply did not get cheap enough — or despised enough — to initiate a multi-decade bull run. My best guess about that bottom is its likely 3-7 years away.
2. Snapback: The 75% bounce over a year seems like a lot — until you put it into the context of a six month 5,000 point collapse. we call that the Armageddon trade — Dow 5000! 3000! We’re going to zero! – was a spasm of panic. It has been mostly unwound the past year.
3. Correction coming (eventually): The cyclical bull tends to end with ~25% correction that lasts about a year. So we are always looking for signs that this run is over. Despite the recent turmoil, we have not found confirmation that the bull run is over — yet.
We look at many factors to help identify that inflection point:
4. Liquidity: Institutional fund managers seem to be all in (only 3% cash), while Investors are at only median levels of equity exposure. Liquidity is still abundant, free money abides. Money flow for the past few months have gone into US equities — that is a new element — at about $2B per week.
5. Internals: The market technical/internals remain constructive: Breadth and momentum are positive. New 52 week highs are also strong. Earnings are supporting some of the move, as year over year comparos are absurdly easy. The uptrend remains in place, and until it is broken we maintain an upside bias.
6. Sentiment: The biggest risk is the unusually high level of bulls. Note however that event hat has moderated over the past week. We are not at the sorts of extremes yet that make the contrarian in us scream SELL.
Source: Barry Ritholtz
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