Clippings 2017

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AltaRed
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Clippings 2017

Post by AltaRed » 05 Jan 2017 19:59

Finance Dept forecast looming fiscal crisis
Two days before Christmas, when most politicians and their staffers had long left their offices for the holiday break, the finance department released — without fanfare or wide notice — a surprising update on long-term economic and fiscal projections.

The report warns that lower than expected growth combined with higher program spending “would be sufficient to put at risk the fiscal sustainability of the federal government.”
I would put less creedence on Sun and Ian Lee sensationalism though...than the report itself. Still, it is troubling that we could have our collective butts handed to us with decades of fiscal deficits. Good thing I will most likely be dead by 2040.
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Re: Clippings 2017

Post by cardhu » 06 Jan 2017 13:37

I guess this was what Justin meant when he proclaimed "Canada is Back!".

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Re: Clippings 2017

Post by AltaRed » 06 Jan 2017 13:59

cardhu wrote:I guess this was what Justin meant when he proclaimed "Canada is Back!".
Seems like it. Clearly, Finance remains fixated on debt/GDP ratio as the measureable to justify ongoing deficits. The problem is that GDP is a highly variable measure influenced by a lot of things largely outside Canada''s control, whereas we get to keep the debt iinfinitum. All we need is trade wars that devastate GDP growth for a lenghty period of time and we are hooped. No amount of deficit spending can offset something like that. Indeed, I doubt the current round of deficit spending will move the GDP needle more than a decimal point.

Added much later: This gem out of the Finance report is even more alarming as it pertains to assumptions to keeping debt/GDP ratio constant.
With respect to federal debt charges, new (and maturing) federal debt is (re)financed each year consistent with the Government’s medium-term debt strategy at new rates. The effective interest rate on interest-bearing federal debt is assumed to gradually increase from about 3 per cent in 2021–22 to 3.7 per cent by 2029–30 and remain broadly stable around this level thereafter. Investment returns on financial assets (which are included in other revenues) are assumed to equal the borrowing costs (which are included in public debt charges) associated with their purchase.
Finance is clearly assuming they can borrow extremely inexpensively for a very long time. They seem to think they can have a made-ic-Canada interest rate policy independent of global effects. Who is going to buy their debt if: a) yield doesn't compete with that globally, and b) the loonie continues to depreciate?
Last edited by AltaRed on 07 Jan 2017 00:32, edited 2 times in total.
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Re: Clippings 2017

Post by Thegipper » 06 Jan 2017 20:50

AltaRed wrote:Finance Dept forecast looming fiscal crisis
Two days before Christmas, when most politicians and their staffers had long left their offices for the holiday break, the finance department released — without fanfare or wide notice — a surprising update on long-term economic and fiscal projections.

The report warns that lower than expected growth combined with higher program spending “would be sufficient to put at risk the fiscal sustainability of the federal government.”
I would put less creedence on Sun and Ian Lee sensationalism though...than the report itself. Still, it is troubling that we could have our collective butts handed to us with decades of fiscal deficits. Good thing I will most likely be dead by 2040.
I don't think the G&M was any kinder in it's assessment.

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Rolling Down The Yield Curve Strategy

Post by Park » 14 Jan 2017 11:01

http://www.forbes.com/sites/marcprosser ... 973a1a16a0

For the novice investor, the above link gives a nice description of rolling down the yield curve strategy. I see bonds as a risk management tool, and I'm not sure that such a strategy fits with that goal. However, such a strategy means that part of the return will be cap gains. In a taxable account, that can make a significant difference. This is similar to how discount bonds can make sense in a taxable account. (The following is a tangent: do bond future returns get taxed as cap gains?)

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Re: Rolling Down The Yield Curve Strategy

Post by adrian2 » 14 Jan 2017 19:58

Park wrote:http://www.forbes.com/sites/marcprosser ... 973a1a16a0

For the novice investor, the above link gives a nice description of rolling down the yield curve strategy.
See also my poll from 5 years ago.
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Re: Rolling Down The Yield Curve Strategy

Post by SoninlawofGus » 16 Jan 2017 12:38

It's very intriguing. But I keep thinking you can't get anything for free. For example, one thing I that I have not seen mentioned is that by using such a strategy, you are necessarily increasing duration risk versus holding to maturity. Using an example closer to our rate differences today, let's assume a stable 1-year rate of 1.31% and a 2-year rate of 1.55%...
-- with a ladder, I'm getting 1.55% every year, with an average 1-year duration. (For year 1, let's assume I also found a one-time, 1-year rate at 1.55%.)
-- with a DIY bond fund, I'm getting 1.79% (less trading costs or MER), with an average 1.5-year duration.

And if rates were steep at the short end (1%, 2%, etc.), the market would be saying something about risk.

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Bond Ladders

Post by Park » 22 Jan 2017 13:09

https://www.thornburg.com/pdf/TH084_laddering_full.pdf

Nice article for the novice investor on bond ladders.

There are two aspects to interest rate risk: market or price risk, and reinvestment risk. If you buy and hold your fixed income investments, there is no price risk.

But you can't get around reinvestment risk, unless of course you are using bond cash flows for consumption. A bond ladder diversifies reinvestment risk. It's another form of periodic investing, akin to dollar cost averaging in stock investing. When it comes to dollar cost averaging, I'm not using the lump sum investing definition of dollar cost averaging.

You're also taking advantage of the usually positive yield curve. Assume you have a ladder of 1 year, 2 year, 3 year, 4 year and 5 year bonds. Eventually, your 1 year bond will have the same return as a 5 year bond.

So with a buy and hold bond ladder, you've decreased interest rate risk and likely increased your return.

Edited to include the following: likely increased your return relative to your interest rate risk exposure.
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Re: Bond Ladders

Post by ghariton » 22 Jan 2017 13:39

Park wrote:But you can't get around reinvestment risk, unless of course you are using bond cash flows for consumption.
How about a bond ladder of stripped bonds, using only the residual?
A bond ladder diversifies reinvestment risk.
Yes. Again, strips would remove the risk of reinvesting coupons. There would still be reinvestment risk when the bonds mature and have to be rolled over. One possible solution is to buy longer bonds whose maturities match your needs for money, and then simply hold.

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Re: Bond Ladders

Post by Park » 22 Jan 2017 14:29

ghariton wrote:
Park wrote:But you can't get around reinvestment risk, unless of course you are using bond cash flows for consumption.
How about a bond ladder of stripped bonds, using only the residual?
A bond ladder diversifies reinvestment risk.
Yes. Again, strips would remove the risk of reinvesting coupons. There would still be reinvestment risk when the bonds mature and have to be rolled over. One possible solution is to buy longer bonds whose maturities match your needs for money, and then simply hold.

George
Asset liability matching with strip bonds makes sense. There's no interest rate risk (price or reinvestment risk) and no liquidity risk. You pay commissions and bid ask spread only once.

The downside is that you have to prepay tax with strip bonds, although that's not an issue in a tax advantaged account. In a taxable account, a ladder of coupon bonds (discount preferably) or a GIC ladder might be better than a strip bond ladder.

You are exposed to the risk of unexpected inflation, which is true for all nominal bonds. But for a ladder with short maximum maturity, that's less of an issue. Or you could real return bond strips, although from what I understand, the market is thin for such securities.


There are two principles in bond ladders.

The first principle is seeking a risk premium. In this case, the premium you're seeking is the interest risk premium.

The second principle is diversification. You try to decrease the risk associated with the risk premium you're seeking by diversifying. Diversifying should decrease your risk, without decreasing expected return. Periodic investing diversifies across time. Time diversification is controversial to some, but I believe in it. By regularly replacing the oldest rung of the ladder, you are engaging in periodic investing. This diversification decreases the reinvestment half of interest rate risk.

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How Much Inflation Protection Do You Need and Currency Hedging Foreign Bonds

Post by Park » 24 Jan 2017 08:21

Two interesting morningstar articles for the novice investor

http://beta.morningstar.com/articles/78 ... -need.html

The more you need income from your portfolio, the more you need inflation protection. The more fixed income in your portfolio, the more you need inflation protection. The article then looks at target date fund compositions, when it comes to inflation protection. It's interesting that REIT and commodity exposure, which are commonly considered inflation hedges, aren't that popular in target date funds. When it gets to the retirement phase, TIPS are popular, allthough not in the preretirement phase. This may be doing somewhat of a disservice to Canadian investors, as RRBs aren't as readily available as TIPS. That begs the question, as to what Canadian investors should use as inflation hedges.

http://beta.morningstar.com/articles/78 ... -risk.html

This article provides sound arguments, as to why you should currency hedge your foreign bond exposure. What I hadn't read before was the difference in hedging foreign corporate bonds versus foreign government bonds.

"On average, the unhedged broad bond portfolio exhibited 50% larger fluctuations than the U.S. dollar-hedged fixed-income index. This risk is more pronounced in the global government market. From January 1985 through December 2016, the unhedged sovereign index’s volatility was twice the hedged WGBI’s, as shown in Exhibit 4. The sovereign bonds tend to have lower credit risk than the corporate bonds, and thus, fluctuations from foreign currencies are more accentuated."

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Re: Bond Ladders

Post by Park » 27 Jan 2017 11:12

Park wrote:
ghariton wrote:
Park wrote:But you can't get around reinvestment risk, unless of course you are using bond cash flows for consumption.
How about a bond ladder of stripped bonds, using only the residual?
A bond ladder diversifies reinvestment risk.
Yes. Again, strips would remove the risk of reinvesting coupons. There would still be reinvestment risk when the bonds mature and have to be rolled over. One possible solution is to buy longer bonds whose maturities match your needs for money, and then simply hold.

George
Asset liability matching with strip bonds makes sense. There's no interest rate risk (price or reinvestment risk) and no liquidity risk. You pay commissions and bid ask spread only once.

The downside is that you have to prepay tax with strip bonds, although that's not an issue in a tax advantaged account. In a taxable account, a ladder of coupon bonds (discount preferably) or a GIC ladder might be better than a strip bond ladder.

You are exposed to the risk of unexpected inflation, which is true for all nominal bonds. But for a ladder with short maximum maturity, that's less of an issue. Or you could real return bond strips, although from what I understand, the market is thin for such securities.


There are two principles in bond ladders.

The first principle is seeking a risk premium. In this case, the premium you're seeking is the interest risk premium.

The second principle is diversification. You try to decrease the risk associated with the risk premium you're seeking by diversifying. Diversifying should decrease your risk, without decreasing expected return. Periodic investing diversifies across time. Time diversification is controversial to some, but I believe in it. By regularly replacing the oldest rung of the ladder, you are engaging in periodic investing. This diversification decreases the reinvestment half of interest rate risk.
Please ignore the following, if you're not an novice investor.

https://books.google.ca/books?id=UD3p96 ... ng&f=false

When it comes to stocks, dollar cost averaging results in a lower average cost per share than the average price per share over the same time period. Dollar cost averaging takes advantage of volatility, which to some extent, is synonymous with risk in finance.

In the link above, Bill Gross points out that dollar cost averaging also applies to bonds. A bond ladder is a form of dollar cost averaging. So a bond ladder lets you take advantage of the interest risk premium with less risk, but also gives you higher return, by taking advantage of the volatility of interest rates.

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Re: Clippings 2017 - Scott Burns is signing off

Post by Peculiar_Investor » 27 Jan 2017 15:40

The father of the Couch Potato portfolio, Scott Burns, has posted Farewell and Thanks
Scott Burns wrote:This is (almost) my last column. It marks forty years of deadlines, thirty-six in national syndication. That’s over 5,000 columns and more than 3.5 million words. It’s the equivalent of 44 books or six tomes the size of “War and Peace.” It has been a wonderful run and I couldn’t have done it without you.

<snip>

Will I come back to writing? I think so. But for now, I’m looking forward to living life without deadlines. One obvious project is a portfolio cookbook for Couch Potato investors. Another is an exploration of what I call “the menu of life and death” about choices we make, individually and nationally, about life itself--- and how long it lasts.
For those more familiar with the Canadian Couch Potato, from their FAQ
Where does the Couch Potato name come from?

In a 1991 article, Scott Burns, then a financial writer for the Dallas Morning News, suggested investors simply put half their money in an index fund that tracked the S&P 500, and the other half in a fund that tracked the US bond market. Every year, he said, you should rebalance the portfolio so it’s once again 50% stocks and 50% bonds. “You need to pay attention to your investments only once a year,” he wrote. “Any time it’s convenient. Any time you can muster the capacity to divide by the number 2.” He called his ultra-simple investment idea the “Couch Potato portfolio.”
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Re: Clippings 2017

Post by DenisD » 01 Feb 2017 01:08

What The Experts Got Right In 2016 by Larry Swedroe
Every January, I compile a list of predictions that financial “gurus” have made for the upcoming year, especially the ones that gain consensus in the media or I frequently hear referred to among investors as “sure things.” I then keep track of whether these “sure thing” forecasts have actually come to pass through a series of periodic updates.

The turn of the calendar into a brand-new year means it’s time for our final review of 2016’s list.
‘Sure Things’ To Watch For In 2017 by Larry Swedroe

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Re: Clippings 2017

Post by Koogie » 02 Feb 2017 12:23

Lots of speculation in the press the last few days that some Canadian banks (CM, BMO, maybe RY) could be planning a stock split based on past history.

why-you-should-get-excited-if-canadian-banks-announce-stock-splits
http://www.theglobeandmail.com/globe-in ... e33852892/

or at

https://www.pressreader.com/canada/the- ... 6276597138


As they say, there is often a bump in the quarters following a split. Could be some quick money for those so inclined to that sort of activity.
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Re: Clippings 2017

Post by Peculiar_Investor » 02 Feb 2017 15:41

Did you know that FWF has previously discussed whether there is a stock split effect? If not then the topic is Stock split investment strategy.
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Re: Clippings 2017

Post by cardhu » 02 Feb 2017 17:26

why-you-should-get-excited-if-canadian-banks-announce-stock-splits
http://www.theglobeandmail.com/globe-in ... e33852892/
A good candidate for the financial porn thread. The author is attributing cause where none exists.

Extending the author's flawed thinking into other areas, we might conclude, if we observed that its raining and its Thursday, that it must be raining because its Thursday.

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Re: Clippings 2017

Post by ghariton » 05 Feb 2017 15:12

The Key Drivers For Growth In Canada

A good overview for those who don t have the patience to wade through the Bank of Canada s quarterly monetary policy report.

Two things caught my eye.

(1) Private sector business investment has been weak for the past couple of years, and has made a negative contribution to real GDP growth. This is a very bad sign for future productivity improvements, hence for future standard of living n Canada.

(2) The forecast increase in real GDP for 2017 is 2.1 per cent. Of that, almost half, or 0.9 per cent, is accounted for by growth in government spending.

Note that the forecast of 2.1 per cent GDP growth for 2017 doesn t factor in any protectionist measures by President Trump s administration.

I find this scary.

George
The plural of anecdote is NOT data.

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Re: Clippings 2017

Post by BRIAN5000 » 05 Feb 2017 16:31

Norm R tweeted this but no link here yet (?) seems like an interesting article.

https://papers.ssrn.com/sol3/papers.cfm ... id=2900447

Most common stocks do not outperform Treasury Bills. Fifty eight percent of common stocks have holding period returns less than those on one-month Treasuries over their full lifetimes on CRSP. When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks. These results highlight the important role of positive skewness in the cross-sectional distribution of stock returns. The skewness in long-horizon returns reflects both that monthly returns are positively skewed and the fact that compounding returns over multiple periods itself induces positive skewness.

The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform.

-under performance not only attributable to fees.
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Re: Clippings 2017

Post by Peculiar_Investor » 06 Feb 2017 17:54

Celebrating an anniversary, Happy 60th, RRSP | Toronto Star with some interesting background details and a view into current contribution rates.
Today, roughly 6 million Canadians — or 23 per cent of tax filers — contribute to RRSPs, a number that has remained fairly consistent since the TFSA was introduced eight years ago.

Canadians had about $951 billion in unused RRSP room in 2014, says Statistics Canada. “That means a lot of Canadians are not taking advantage of RRSPs,” says Ablett.
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Re: Clippings 2017

Post by ghariton » 06 Feb 2017 20:34

Remember that the previous government passed legislation to increase the retirement age from 65 to 67, and that one of the present government's first measures was to roll back the increase? Oops
The Trudeau government's economic advisory council is recommending Ottawa raise the age of retirement eligibility and explore a national child-care program as ways to deliver a much-needed participation boost for the country's workforce.

<snip>

encourage older Canadians to work longer, the council recommended the ages of eligibility for old age security and the Canada Pension Plan be "recalibrated and increased" to address the impacts of the country's aging society and longer life expectancies.

The idea contrasts with the Liberal government's move to reverse a controversial decision taken by the former Conservative government and return old age security eligibility to 65 from 67.

Raising the eligibility age so that it closes the gap between Canada and industrialized countries with the highest labour participation rate among workers 55 and over could add $56 billion to the gross domestic product, the council's report said.
We will see whether Mr. Morneau incorporates this into his budget. But it seems to me that the Council probably had their report vetted by the PMO before its release.

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Re: Clippings 2017

Post by Shakespeare » 06 Feb 2017 20:38

Mr. Morneau incorporates this into his budget
Unlikely.
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Re: Clippings 2017

Post by Koogie » 07 Feb 2017 10:00

ghariton wrote:Remember that the previous government passed legislation to increase the retirement age from 65 to 67, and that one of the present government's first measures was to roll back the increase? Oops
The Trudeau government's economic advisory council is recommending Ottawa raise the age of retirement eligibility and explore a national child-care program as ways to deliver a much-needed participation boost for the country's workforce.
<snip>
encourage older Canadians to work longer, the council recommended the ages of eligibility for old age security and the Canada Pension Plan be "recalibrated and increased" to address the impacts of the country's aging society and longer life expectancies.
The idea contrasts with the Liberal government's move to reverse a controversial decision taken by the former Conservative government and return old age security eligibility to 65 from 67.
Raising the eligibility age so that it closes the gap between Canada and industrialized countries with the highest labour participation rate among workers 55 and over could add $56 billion to the gross domestic product, the council's report said.
We will see whether Mr. Morneau incorporates this into his budget. But it seems to me that the Council probably had their report vetted by the PMO before its release.
George
More worrisome are the rumors about the changes to the rules for CCPCs.
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Re: Clippings 2017

Post by OnlyMyOpinion » 07 Feb 2017 10:57

The points - national childcare and moving OAS eligibility upward - don't exactly jump out of the report. The discussion is found on pages 7-9 in the sixth of six pdfs on the gov't website. Discussion in the report is directional, without specific recommendations. Discussion around the table may have been more specific though?
Report: http://www.budget.gc.ca/aceg-ccce/pdf/w ... il-eng.pdf
Website: http://www.budget.gc.ca/aceg-ccce/home-accueil-en.html
I hope that any related federal changes would come as part of a coherent plan. Otherwise we may have to depend on Tim Hortons opening more stores to absorb those among the olds, youngs and new immigrants who are wanting or needing to work.
I suppose more low-paid child care workers may be in demand as well. :(

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Re: Clippings 2017

Post by Chuck » 07 Feb 2017 12:22

OnlyMyOpinion wrote:Otherwise we may have to depend on Tim Hortons opening more stores to absorb those among the olds, youngs and new immigrants who are wanting or needing to work.
I suppose more low-paid child care workers may be in demand as well. :(
Indeed, I was thinking I would like to see the report about all the jobs waiting for these seniors and housewives that are currently unfilled.

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