Gold & Precious Metals
According to the Bank for International Settlements, the total of public and private debt in the G20 Nations is 30 percent higher than it was before the Great Recession of 2008 and 2009. And when you think of a crisis as a period for deleveraging, or starting to reign in and payback debt, that hasn’t been the case across the world’s 20 largest and emerging market economies, and policies like ultralow interest rates and quantitative easing have only acted to encourage and exacerbate the issue.
The concern stems from the stimulus driven policies of the world’s central banks that have allowed consumers to go out and make big ticket purchases at relatively low financing costs. Buying that new car or managing mortgage payments were made significantly more achievable because of how longer term interest rates were and are being suppressed. But as the Fed enters this period of altering their form of stimulus which they provide to the market by shifting away from an exhausted bond purchase program towards enhanced forward guidance on record low policy rates, the market still conceals a lot of uncertainty that becomes difficult to price in.
We like to believe in the efficiency of markets and that the price of an asset reflects all the current available information to any level of investor. And that encompasses the fact that expectations of future events are priced into the market as well. Hence the episode back in May of 2013 when Chairman Bernanke hinted at the idea of paring back bond purchases, the effect on financial markets was significant because easy money policies from the Fed provided fuel for risky assets. But now that the markets have seemed to have digested the idea of a taper from the US Federal Reserve and the realization that Quantitative Easing (QE) can come to an end, some analysts suggest that this is then realized in the price of financial assets.
Jan 18th Media Appearance Michael Campbell’s Money Talks.
KeyStone Financial’s Senior Analyst Mr. Aaron Dunn will be speaking on Money Talks radio show with Michael Campbell (CKNW 980AM) on Saturday January 18, 2014, at after 9:00 a.m. Pacific Time. Mr. Dunn will be discussing Income Investing and Dividend Growth Stocks. For those interested in the Income Stock Research service please go to www.keystocks.com. The appearance will be archived in the CKNW (Corus Radio) audio vault on Saturday morning – the appearance should be some time after 9:00am. http://www.cknw.com/audio-vault/. It will also appear on Moneytalks.net sometime after 9am and for the balance of the week. You will find it in “The Latest Radio Show & Michael’s Market Minute”.
Market Buzz – Registered Investment Accounts – TFSAs and RRSPs
When we talked about starting up a trading account with discount brokerage, we never specified the different types of accounts that are available. A regular trading account needs little explanation. It provides all the basic functions you need to buy, sell, and hold, stocks, bonds, and other securities. Any investment returns earned in a regular investment account are taxable as income, dividends, or capital gains. But investors also have access to a range of registered investment accounts which can provide some very attractive tax benefits. The two most common registered accounts in use are the Registered Retirement Savings Plan (RRSP) and the Tax Free Savings Account (TFSA).
Registered Retirement Savings Plan (RRSP)
The RRSP is a tax deferred account. A common misconception that many people share is that the RRSP is some type of investment. It is not. The RRSP is an investment account through which you can buy, sell and hold a wide range of different investments; just as you can in a regular account. What the RRSP does for you is allows you to contribute pre-tax income and generate returns on a tax free basis until the funds are withdrawn from the account. At withdrawal, the funds are taxed at your marginal rate for regular income. While inside the RRSP your capital can accrue returns tax deferred, which means that a portion of the return on capital you are generating actually belongs to the government (they collect their share when you make a withdrawal). One thing that is very important to understand is that when you withdraw your funds from an RRSP you do not receive the preferential capital gains tax treatment as you would in a normal, non-registered investing account. For this reason, the RRSP must be seen as a place to put capital for a long-term time horizon so it can fully benefit from the tax deferred treatment.
Basic Facts (RRSP):
• Contribution deadline March 1st.
• 2013 annual contribution limit of the lesser of $23,820 (2013) or 18% of gross income from the previous year.
• Individuals can choose self-directed (individual manages their own investments) or directed (a third party money manager administers the account).
• Unused contribution room can be carried over to future years.
• Withdraws from the RRSP are treated as income for the current year and taxed at the normal rate.
• Withdraws from the RRSP count as income and effect taxable benefits like OAS, CPP, and medical.
Tax Free Savings Accounts (TFSAs)
The TFSA is a tax free investment account. This means that you contribute money that you have already paid tax on but your investment returns on that capital accrue tax free. Just like the RRSP, you can hold a wide variety of stocks, bonds, cash instruments and alternative investments in your TFSA. One thing that people like about the TFSA is the flexibility. Investors can make deposits (up to the contribution limit) and withdraws at any time in the year with no impact to their taxable income or taxable benefits.
Basic Facts (TFSA):
• Contributions can be made at any time of the year.
• Annual contribution limit of $5,500 (2013) with ongoing inflation increases in increments of $500.
• Individuals can choose self-directed (individual manages their own investments) or directed (a third party money manager administers the account).
• Unused contribution room can be carried over to future years.
• Withdraws from the TFSA do not count as income and are not taxable.
• Withdraws from the TFSA do not effect taxable benefits like OAS, CPP, and medical.
The Power of Tax Advantaged Accounts
To illustrate how powerful these registered accounts can be we will use a simple example. We have three fictitious investors John, Jim, and Mary. Each has made an extra $5,000 in pre-tax income for the year that they wish to invest. John invests in a regular investing account, Jim uses his RRSP and Mary uses her TFSA. All three investors have a marginal tax rate of 30% and will each earn an average pre-tax return of 8% over the following 10 years.
John (Regular Investing Account): The regular investing account provides no special tax benefits and John must first pay tax on his $5,000 of income before he can deposit it into his account.
After Tax Contribution = $5,000 x (1 – 30%) = $3,500
John must also pay tax on his investment returns. We are assuming that the portfolio is taxed on an annual basis at a marginal rate of 35% (in reality it is a little more complicated).
After Tax Return = 8% x (1 – 30%) = 5.6%
After 10 years, the $3,500 after tax contribution will be worth $6,035.
$6,035 = $3,500 x (1 + 0.056)10
Jim (RRSP): The RRSP allows Jim to invest his income on a pre-tax basis so he retains the entire $5,000 as his initial contribution. The RRSP also allows investment returns to accrue tax deferred as long as they remain in the account.
Initial Contribution = $5,000
Annual Return on Investment = 8%
After 10 years, the $5,000 after tax contribution will be worth:
$10,795 = $5,000 x (1 + 0.08)10
But before Jim can run off with his money, he has to remember the tax. RRSPs are a tax deferred account but the bill must be paid upon withdrawal. The after-tax value of the portfolio base on the 30% tax rate will be $7,556.
$7,556 = $10,795 x (1 – 30%)
Mary (TFSA): The TFSA allows Mary to accrue investment returns tax free but the contributions are made with after tax dollars.
After Tax Contribution = $5,000 x (1 – 30%) = $3,500
Annual Return on Investment = 8%
After 10 years, the $3,500 after tax contribution will be worth $7,556.
$7,556 = $5,000 x (1 + 0.08)10
Because tax was already paid on the initial contribution and the returns accrue tax free, the capital can be withdrawn from the account at any time without any impact on taxable income.
RRSP vs. TFSA
You have probably noticed that in our last example both the RRSP and the TFSA generated the exact same portfolio value at the end of the 10 years. That is because we assumed the same tax rate at contribution and withdrawal. With the TFSA you pay the tax today. With the RRSP you pay the tax when you withdraw the funds. The most effective alternative is the account that pays the lowest tax rate. If your tax rate is lower today, the TFSA is the more attractive option. If your tax rate will be lower when you withdraw the funds 10 or 20 years from now, the RRSP is more attractive option. Although most of us will assume that our tax rate at retirement will be lower than in our peak earning years, the fact of the matter is that the future tax rate is unknown. We don’t know what the tax rate is going to be a decade or two in the future. What is more important than spending too much time deliberating between the TFSA and RRSP is that you make use of at least one of these tax advantaged vehicles. A lot of people like the TFSA due to its flexibility. Contributions and withdrawal (and then re-contributions) can be made at any point in the year (up to the respective contribution limits) with no impact on taxable income or taxable benefits.
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Disclaimer | ©2014 KeyStone Financial Publishing Corp.
Regards,
Jenny McConnell,
Administrative Assistant/Office Manager
INSTITUTIONAL ADVISORS
FRIDAY, JANUARY 17, 2014
BOB HOYE
PUBLISHED BY INSTITUTIONAL ADVISORS
The following is part of Pivotal Events that was
published for our subscribers January 8, 2014.
Signs Of The Times
“Global bond sales from emerging markets have defied all odds to hit a record high in 2013.”
– Financial Times, January 2
“Emerging-market stocks fell to a four-month low.”
– Bloomberg, January 3
Looks like a big rotation from stocks to reaching for yield.
“The total debt of local governments in China has soared to nearly $3 trillion on the country’s addiction to credit-fueled growth.”
– The New York Times, December 30
“Faced with a mountain of maturing loans this year, China has given local governments the go-ahead to issue bonds as a way of rolling1 over their debt – to avoid default.”
– Financial Times, January 2
“Another Ice Age?”
“Scientists have found indications of global cooling. There has been a noticeable expansion of the so-called circumpolar vortex.”
– Time, June 24, 1974
“But not only does the cold spell not disprove climate change, it may well be that global warming could be making the occasional bout of extreme cold weather even more likely. Right now much of the U.S. is in the grip of a ‘polar vortex’.”
– Time, January 6, 2014
In the 1980s disaster some wag observed that “a rolling loan gathers no loss”
In 1974, Time could relate global cooling to, well, global cooling delivered to a neighborhood near you via the polar vortex. In the mid-1970s, Ibn Browning noted that lengthy cooling trends were accompanied by deeper loops in the jet stream. In 2014, Time explains that this cold spell and polar vortex is due to global warming.
In the 1600s, tortured logic and writing was needed to promote the theory that the solar system revolved around the Earth. And now with Global Warming it is still the feature of promoting government science.
During the summer months, US weather stations recorded 2899 record lows and 667 record highs.
“Excessively high temperatures are already harming public health.”
– President Obama, November 1
A chart of US November to January Temperatures follows.
* * * * *
Credit Markets
The December 30th ChartWorks “Early Signs Of A Shift In Credit Markets” noted a negative divergence on the stock market – a technical alert.
More toward fundamentals, would be the action in the treasury yield curve. This served in 2007 when we noted that such a boom would run some 12 to 16 months against an inverted curve. Short rates increase faster than long rates. Early in 2007 we counted out that June would be the “Sixteenth Month” and the curve reversed in that fateful May. This was followed in June with credit spreads reversing. At that point even the most massive stimulus was doomed.
Going into the blow-off of March 2000, we just used the record of rising long rates. Typically the boom will run some 12 to 18 months against rising rates. Beginning in January 2000, we frequently noted that March was the “Eighteenth Month”. It was, and it was the “killer”.
On this credit cycle, long rates set their low in July 2011 and December is the “Eighteenth Month”.
Retrospectively, this worked on the very important stock market high in January 1973. Why was it so important – the worst bear since the 1930s followed. Charts are attached.
Any competent central banker should know this. Should know it well enough not to “fight the tape”.
As the stock market rolls over so will lower-grade bonds which are in “never-never” land.
This represents weak pricing power in most of industry and commerce.
This melancholy condition would be confirmed when the CRB takes out the November low of 272.
Precious Metals
Our main theme has been that the precious metals sector would trade opposite to the universe of orthodox investments. Lately this has been fully committed to stocks and lower-grade bonds.
The “opposite” play became evident in September 2012 when Bernanke’s decision to buy bonds was celebrated as a reason to buy gold and silver. This drove the RSI on the silver/gold ratio to 84, which we noted as a measure of “dangerous” speculation.
Orthodox favourites have soared to equally “dangerous” levels of speculation and as this fails it will set precious metals up as the “go to” sector.
The opportunity shows in the Monthly RSI, with that for the S&P at 77 and that for the HUI at 29.7. Both are at extremes.
While the sector is outstanding in prospect, the transition could be choppy.
Link to January 10, 2014 Bob Hoye interview on TalkDigitalNetwork.com:
http://talkdigitalnetwork.com/2014/01/stats-show-us-equity-market-drop-likely/
The boom has run 18 months against rising long rates.
- The typical duration has been from 12 to 18 months.
- A number of booms ended at “Month Eighteen”.
- The 1973 example is shown as it ended in January of that fateful year.
BOB HOYE, INSTITUTIONAL ADVISORS
E-MAIL bhoye.institutionaladvisors@telus.net
WEBSITE: www.institutionaladvisors.com
PIVOTAL EVENTS – JANUARY 8, 2014
“You can’t trust the Russians,” was the warning. It came from a Moscow cab driver, delivered to our son Henry. We had sent him to investigate.
From our point of view, it was an unnecessary caution. We never trusted the Russians anyway. Or the Chinese. Or the Democrats. Or wealth managers. Or General Petraeus. Or people from north of Baltimore or west of Hagerstown.
But what the heck?
You need confidence to buy Amazon. Or Google. Or Chipotle. You need confidence to buy a US T-bond, too. Or to let a contractor remodel your house on time and with the right materials.
But Russian corporate earnings are so cheap right now (in terms of the price-earnings ratio) you don’t need to trust Russians to profit from the situation there.
It’s why the Russian stock market is our top recommendation to members of our small family wealth advisory, Bonner & Partners Family Office (of which we have some important news below).
Since 2009, the world’s central banks have put an additional $8 trillion into the global economy. But this flood of liquidity has left Mother Russia high and dry.
The “trailing” P/E (based on 12-month “as reported” earnings) for Russian stocks is 5.7. This is in stark contrast to the S&P 500, which is trading on a trailing P/E of nearly 18.9. (In other words, a dollar of underlying Russian earnings is selling at a nearly 70% discount to a dollar of S&P 500 earnings.)
“It is priced for a crisis,” says Robert Marstrand, the British former investment banker who serves as the chief investment strategist at our little family wealth project. “And there is no crisis.”
Another colleague, Merryn Somerset Webb, editor of British finance magazine MoneyWeek, adds that Russian stocks are:
… cheap relative to everywhere else, and cheap relative to Russia’s own valuation history. Both measures are now much where they were back in 2008, and not far off half their averages over the last 10 to 15 years.
You will say that this makes sense. After all, who wants to pay normal prices for assets which are based in a very abnormal state? Surely anything dependent on a slowing economy, that is in itself dependent on gas and oil, is to be utterly shunned? As is any investment that comes with the appalling corporate governance on offer in Russia.
These are all perfectly good points. But there is cheap and there is cheap.
At current prices, investors are practically pricing in the return of Stalin, says Merryn.
So, we asked Henry to go to Moscow to have a look on behalf of Bonner & Partners Family Office. (We like to put “boots on the ground,” as they say. If those boots belong to a family member, all the better.)
We Owe the Soviets a Great Debt
“Russian companies are very inefficient. And they work in a world that makes it hard to get things done,” Henry reports.
“But you have to understand that Russians lived for 70 years in an economy that didn’t care about getting anything done. Output didn’t really matter.”
Before taking the capitalist road, Russians had an economy where, as one worker put it, “We pretend to work. They pretend to pay us.”
We owe the Soviets a great debt. They continued their experiment with central planning for seven decades. It should have been obvious at the get-go that you can’t increase output by letting bureaucrats run your economy. From the start, real, useful output began falling in the Soviet Union.
But God bless ’em. The Soviets kept up with it until they had proved conclusively that their centrally planned economy wouldn’t work.
Even now, the economy still suffers from serious problems – many of them the residue of the Great Experiment.
In the 1990s, the average Russian man had a life expectancy 20 years shorter than the average American. And according to former Goldman Sachs chief economist Jim O’Neill, who coined the term the BRICs, more than 60% of all Russian males over 40 die drunk.
And after the Berlin Wall fell, the Russian birth rate collapsed. In 2004, fewer than 11 children were born for every 16 Russians who died.
But Russian president Vladimir Putin has made some progress in this regard. A campaign to get rid of low-quality vodka has helped Russian men continue drinking longer. Now, male life expectancy in Russia is only 13 years below that of the US.
The Kremlin is working hard to try to keep their taxpayers from disappearing… and create even more of them. In 2007, for example, the City of Ulyanovsk organized a special “day of conception.” Workers were told to go home and go to bed. Prizes were given to those who had children nine months later.
Russia can be a tough place to do business. Businessmen, politicians and journalists often die under suspicious conditions. In 2003, the richest man in the country, Mikhail Khodorkovsky, was arrested. He spent the next 10 years in jail, on what looked to many like trumped-up charges. (Recently, the Kremlin announced he was being released.)
Even “outsiders” aren’t above reproach. Bob Dudley, the CEO of BP, was forced to flee Russia in 2008 in the wake of a management dispute and trumped-up tax-evasion charges (which were later dropped). Despite these annoyances, money is money. Russian companies may be benighted and labor in a world of woe. But they generate earnings. And you can buy these earnings at some of the lowest multiples in the world.
Henry concludes:
I was skeptical when I first arrived in Russia. But I came away confident that there is a real opportunity in Russia to take advantage of this country as it catches up with the rest of the world. What’s great about Russia is that the earnings are already there – we don’t have to buy “pie in the sky.
Regards,
Bill
Market Insight: Why Russia Is a Contrarian’s Dream Right Now
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
As you can see from the chart below of major market price-earnings ratios (P/Es), the Russian stock market is deeply unloved by investors right now.
That makes Russian stocks a contrarian’s dream right now…
We’ve been pounding the table on this opportunity both here at the Diary and at Bonner & Partners Family Office. We like to think of it as a “bull opportunity in the Russian bear.”
That’s because price-earnings multiples (and stock prices) are mean reverting. They may veer far from their historic average. But over time, they move back toward the average.
This is another way of saying that all things move in cycles. Nothing goes in one direction forever. No tree grows to the sky. And few things go to zero.
A case in point is Russian stocks. The last time P/Es were this low, in 2008, the Russian market rose by 167% over the next three years. And the time before that, in 2001, investors made 328% gains over the following three years.
You may not like Russia. You may not even trust Russians. But our advice is to trust in the power of mean reversion and the outsized returns you can pocket by leveraging this powerful force. Buy a Russian index fund now and hold for the long term. We expect at least 100% gains from this investment.
Ed. Note: This is exactly the sort of setup we look for at Bonner & Partners Family Office. That’s because family wealth investors have one big advantage most ordinary investors do not: time. Over time, you can put Mr. Market’s mood swings to your advantage. Buying when assets are out of favor… holding for the long term… and selling again when they are in vogue.
We believe passionately that this is the single best way to build wealth over time. That’s why, starting today, we’ll be sending you a series of bonus reports on what family wealth investing is all about. And how you can use the strategies developed by Bill and his team to build and protect your own portfolio. Look out for them in your inbox later today.
What Blows Up First? Part 1: Europe,
2013 was a year in which lots of imbalances built up but none blew up. The US and Japan continued to monetize their debt, in the process cheapening the dollar and sending the yen to five-year lows versus the euro. China allowed its debt to soar with only the hint of a (quickly-addressed) credit crunch at year-end. The big banks got even bigger, while reporting record profits and paying record fines for the crimes that produced those profits. And asset markets ranging from equities to high-end real estate to rare art took off into the stratosphere.
….continue reading HERE
and
What Blows Up First? Part 2: Japan
Of all the crazy financial stories of the past year, Japan’s might be the craziest. To recap:
For two decades, successive Japanese governments have fought the deflationary effects of bursting real estate and stock bubbles with ever-larger public works programs. These prevented the collapse of the country’s zombie banks and construction firms but didn’t produce the kind of growth necessary to bring the zombies back to life. The sustained deficit spending did, however, produce a public debt that as a percentage of GDP dwarfs even those of the US and Europe.
So in 2013 incoming Prime Minister Shinzo Abe demanded that the Bank of Japan inject enough credit into the banking system to produce at least 2% inflation. The bank acquiesced and in the space of less than a year more than doubled the size of its balance sheet by buying bonds on the open market with newly-created currency.
Now here’s where it gets strange.
….continue reading HERE
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