Monday 31 August 2009

Book Review: Worry-Free Investing (UK edition) by Zvi Bodie and Ian Sykes

"... invest in inflation-linked government savings products"

That quote taken from the first page of the preface conveys the essential message of this book. The basic stance of the book is that essential "cannot afford to lose them" funds should be invested in inflation-linked products and if current savings are not sufficient to reach future goals that way, then one should either save at a higher rate, reduce goals or work longer, but not try to get a higher rate of return by investing in risky stocks.

I must admit to being surprised by the book. Despite the impeccable credentials of the authors (Bodie is a finance prof who co-authored the widely-used Investments textbook and Sykes is a consulting actuary in the UK) and the cover endorsements by a couple of Nobel prize winners, the good content is under-mined by poorly chosen assumptions for a number of examples.

Unrealistic Assumptions:
  • 2% real rate of return in Index-Linked Savings Certificates; the current rate is only 1% per National Savings and Investments; using Bodie and Sykes' own calculator from the downloadable spreadsheet on the book website, that would bump up the required savings rate by almost 5% of salary per year, a huge jump
  • 20 years in retirement; given rising life expectancy, one or the other of a couple is highly likely to survive beyond 20 years, especially if retiring before 65. Life expectancy is just an average - many people die older. If that happens what would one do if the planning has been to run out of money at 85 but one is still alive? Increasing the estimate of years in retirement to 25 by itself raises the requires savings rate by around 3%. Combined, the two factors would raise total annual savings to 24% of salary. To be really sure of being dead by the time money runs out, one might use 30 or 35 years in retirement. Is that realistic? The book's answer to life expectancy and the risk of outliving income from inflation-linked instruments is to buy an annuity. But buying an inflation-indexed annuity with the calculator's total estimate of future savings would, per the FSA website where current quotes can be obtained (it is commendable that the book provides the link), produce an annual income that would be far short - only about 61% - of the desired 70% income replacement.
  • 70% income replaced in retirement - on the other hand, the authors use without comment this oft-disputed piece of "retirement experts" advice; 70% is un-necessarily high in many cases, and significantly controllable by retirees. A lower retirement income can substantially reduce required savings rate - by about 4% using their base case numbers.
  • 10% annual rate of withdrawal from the initial amount of a retirement portfolio. The rule of thumb safe withdrawal rate in retirement is 4% for a mixed portfolio of stocks and bonds, so using an unrealistically high rate destroys the credibility of the book's contention, which is true, that the variability and the sequence of returns during the initial years of retirement make a critical difference in the long term survival of the portfolio. If a person were to withdraw 10% a year from a portfolio consisting only of inflation-indexed securities earning 1% a year, it wouldn't last long either.
  • introducing the idea that stocks are risky, even in the long run, in chapter 1 by showing the decline of stocks in a three year period - that's hardly the long run.
I also found it strange to see the authors showing how to construct a type of principle-protected note by combining bonds with call options. For a book seemingly targeted at the beginner level (later on they say if it is too complicated to pick up the phone to buy index-linked products, then you probably need a professional financial planner's assistance), the idea of buying options is likely far beyond what most people would feel capable of doing. Similarly the future value math formulas peppered through the chapters (and the companion website does not have the future value calculator as promised in the text) will surely seem daunting and complex to the beginner.

There is still a lot to like about this book and much useful advice:
  • defines risk tolerance in practical terms like the safer your projected future earnings, and the greater your ability and willingness to postpone retirement if risky investments perform badly, the higher your risk tolerance instead of emotions
  • stocks did not provide any inflation protection during the high inflation years of the 1970s
  • shows how to calculate value of future requirements and provides an online calculator at the book website
  • shows various methods (specific to the UK) for obtaining extra retirement income from one's home
  • recommending to people who do invest in stocks to do so via low cost index funds and suggests some circumstances when they feel it is appropriate for people to invest in stocks
  • presents a simple, sensible six step process to build a financial plan
  • tells how to find trustworthy professional advice and briefly debunks a number of myths that can lead astray
  • excellent collection of tools and useful links to websites e.g. FSA website for getting a current representative quote for an annuity from various providers, Government Actuary life expectancy tables
This book reminded me that Canada lacks one valuable savings product available in the UK - inflation-linked savings certificates which are completely free of tax. There is certainly a need for something that provides inflation protection and no default risk for a taxable account. As it is now with real return bonds in Canada, the government taxes everything on RRBs, including the inflation adjustment component of the return, which makes it quite unattractive to hold outside a registered account.

I cannot subscribe to the book's fundamental philosophy of taking no risk to achieve financial goals. I believe that investing in a diversified portfolio which includes equities can be a reasonable long term strategy to achieve long term returns that are substantially higher than the ultra-safe inflation-indexed products touted as the answer in this book. Between the ultra-safe strategy and the much riskier 100% stocks approach there is a middle ground. Sure if you don't need to, don't take the risk, but if you do, as most people do, then the restrictive alternatives proposed by Bodie and Sykes should not be the only path. You just need to be aware of the risk you are taking and be ready to do the back up plan of working longer. With the no-risk strategy, you are also sure that you will not have an upside either.

My rating: 3.5 out 5 stars.

Saturday 29 August 2009

Financial Bad Effect of Obesity

Apparently, obesity is not just bad for your physical health, it hurts you financially as well. In Obesity and wages: using body composition as an alternative to BMI, Georgia State University Economics professor Erdal Tekin finds that "... increased levels of body fat decreases wages of both males and females." The converse is true as well: "... individuals with high levels of fat-free mass or lean body mass earn a wage premium".

Along the way, he notes that Body Mass Index (BMI) - the ratio of weight in kilograms and height in meters squared - is not a very good measure of being too fat due to differences in body build, fat patterning, and muscularity.

Friday 28 August 2009

Secret of Canadian Bank Resilience Explained

It was reliance on you and me, that's what explains the strength of Canadian banks during the financial crisis, according to Rocco Huang and Lev Ratnovski in Why are Canadian banks more resilient? And what can we do about risky wholesale funding? posted at Vox. That's right, reliance on deposits instead of wholesale borrowing from other banks explains most of the difference in our banks' performance by insulating them from the freeze-up last fall of the inter-bank wholesale funding market. Maybe they could thank Canadians by lowering fees or raising interest on deposits? That would be fair wouldn't it? After all, if depositors provide the stable basis on which the Royal is able to make large trading profits, some quid pro quo is in order, no? Disclosure: Just on the off chance they do not follow through, I own some bank shares to get my share of the profits.

Thursday 27 August 2009

Canadian ABCP Explained, Health Warning

Bond expert Edward Devlin of PIMCO explained how ABCP works in Changing on the Fly: Canadian Credit Markets. Warning: reading and trying to understand how it works will hurt your brain! Only an expert could understand it. I doubt even 0.1% of average investors could, or 1% of investors not specialized in fixed income, even when it is explained clearly as in this example. Did regulators or ratings agencies like DBRS even understand what was going on?

PIMCO certainly knew what was going on and took advantage, though it seems not in a direct way, merely through exploiting the indirect effects; "Needless to say, PIMCO has not invested in the ABCP of any Canadian conduits, but we have found a way to capitalize on their market impact."

Favorite quote from this article, written in May 2007, a few months before ABCP blew up: " ... tick, tick, tick ..."

Moral of the story: don't invest in something you don't understand. That's why people like Warren Buffett say the average investor should stick to index funds, despite the fact that he, an expert, doesn't operate that way.

Reality check: if you think you understand something, ask yourself if you really do. The ultimate test of perfect understanding: could you explain to someone how to create the product in question?

Wednesday 26 August 2009

International Diversification for the Canadian Investor: partial evidence

There is much published material on how international diversification benefits US investors but surprisingly little on the topic from the perspective of a Canadian investor. While one would normally expect that results from one country will be repeated elsewhere, as with so much else in investing (e.g. mutual fund MERs are too high, bonds return less than stocks over the long run), it is always worthwhile to look specifically at the Canadian experience.

In 2007 two graduate students from Simon Fraser University, Lei (Jeff) Wang and Luoxin (Peter) Wang took a look at the period 1996-2006 in their thesis Can Canadian Investors Still Benefit from International Diversification: A Recent Empirical Test. They wanted to figure out how much benefit could be obtained from international diversification in recent years given the rise in world economic integration and the convergence of stock market returns, which we all observed last autumn as markets crashed together in perfect unison. They took account of currency shifts to estimate real returns for portfolios optimized using equities and/or bonds from the USA, UK, Japan and Hong Kong combined with Canadian stocks, bonds and T-bills/cash.

Their results are positive but less strong than I would have hoped or expected. Despite correlations that did not exceed about 0.7 amongst any of the asset classes and a number of negative correlations (especially bonds vs stocks), the benefits of both return enhancement or risk reduction (aka reduction of volatility / standard deviation) were quite modest. The main benefit came from the addition of international bonds, which provided a hedge against inflation for the Canadian investor. The optimized portfolios they came up with are decidedly unusual - most have a 0% weight in US equities and not a single one has any UK or Hong Kong equity component.

Part of the problem with the weak benefit they found is that, as they note, in this particular period of 1996-2006 the Canadian stock market outperformed everyone else's. That may not, probably will not, be the case forever, especially since the Canadian stock market is so concentrated in only three sectors - financial services, resources and energy. Thus, diversification should work better over a longer period in the future than their results show. A second point worth considering is that they found a fairly significant inflation-hedging benefit during a period when inflation in Canada has been consistently low. That also may not be true forever. It's good to have a supplement to real return bonds as an inflation hedge. The final point, which they do not discuss and which is probably significant, is that their portfolio construction method included no rebalancing. They calculated the single optimal portfolio for the duration. Rebalancing provides the "buy low-sell high" mechanism for enhancing portfolio returns and reducing risk. Perhaps they can do a PhD to do more calculations.

Economic Recovery after the Crisis - How Long? Lasting Effects?

Yesterday James Hymas of PrefBlog posted on the papers coming out of the recent Jackson Hole Symposium on Financial Stability and Macroeconomic Policy. One of the papers Hymas links to is Financial Crises and Economic Activity, written by Stephen G Cecchetti, Marion Kohler and Christian Upper.

They study the severity and duration of the numerous past banking and financial crises (no less than 124 between 1970 and 2007, out of which they pick 40 since 1980 to dissect). They estimate that the US and the UK will recover to pre-crisis levels of GDP by mid 2010. Japan will have had the shortest but the most severe recession. Canada is not mentioned. I guess that's because it did not have its own banking and financial crisis, it merely got sideswiped by that of the USA and the others.

They also conclude that there is no such thing as an average crisis and therefore trying to predict based on averages is useless. But they do identify a bunch of factors that influence severity of fall and speed of rebound to come up with their estimation, which is couched with the usual "results can vary a lot from the point number".

One interesting observation they make is that countries with sovereign debt crises who default have much shorter and less severe economic contractions. The money that need not be paid back to foreign lenders then gets used to fund domestic expansion. Hmmm, maybe the USA should stiff the Chinese who own so much of their government debt.

The bad news is that recovering to get to where GDP would have grown to had a crisis not occurred takes years, over 4 years on average. That's even when growth is faster after than before the crisis, as it often is. It's a version of the problem all too familiar to investors - a 50% decline needs a subsequent 100% increase merely to get back to the starting point. Worse, some countries have even suffered from on-going long term lower growth rates after the crisis ends, in other words they suffer lasting damage. Will that be the case this time with the USA or the UK?

For investors, possible longer term post-recovery effects - here the authors offer no opinion as to whether we are likely to face any of these negatives - include:
  • higher real interest rates as hugely increased government borrowing crowds out private borrowers, making capital investment costlier
  • rising actual and expected inflation
  • higher risk premia as both estimates of risk go up and willingness to take on risk goes down, which would lower returns of riskier things like stocks as safe haven assets are favoured

Tuesday 25 August 2009

Demand for Leisure or Demand for Freedom?

Subtitle: Bureaucrat emeritus tells the truth as he sees it

The seven deadly sins in aging policy and research: a cautionary list for policy makers and prognosticators by C. Eugene Steuerle provides no directly useful lessons or financial advice for the individual investor. Instead, it provides delightful reading, states uncomfortable truths, punctures ignorant or politically incorrect policies and twists of insight on aging, retirement and what people are really after in life. It is about the situation in the USA.

The piece tends to reinforce the idea that more people will choose to work longer and governments will change rules that encourage people to stop working too early.

Sample quotes:
"... “leisure” is almost a meaningless concept. People, at least those who are not economists, don’t just do “nothing. ... Among those intangible items we seek are freedom from financial pressures and the dictates of superiors in our jobs; we don’t like outside forces to command our use of time to do things we really
don’t like doing." Amen to that, brother.

"... my calculations show that by sometime before 2020 there are no revenues left for any other function of government other than providing defense, Medicaid, Medicare, and Social Security. Basically, middle-aged people today are scheduled, by the time they retire, to get almost everything government provides—for themselves."

Tuesday 18 August 2009

Disturbing Views of Children at Maclean's

The August 3rd cover of Maclean's blares out The Case Against Having Kids. Inside, the headline of the article, written by Anne Kingston, is "No Kids, No Grief". The sub-title gives a good summary of the content: "A new manifesto argues that parenting is bad for your career, your marriage, your bank book and your love life." Granted, Maclean's' is at liberty to sell magazines with controversial content, and not to give a balanced view. But I am still disturbed by the article for several reasons.

Despite the fact that Maclean's is not required to argue the pros as well as the cons, the absence of such makes it an prime piece of sophistry - clever argumentation of a fundamentally flawed position. It transforms a description of what is true for some people into a prescription for how everyone should act - saying in effect that the new reality is such and such, therefore we should all accept its inevitability, and adapt our behaviour - i.e. stop having kids.

Kingston's message is not merely that people should have a choice whether to have kids and not be made to feel bad if that's what they decide. Rather it is the dramatic, extreme proposition that having kids is a stupid idea, the very opposite prejudice. The closing paragraph, which asks for respect for those who choose not to have children, does not overcome the tenor and the bulk of the article's content, which is overtly anti-child - e.g. citing sensationalist Corinne Maier's description of children "If you really want to be host to a parasite, get a gigolo." with the prefacing words "Among Maier's hard-won advice" transforms what could, in a comedy show, be a funny line to parents who love their kids, into a straightforward statement of hate. In the No Kids Debate Continues rebuttal, Kingston acknowledges that Maier herself meant the quote to be ironic and provocative. (I hope Maier's own kids know she was being intentionally silly). Well Ms Kingston, you need to work on your writing craft because your preface to the quote gave no clue to its real intent.

Other problems in the use of language are found in her description of the term "child-free" versus "childless". Instead of merely portraying those who don't want kids in a neutral light, Kingston and those who don't want kids use the suffix "-free", which is used in advertising products without harmful ingredients like sugar-free, smoke-free, fat-free, caffeine-free. Implication: child = harmful. The original adjective for a person without children - childless - Kingston says conveys a "void" (accurate enough, but is a void always bad?) or "handicap" (not accurate, that's a value judgment added by some people upon learning the factual reality). The suffix -less means merely "devoid of" and depending on the word to which it is attached, can have a positive - selfless, blameless - or a negative meaning - witless, valueless - or a neutral, factual meaning - treeless, cloudless, waterless, childless. Please stop transforming and condemning perfectly good words. People who think it is a deficiency or a poor choice will still do so whether the label is childless or childfree. If there is any problem, it is with the word childfree, whose Wikipedia description includes a raft of complicating political and economic viewpoints.

Over at MercatorNet, Barbara Lilley does a pretty good job countering the emotional arguments that kids are inevitably bad for your love life and for your marriage in her post Children are Worth Having.

Maclean's and writer Kingston have also been deluged by considerable negative reaction and are backing off the universal prescription by saying that the article only portrays the point of view of a small minority: "the point of the article: to examine the small but growing strata of people who are choosing not to have children" in "The 'No Kids' debate continues". Kingston's rebuttal suddenly de-emphasizes the selfish motives and emphasizes the positive reasons people some adults choose not to have children - not feeling capable of coping, feeling they contribute more to society in other ways, taking pressure off the environment (really?!) etc.

Children do cost a lot to raise to the point of being productive members of society able to fend for themselves and pay taxes to help others too. And it is true that families bear a lot of cost (whatever amount or proportion the government currently bears, it's still a lot for individual families). The economic force does reduce people's willingness to have children at all or more of them. That's the way it is, but the discouraging automatic psychological implication of the article, a mistake in my opinion, is that it can only be that way.

It is discouraging because it doesn't have to be that way. Governments, especially, and companies, to some extent, can provide programs and incentives that make having children much more viable. And when governments and companies do, people have more kids, proving that when the money is there, people naturally gravitate to the kids option. A previous, and much better, Maclean's article in 2007 by Lianne George Making moms: Can we feed the need to breed? described such initiatives in France and Québec that have evidently (rising birth rates are the proof) successfully removed the monetary barrier to children.

It is also discouraging because on a societal level, the promotion of an anti-having children mindset will exacerbate the problems of increasing longevity and a birth rate in Canada that is far below population replacement levels. If too many decide not to have kids, then eventually there won't be enough people to do the work, or alternately, work will shrink to fit. That will put pressure on taxes, government spending programs, economic growth, investment values, pensions as the pitter-patter of little feet gives way to the shuffle of walkers.

Not only are children well worth the effort on the whole in their own right, we need them for our future.

China ETFs and Mutual Funds - Any Difference?

The Contenders: the two largest by assets of each type

Mutual Funds
1st answer: No, there is no difference
Though the ETFs are explicitly passive index followers and the mutual funds are presumably active managers trying to pick winners, their holdings all look remarkably the same. Take a look at the top ten holdings table below, where I highlighted with different colours the common companies in each fund. It is a very colourful chart!! There is only ONE company at most in each fund that is not found in at least one other. Six companies are in all four funds. Even the place of individual companies in each top ten looks quite similar. The funds are all heavily concentrated in their top ten, with the total assets devoted to the top ten ranging from 50 to 60%. Finally, even the mutual funds are more or less fully invested, with the maximum cash holding being HSBC's 4.5% - if active fund managers were to be able to time a market peak and pull back, would it not have been a good time a few weeks ago (the time of this data) when valuations seemed to be ambitiously high? Today's Globe article Shanghai exchange: Tea leaves might be helpful talks about a possible growing chinese bubble, which is after recent days' big declines.

The net result is that FXI and GXC track each other's market performance very closely (easily verified by a Yahoo stock chart). I bet HSBC's and AGF's would too, except for ...

2nd answer, Yes, there is a difference
Perhaps this is no surprise for observers of ETFs against mutual funds, but the ETF MERs are vastly lower:
  • FXI - 0.74%
  • GXC - 0.59%
  • HSBC - 2.56%
  • AGF - 2.94%
With the holdings being pretty well the same, the extra MERs will surely drag down the net performance for the mutual fund investor by about that 2% difference. Maybe a series of small trades could eat away that ETF advantage through trading costs but someone planning to buy infrequently and then hold with medium size amounts (e.g. $10 trade commission on an ETF on $1000 purchase is a 1% cost) would be much worse off in the mutual funds.

On the other hand, I have read that professional fund managers with resources to do proper research in less developed and therefore less efficient markets, such as China surely still is, can outperform and produce returns superior to an index (see this 2007 YouTube video of Random Walk Down Wall Street author Burton Malkiel - the market efficiency discussion starts at around 33 minutes).

Maybe the China mutual fund managers need to re-think their value proposition and either adopt outright passive indexing and drop their fees considerably, or start doing their job of company analysis and start earning their fees?

Thursday 13 August 2009

Book Review: The Panic of 1907 by Robert Bruner and Sean Carr

Financial history distilled into a thriller, that's what this book is. The short chapters tumble along and I found myself being caught up in an exciting story as the authors capture the mood of that time when the whole edifice of banking was poised on the brink of collapse and minutes at times lay between catastrophe and survival. The cascade of events, one crisis overlapping and exacerbating another, created extreme pressure under which both the public and the professional, supposed leaders, often wilted and panicked. But some men (and at the time, it seemed all were men) excelled in making the correct instantaneous decisions of huge consequence, chief among them the famous financier J. Pierpont Morgan.

Those who think the crash of 2008 was unique or more severe should read this book. You may find yourself thinking of all sorts of parallels between 1907 and 2008 - a sort of ironic "panics 101, as in 2008-1907 = 101". The authors deliver on the subtitle's promise of "Lessons Learned from the Market's Perfect Storm" in a last chapter where they provide a most helpful summary of the seven factors (with lots of references, being the good academics they are) that allow such deadly storms to occur:
1) System-like architecture to enable trouble to travel and propagate
2) Buoyant economic growth, engendering false optimism
3) Inadequate safety buffers, to stop a small slide before it becomes an avalanche
4) Adverse leadership, both political and economic, create an environment vulnerable to shocks
5) Real economic shock - the spark of the panic is an event of consequence that everyone understands is bad
6) Undue fear, greed and other behavioral aberrations create a self-reinforcing excess
7) Failure of collective action, which is necessary to prevent or put an early stop to a panic

The book's concluding "Coda: can it happen again? ... Almost certainly, it can." was written in 2007 (date of publication) it seems. Too painfully prescient. My one criticism of this book is that this conclusion is too timid. Since 1907, there have been numerous other crashes, 2008 being only the most recent. Though specific lessons are learned and defects fixed after each crisis (1907 led eventually to the creation of the Federal Reserve to improve the flexibility of the money supply and to institute deposit insurance to stem bank runs), the nature of our financial system has not changed in a way that can prevent future crashes. Governments, regulators and industry are always one step, one crisis behind.

The inevitable conclusion should be: IT WILL HAPPEN AGAIN. One needs to take measures both to try to detect the next bubble and subsequent crash and to organise finances to be able to withstand it in case one gets caught in the storm anyways.

My rating: Highly recommended. 4.99 out five stars (0.01 deduction for the slightly wimpy prediction)

Wednesday 12 August 2009

Gail Bebee Warns on Treating Cottage as an Investment

No Hype Investing author Gail Bebee sent along the following note on cottages.

"Five reasons to avoid the allure of cottage country real estate

Toronto, August 12 – The long awaited summer weather may be tempting some Canadians to join the ranks of those who own cottages. “I don’t think owning a cottage is a good investment,” says independent investor and personal finance author Gail Bebee. “If you love the cottage lifestyle, go ahead and buy a property by the lake, but don’t buy it strictly as an investment. There are better places to put your money to work.”

Here are some of the reasons Bebee thinks owning a cottage is not a good investment:

1. Real estate is illiquid, so your money may not be available when you need it.

2. The return on your investment is not guaranteed.

3. Ongoing costs (taxes, insurance, maintenance etc.) eat into your profits.

4. Cottages demand your personal time, especially for upkeep.

5. Transferring the family cottage to the next generation often results in family quarrels, or misery if the cottage must be sold to settle an estate.

For more information on the pros and cons of investing in a cottage or to arrange an interview, please contact:

Gail Bebee

Canada’s Independent Voice on Personal Finance

Personal finance speaker and author of No Hype—The Straight Goods on Investing Your Money

Tel: 416-733-0221"

As a cottage owner, I can only agree that a cottage should be for fun not profit. What you gain in appreciation seems to be more than taken up with maintenance and tax increases alone. Came across this useful summary of advice on how to minimize various taxes by CIBC's Jamie Golombeck in this article by Jonathan Chevreau in June.

Tuesday 11 August 2009

Inflation, Alcohol and the Bank of Canada - an Unhealthy Mix?

"Inflation is like alcoholism.

When you start it, the good effects are immediate, and the bad effects come later.

When you want to stop it, the bad effects come immediately, and are very painful, and the good effects come much, much later.

And, like alcoholism, the later you stop inflation, the more you will suffer, and the longer it will take -- but, eventually, you will always have to stop it, or you will die."

(quote found in comments attached to Deflation in America: The greater of two evils on the Economist magazine website)

The Bank of Canada (BOC) seems to believe in an extension of the alcohol analogy, viz that a little bit of alcohol is good for you (see BBC article). The explicit policy of the Bank is that inflation should always lie in the range of 1-3%. It has been remarkably successful in that endeavour as inflation has averaged 1.96% since 1995, as can be found by plugging in the numbers on the Bank's inflation calculator.

Now comes the baffling bit. Another BOC background page says: "A situation where inflation is low enough so that it no longer affects people's economic decisions is referred to as price stability." Huh? Does BOC mean that if we don't notice, 2% inflation is price stability? It must be since another BOC page says "

Low inflation has many benefits

  • Consumers and businesses are better able to make long-range plans because they know that their money is not losing its purchasing power year after year."
So, low inflation (2%) = not losing purchasing power? Let's see, back to the BOC inflation calculator ... between 1995 to 2009 a $100 basket of goods in the CPI would cost $131.24. That's not exactly "not losing purchasing power".

Dear folks at BOC, why exactly do we need any inflation - why not target 0% and +/- 1% as the bounds? Deflation seems to be the big fear, the experience of the 1930s and Japan in the 1990s being cited everywhere as the reason to never, under any circumstances to allow the tiniest bit of deflation to occur. Yet the 1970s inflation, for those of us old enough to remember, was no pleasant time. Inflation transfers wealth from savers to borrowers and spenders, and deflation does the opposite. Shouldn't it be a level playing field rather than a permanent tilt to one group?

Oh, and alcohol is not like the rest of inflation. Stats Can's CPI Index and Major Components shows that alcohol and tobacco price increases far outstripped the general level of price rises, going up 32% since 2002 alone while CPI rose only 15%. Maybe everyone needs to lay off the booze a bit, in more ways than one. Claiming only the health benefits of alcohol without considering the risks isn't smart.

Monday 10 August 2009

Canada Post and UPS vie for Crappy Service Award

It's midnight in Halifax last Sunday and the sinking feeling of disaster strikes as you walk to your car in the parking lot and cannot find your keys. A quick phone call and you realize that you have left your keys back in Ottawa with your family. What to do?

Sending the keys by urgent courier the next day would seem to be the best course of action. But wait, the next day, Monday, is a civic holiday in both Ontario and Nova Scotia and all public and private courier services are closed. Quebec is open for business however. Hmmm, Gatineau is just across the river in Quebec so shipping from there would would work, n'est-ce pas? A call to Fedex, however, reveals that Gatineau isn't operating Monday either since that side of the river is served from Ottawa. Thanks for warning me, at least I know. To ship Fedex would require driving an hour and a half down the highway towards Montreal to reach the nearest area served by Montreal which is operating and moving parcels.

What about Canada Post? Maybe they are operating in Quebec? The website seems to suggest so - viz the Public Holiday Schedule. The next morning, just to be sure, phone up the nearest Gatineau postal counter at Marché Jovi and ask specifically, whether the Priority Next AM will deliver a package by the next day in Halifax. Answer: Yes. (It is interesting how few postal counters are in Gatineau as an attempt to locate one in the downtown area using the Canada Post "Find a Post Office" search tool proposes only locations in Ottawa when using the postal code of the Quebec-side Canadian Musuem of Civilisation - K1A 0M8 - as the search point.)

Drive to the Marché Jovi postal counter and ask again whether there will be a pickup and whether the Priority service will get there by Tuesday noon. Again, yes. Notice the sign above the counter touting the service "In a panic? Use Priority Next AM". Away the fateful package goes.

Later that day in the evening something seems not right when the online tracking tool gives a "no information available" message. The next morning, same story. The next afternoon in Halifax, no package has arrived either. Now learning the irony of the promotional blurb - panic, if present before the shipment, will be maintained and boosted further by Canada Post!

Canada Post customer service telephone rep says no follow-up or investigation is even considered until 24 hours after the delivery was due and then a case will be opened which they promise to give results of after another five business days. Another day passes and still no online status of any sort. Keys have disappeared.

Desperate person in Halifax enquires about getting replacement key made by dealer but is told that car would have to be towed to the dealer and, by the way, dealer cannot give an appointment to have key made till the following week. (btw, Replacement car keys make an interesting story. So glad that house key replacements don't work like car keys.)

After two days and no word or sign of the first key, a second spare key is sent by separate courier, this time UPS Express, whose tracking system appears to operate and shows key no.2 getting all the way to Dartmouth by early the next day.

Day 3, out of the blue Canada Post delivers the first key in the early afternoon. A few hours later after the fact, tracking information mysteriously and miraculously appears in the tracking tool.

Meantime, the key via UPS seems to have got stuck - no delivery that day, as per the service promise. All through day 3 and day 4, there is no change in status in the tracking system. Suddenly, late in the evening of day 4, a note appears in the tracking system that the delivery contains "multiple address errors". Funny, the identical address was eventually used successfully by Canada Post. And there was no attempt to contact the recipient's telephone number given to UPS nor does the tracking system show any attempt to load on the delivery truck. Looks suspiciously like an after-the-fact attempt to cover up the fact that the package was forgotten in the Dartmouth terminal for a day.

Canada Post is apparently going to refund the shiping fees automatically. UPS meanwhile is making it difficult to claim the shipping fees, saying it is necessary to go through the local UPS store where the package was dropped off.

Unfortunately, there is little the consumer can do when it is really necessary to ship something quickly. We are at the mercy of big organizations whose objective is to automate and reduce costs. Funny how the revenue generating systems always seem to work while the delivery and tracking systems flounder. Reminds one of airlines and their handling of baggage.

The whole idea of having to pay a huge premium to get one-day delivery service in Canada compares pitifully with the UK where ordinary first class mail gets delivered reliably the next business day, i.e. for 39p or about 71 cents vs the $35 it cost for the Premier Next AM. And the UK Post Office delivers six days a week. Guaranteed one day delivery costs £4.95 or $9.00.

Oh, and this episode suggests it is a good idea to keep the spare set of car keys inside the car. The CAA can pop open a door in a few seconds.

Update late August - both Canada Post and UPS have refunded the shipping charges, so they at least got that right.

Sunday 9 August 2009

DBRS says Defined Benefit Pension Plans not Doing Badly

With all the news about the woes of pension plans at Nortel and GM, it is encouraging that debt rating agency DBRS concludes in its August 2009 report Canadian Private Pension Plans - Losing or Cruising? that the state of DB plans in Canada is reasonable:
"From the review of the major private pension plans in Canada, there are three main conclusions that stand out:
• The outlook for pension plan funding remains manageable.
• Pension challenges are not expected to lead to rating events.
• The shift from defined-benefit plans to defined-contribution plans will continue."

DBRS includes metrics of 70 large private sector plans, so one can see varying asset mixes, past returns and funding gaps (see App.5), which is useful both for the investor and for plan member employees of those companies. Though the average is ok, I would be worried about Canadian Oil Sands Trust (42.7% under-funded) and Nexen (42.3% under-funded). Employees and shareholders of Bank of Nova Scotia (25.4% over-funded) and Great West Life (9.0% over-funded) need not worry about pension obligations.

Also of note,
Widely varying asset mixes
  • equity averages 51% of pension plan assets but is as much as 68% (Canadian Oil Sands Trust) or as low as 16% (Sears Canada, which might seem conservative but what does Sears' 34% of "Other" consist of - Hedge funds?)
  • fixed income averages 43% of assets and "other", defined mainly as real estate, averages 6%; the portion of fixed income has been rising
Return Assumptions Declining
  • now averaging 7.1% for all plans, return assumptions have been trending downwards over the past decade due to greater fixed income, falling interest rates and lower equity returns. They are now 0.5% lower than in 2002.

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