The reentry

Fourteen months ago this pathetic blog said pandemics are temporary. They suck hard. Then they pass. None has ever been permanent. Just wait. Stay invested. Wear your mask. Chill.

This one’s now in the process of cresting and retreating. Vaccines 1, bug 0.

But back in March of 2020 nobody seriously thought Toronto would still be locked down in May of 2021, that the RCMP would manning roadblocks in BC or pastors would be handcuffed in Alberta for holding a service. Meanwhile most Canadians look like alpacas because all the damn barbers are closed.

  This Covid thing has lasted so long that coming off it has created… issues. Government debt has gone off the cliff. House prices have inflated absurdly. Interest rates have crashed. Stock markets have soared. Millions have forgotten how to save, shower or wear pants. Downtown cores are ghost towns. Airports are empty. Small businesses are croaking. WFH companies, online retailers and the Big Tech guys have romped. Now we face questions about mandatory inoculations, vaccine passports and the return of WFW.

This week give s a case-in-point of the disruption faced as the virus retreats. Wall Street is moaning about a new Tech Wreck with the Nasdaq tanking. The problem? Investors see rapidly rising commodity prices as the global economy starts to reopen and inflation rekindles. That means nobody believes the CBs any more when they say interest rates will be suppressed for the next two years. Higher costs for raw materials and money means lower profits. And stocks respond.

The virus also did weird things to government. In Canada CERB funds flowed like the mighty Fraser River until there were billions stacking up in personal bank accounts. In the US spendy President Biden just sent a new round of $1,400 cheques to everyone. Household savings accounts in both countries are at the highest level in decades. Deficits in both have exploded. Biden has launched a new soak-the-rich plan to help pay for it.

Meanwhile government largesse has hit the labour market. There are currently 8.1 million open and unfilled jobs in the States – a new record. Fully 44% of small businesses report they can’t find enough people to work as the virus exits. The inevitable result will be higher wages offered. Inflation. Now combine that with today’s seriously-messed-up supply chain, insane prices for houses, lumber, puppies and Pelotons and you can see the problem. The guy renovating a duplex across the road form me just found out there’s a global shortage of heavy wire. He ordered two soaker tubs and has to wait 14 weeks. After thirty years of building stuff he is shocked at the price of plywood. Drywall. Tiles.

In other words, central bankers are losing it. An economy can run hot for only so long, until it melts. When a guy in Tofino pays $1 million above asking for a $1.4 million condo townhouse, or the Dow Jones index sets 24 all-time record highs in five months or a pretend-money coin with s Sheba Inu on it inflates 20,000% in twelve months or a collector pays $500,000 for the NFT of kid in front of a burning house in 2006, you know it. This is not a normal reentry.

Where is all this taking us?

Tech stocks seem to know. The post-Covid period (a few years, not months) will likely be characterized by swelling prices, a big spurt in consumer spending and seriously higher commodity prices. Wages will grow amid a labour shortage when restaurants reopen, planes fly again, vacations are a thing once more, you can shop for shoes and Justin gets his locks bobbed. Most of Canada’s GDPfter all, is comprised of the service sector – which was shuttered by Covid.

By the way, a reopening economy amid rising costs also means the 40% jump we’ve seen lately in corporate profits was no accident. As companies make more, P/E ratios decline. Suddenly an inflated stock market doesn’t look like a gorilla.

All this points to inflation – not hyperinflation (will never happen here), but a solid reading which will guarantee interest rates increase long before the late-2023 timetable you were given. Of course, higher money costs are the last thing needed when you’re $1.3 trillion in debt and spending $400 billion a year more than you earn – which is why 2022 will also be ushering in higher taxes in Canada.

More reasons to (a) lock in your mortgage, (b) take profits and (c) stuff your tax shelters.

Oh, and gas the car. More on that tomorrow.

About the picture: “I’ve been reading your blog for years and wake up every morning at 5am to start my day with coffee in bed (while reading your blog),” says Alanna. “I run the coaching program at Enriched Academy, an online curriculum to teach Canadians about financial literacy. We’re now working with the CFLPA, we’ve launched a pilot project with 3,000 high school students in Alberta, and are sharing our education with a lot of police officers, who have to go through our training as part of their overall training. Anyways, I wanted to share some pics of my 2-year-old Berner, George. He’s the sweetest and most cuddly dog. Please use whenever you feel!”

The big suck

Okay, go check your latest RRSP statement. If you see these three letters – DSC – written after the name of a security some dude sold you, you’re in jail. It’s the Mutual Fund Prison, designed to prevent people from doing what they should – which is breaking out.

Once upon a time mutuals were new, innovative and a whole lot better than trying to pick a few stocks based on your crazy BIL’s hot tips. Fund companies created these assets which allowed retail investors to have a broad (and useful) diversification, and also benefit from the skill and experience of a fund manager. It was his/her job to buy/sell assets and make you money. But in return for doing that they also needed a nice house, a cottage and a Porsche. So funds came with big fees – especially when they held assets like stocks (as opposed to, say, bonds).

Mutual funds swept the industry in the Eighties, Nineties & Aughts with companies like Investor’s Group growing fat on the spoils. During those years of high inflation, economic growth and robust markets, the funds gave good returns, so investing shmucks hardly noticed the 2% or 3% MERs (fees are disguised under the term ‘management expense ratios’). But people did notice the upfront charges also paid to the fund salesguy (disguised as an ‘advisor’), and balked. So the industry came up with a ‘back load’ solution. Yup, the DSC.

The ‘deferred sales charge’ revolutionized things for the fund companies for two big reasons. First, by removing the upfront charge and burying the MER this made the investment look like it was almost free. Second, by creating a back-end charge no investor would be happy paying, which lasted seven years, it locked people into funds even when they were pooches and deserved dumping.

Here’s a typical DSC schedule. Take a gander at the giant money-suck for exiting in the first year or three. Ouch…

Now it’s worth understanding how much is involved here, and who the DSC victims typically are. The Mutual Funds Dealers Association is made up of fund companies plus advisors licensed to sell those assets, and currently oversees $700 billion in client funds. Over 9,000,000 households have mutual funds (more than half the country) and it’s estimated a quarter of this money is DSC. Most alarming is this: 83% of these households, the MFDA admits, have less than $100,000 in financial assets.

That suggests victimization. The people with the least are paying the most. Salespeople who traditionally flog high-cost mutual funds and are paid by trailer fees or front-end charges are in an inherent conflict of interest position. Did they recommend a fund purchase because it was the right choice for a low-net-worth household, or because they get a hefty fee? Then imagine the worry and stress of people discovering they can’t quit a fund because it disappointed or they simply need the money – without paying an outrageous DSC. Is this predatory? Do we wonder why so many people distrust the financial business?

Well, maybe you heard the good news Friday. The Ontario Securities Commish has finally relented and will ban deferred sales chares on all new fund sales – but not for a year. The OSC was a holdout after other Canadian regulators suggested two years ago that these blood-sucking charges be offed. But, better late than never. Now it’s national.

The change will give more transparency to the industry. Investors will gain more flexibility. Sales people masquerading as financial experts will have to find a more honest way of making a living. Become realtors? It’s just a shame this is a year away and that all existing DSCs won’t be nuked.

By the way, not all funds come with this structure. Some are low-fee and some pay advisors nothing – but most mutuals aren’t cheap. Read the prospectus. Better yet, buy ETFs.

Exchange-traded funds have two big advantages: they trade on the markets (like stocks) and can be bought or sold with the click of a mouse. More liquidity means more security. Second, they’re incredibly cheap. And getting cheaper. Embedded fees are miniscule compared to mutual funds, often less than one-tenth of one percent. That’s because most ETFs don’t have suspender-snapping 911-driving portfolio managers, but operate as passive index funds. The good news is that 90% of managers don’t beat the market, anyway.

So what does a good advisor do?

Sell you nothing. Take not a nickel in commission – from any asset, fund company, insurance provider nor any other third-party. Rather this person should build a low-cost, liquid and  balanced portfolio of the right combo of ETFs, guide you in avoiding (not evading) taxes, ensure a good mix between real estate, retirement funds, kids’ resources, mad money and help you craft a long-term strategy for financial security. A holistic approach. For that you pay a small monthly fee. Often tax-deductible. No back-end charges. No imprisonment. No conflict. And, no, [email protected] doesn’t do this. Nor do robos. And Investors Group is gone. Now it’s IG Wealth Management.

But we know.

About the picture: “Thanks for your blog. I am a financially clueless individual who loves and is dedicated to reading your blog,” says Sandrine. “I think you had me at “dog.” Raised by back-to-the-landers on a tiny island (Lasqueti) in the straight of Georgia I learned the way of nature, but my understanding of money and investments? Laughable! Thank you for keeping it fun, however I still haven’t invested in ETFs. I need help, Obviously! The good news is that I still have a job and a pension. ICU nurse. Bitter sweet. Here is our old girl, Molly Bloom, at 14 years and at 4 months. How can you not love that face! Sadly, She passed away in March. We are gutted.”