Juggling Dynamite

A good historical overview of the retreat in globalization now sweeping the world can be found in  Whatever Happened to Free Trade?

Globalization is a secular cycle, now in its third mean reversion since the late 1800’s as charted below.

The first expansion cycle lasted 43 years and then spent 37 years in the retracement phase (1913-1950). The second expansion lasted 23 years, followed by 15 years (1973 to 1988) of retracement. The third lasted 20 years from 1988-2008 , before beginning the give back period now in process. Now just 9 years in, we should expect this downcycle in global trade, capital flows and growth to continue for several more years, perhaps a decade or more.  This is all par for the historical course.

Trees can’t grow to the sky, hence we need the downturns to reboot and refresh:  to burst asset bubbles, consolidate debt and reallocate capital from speculation to productive investment and policies.

Good perspective on the impact of bubblenomics and asset price gains, relative to income, courtesy of Patrick Watson today in Charts that Matter:

“More net worth is always good, right? Not necessarily. This chart from 13D Research shows US household net worth divided by average disposable personal income over the last 50 years.

If you do everything right and are lucky, your net worth should be greater than your income. But if it is too high relative to your income, it may be unsustainable. Peaks tend to coincide with recessions and bear markets. Today, the ratio is near an all-time high and very close to the last peak just ahead of the 2007–09 recession. That vicious bear market knocked the ratio back down to its long-term average. It has since crept higher again. In fact, much of the net worth was illusory in the first place. Housing accounts for a big part of it, with both banks and homeowners marking property values well above realistic selling prices. It may be happening again.”

It reminded me of this chart of the incredible leap in Canadian and Australian household wealth relative to other countries in 2016, courtesy of bubbling realty prices.  Since few cash out when asset prices are unreasonably high, most will keep holding as their net worth retreats through the mean reversion cycle once more.

Another CBC update today on their whistle-blower investigation into predatory financial practices throughout Canadian banks.  See:  Go Public:  ‘I feel duped’:  Why bank employees with impressive titles could cost you big time.

The findings reiterate the case for why Glass-Steagall like divisions must be re-established between deposit taking banks–backed by taxpayer-funded insurance–and the financial/investment product sales franchises.  But this is not just in banks, it is financial sector wide.  Allowing the product sales side to dishonestly promote itself as ‘advisory services’ (with an ‘o’, as opposed to fiduciary adviser with an ‘e’) since the late 1990’s, has been a financially suicidal time for individuals, families and the global economy, now teetering once more on toxic debt and asset bubbles.

What the article misses however, is that individuals play a leading role in their own poor financial outcomes. It takes both a self-interested, sales rep and gullible, greedy, misinformed or undisciplined clients to enable destructive financial plans and execution.

In this article, the ex-RBC client Black, is set up for disappointment and frustration from inception by virtue of his own insufficient savings and unreasonable expectations about what returns he can safely earn, and when he can afford to retire (he has no pension).  Black makes the classic error of believing he can retire because he has “worked for 35 years”.  Years in the work force is not the test here folks!!  The test is:

1. what are your income needs for retirement?
2. how much savings have you accumulated to date?
3. what income can your savings safely produce, without unduly risking the capital, given currently available yields?

When current yields on GIC’s, CD’s and government bonds are yielding less than 2%, rental incomes are increasingly negative, corporate debt and equities are dramatically over-priced and yielding very little in exchange for high capital risk, then we have to factor the reality of the environment into our financial plans.

We don’t get to put ourselves in different public markets.  We can’t pay higher fees to a sales person and expect that will somehow magically make our savings produce more safe income. To the contrary–paying higher fees in this environment is most likely to have the opposite effect–more risk, capital losses and even lower returns over time.  And this is all before we even get into the next bear market which is likely to remove anywhere from -25 to 55% from currently egregious asset prices.  This is not true because I say so, this is true because it is the math we all face in our present market cycle and current asset valuations.

One million dollars in this environment, without unreasonable capital risk, can safely produce 1 to 2% of income per year.  This will only improve, when asset prices mean revert lower so as to produce higher income yields with much less capital risk.  Until that happens, signing up with sales firms who say you can retire now, or produce returns that are 2, 3 or 4 times the rate of available yields, is pure folly and willful blindness.

Those who can see truth and control their financial choices and behavior accordingly, will earn much better returns ahead.  Those who cannot however, will earn the usual fate of undisciplined financial behavior:  lost money, lost time, insufficient capital and psychological anguish. Bad returns indeed.