Juggling Dynamite

In our world of sub 1% interest rates on guaranteed deposits and government bonds, many people have moved their savings into principal-insecure assets in the hopes of picking up more yield nickels in front of oncoming steamrollers.

In the process, corporate asset prices have been bid to record highs once more.  As in similar fateful periods like the late ’20s, ’60’s, ’90s, and 2007, this price-indiscriminate behaviour has bought the perverse opportunity set of high capital implosion risk and still-low yields–since the higher the price paid, the lower the investment yield inherent–that’s just the math.  As shown below, global stock markets this week reached a record market capitalization (price x shares) of $95 trillion–the highest in history.

We should also note here that the one-month-meltdown between February and March 2020 returned global markets to the same level they had peaked at in 2007–13 years earlier.  And, although secular forces of gravity were stalled by central bank backstops since, a retest of March 2020/December 2007 price levels remains probable ahead.

A vaccine can’t fix any of this, but history assures us that much lower asset prices eventually will.  We should all look forward to and prepare for that opportunity.

There’s no free lunch.  Presently most items on offer at the financial product buffet offer negative health effects. Like highly processed junk food, they may look easy and attractive but will leave us in worse shape over time.

There are many healthy, life-sustaining choices, though, and they include:

• Doing everything possible to make our mind and body healthy and productive.
• Spending less than we make at every life stage.
• Living debt-free.  If we need to borrow for a home or our business, getting back to debt-free as soon as possible thereafter.
• Actively earning an income well into our 60s to cover expenses and build savings.
• Keeping principal security as our dominant savings’ objective even when yields are low.
• Knowing what attractive investment value looks like and not wagering our capital unless the risk-return odds are solidly in our favour.
• Deferring Canada Pension Plan withdrawals until after 65, where possible, because we will receive 36% less income for the rest of our life if we take it at age 60 versus 65 and 42% more if we can wait until age 70. (CPP is permanently reduced by 7.2% for each year if taken between 60 and 65, and permanently increased by 8.4% for each year that collection is deferred between 65 to 70).
• Where we need or wish more reliable retirement income than our pensions and principal-secure assets can provide–rather than betting money we can’t afford to lose in casino-like markets and schemes--we can consider using some non-registered savings to buy a life annuity with a guarantee period.  Although annuity yields are also linked to interest rates, when buying them after age 60, the guaranteed after-tax income-for-life can still be more than 4% (yes, you do have to give up the principal to buy one).

These are tangible steps that really add up over time.  As always, personal discipline is the highest yielding investment and, fortunately, it’s mostly within our control.

The BioNTech and Pfizer vaccine announced last week was developed by the husband and wife-co-founders of BioNTech, Dr. Ugur Sahin (age 55) and Dr. Özlem Türeci (age 53), and their team, based in Germany.   See The Husband-and-Wife-Team Behind the leading vaccine to Solve COVID-19:

BioNTech began work on the vaccine in January, after Dr. Sahin read an article in the medical journal The Lancet that left him convinced that the coronavirus, at the time spreading quickly in parts of China, would explode into a full-blown pandemic. Scientists at the company, based in Mainz, Germany, cancelled vacations and set to work on what they called Project Lightspeed.

In 2001, the couple founded Ganymed Pharmaceuticals to develop drugs to treat cancer using monoclonal antibodies. In 2016, they sold Ganymed for $1.4 billion. In 2018, Dr. Sahin said at an infectious disease conference that their company might be able to use its so-called messenger RNA technology to rapidly develop a vaccine in the event of a global pandemic.  The below graphic from the Washington Post shows how RNA vaccines work.

Last year BioNTech went public–its shares doubling since June, to a recent market cap of $21 billion–making the two co-founders among the wealthiest people in Germany.

The billionaire scientists reportedly still live with their teenage daughter in a modest apartment near their office, ride bicycles to work and do not own a car.

They partnered with Pfizer to accelerate the testing and distribution of their vaccine and they’ve not yet finalized the financial details of their agreement.  The reported results of their recent trials have not yet been peer-reviewed.

Mass-vaccination campaigns involve a complex network of suppliers, transporters, administrators and middle-people at the best of times.   BioNTech’s has the added challenge of needing two doses per person, administered 4 weeks apart, and storage around minus 70 degrees Celsius (-94 Fahrenheit–similar to the South Pole in winter) which no hospitals, medical offices or transportation vehicles currently possess.

Speaking to the BBC’s this week Dr. Sahin said that if their vaccine succeeds it would reduce transmission of the virus – but some difficult days still lie ahead.

Here is a direct video link.

The below graphic from The Economist summarizes the seven leading vaccine contenders currently in phase three trials.  Here’s hoping…In the meantime, it appears, in a best-case scenario we face another nine to twelve months of disciplined social distancing and mask use, not to mention associated financial, social and mental health challenges.  Could be longer.  Acceptance, patience and a longer-term mindset are key.

Danielle was a guest with Jim Goddard on Talk Digital Network, talking about recent developments in the world economy and markets.  You can listen to an audio clip of the segment here.

Pandemic and sudden income loss have made people more aware of their vulnerability.  Even as interest rates have fallen again since March, loan demand is weak and cash savings in bank accounts have risen sharply.  These are financial-health-restoring-trends in the right direction for individuals; not so much for banks and other lenders.  See Deposit interest rates are taking a pandemic nosedive:

The average rate on savings accounts at U.S. banks stands at 0.08%, down from 0.1% in early spring, according to Bankrate.com, a personal-finance website.

But for many people, money stashed in a savings account represents an important protection against potential financial hardship. Easy access to that money outweighs the fact that they are being paid peanuts in interest.

Andrew Frisbie, executive vice president for consumer pricing at Novantas, said the pandemic had made many customers more interested in saving money for an emergency.

At the same time, demand for commercial and industrial loans is also weak, as shown below, courtesy of DailyShot.com, for small, medium and large firms.  When debt levels are already high and revenues/income/demand weak, more debt is not ‘stimulative’.