Juggling Dynamite

The 2019 Household Balance Sheet Report by Investor Economics found that in 2018 the financial holdings of Canadians–deposits, investment funds and direct holdings of securities–declined for the first time since the 2008 financial crisis.

This was the first year in a decade that Canadians on average started directing free cash flow to pay down debt rather than buy investment products.  As this trend continues, asset management companies should experience an ongoing decline in the amount of money going into their offerings, specifically toward retirement savings, the report said. See:  Canadians shift savings from investing to repaying debt for the first time in a decade.

This is a constructive step for households.  Depending on one’s income level, sometimes, the math does favour making tax-deductible contributions to retirement savings accounts before paying personal debt, but rarely in the case of non-registered savings.  In most cases, the interest rate on personal credit outstanding far exceeds the net return likely in investment markets.  Moreover, first and foremost, strong financial foundations are built on being cash flow positive and debt-free, with a healthy cash buffer maintained for contingencies.

At our management firm, we have long advised that individuals pay off their debt first before building savings in non-registered accounts. But this makes us a rare voice in a financial business fixated on maximizing its profits ahead of the best interests of its customers.

Two decades of risk-buying and insufficient savings/contributions have set both individuals and pensions on an unsustainable course.  Public pension and retirement funds are currently underfunded by trillions of dollars.  As the world weakens into the next recession, low and negative investment yields will intensify these issues and force unpalatable decisions that have heretofore gone largely ignored.   Most will have to raise contributions and push out retirement dates significantly and/or cut withdrawal/payout plans.  The later reality is faced, the worse option sets will be.  See:  The DB pension plan business model has failed –and everyone is paying the price:

For the past 20 years, many private-sector companies across Canada followed the same risky strategies for their defined-benefit (DB) pension plans as they did in previous decades. Unfortunately, over this time these strategies cost stakeholders almost $158-billion and jeopardized the retirement security of millions of Canadians.

…DB Pension Divisions are investing this money in a way that’s mismatched from the bond-like promises they made to employees. They make bets on equity markets and interest rates in the hopes of generating excess returns that will make it cheaper to pay these promised pensions.

But pain is not inevitable.  Facts must be accepted, and risks managed to meet financial goals.  Recessions and bear markets are recurring norms, not anomalies.  By anticipating and preparing for them in advance, repricing cycles can be used to one’s benefit.  Rejecting status quo recommendations, and coming into downturns with low leverage and high liquidity, are critical for successful outcomes.  Doing the opposite is self-destructive.

While the whole world is scrambling for ways to stimulate spending and economic growth, one way remains vividly evident and yet widely ignored: equitable income and opportunity sharing between men and women.

Men are not inherently smarter, better or more deserving workers than women.  Disproportionally enriching one sex at the expense of the other is not only indefensible, but it’s also bad for business and global demand. Fixing this requires an active effort on the part of all corporations, leaders and policymakers, it’s not happening on its own.  The status quo needs to understand that it is in all of our best interests to get this highly inefficient and damaging imbalance remedied without further delay.  A stronger economy requires greater income sharing.

$226,000 is a massive gap between salaries of men and women pic.twitter.com/52QsOaZVh4

— Business Insider (@businessinsider) September 6, 2019

Last week, for the first time ever, the Bank of Canada released a report examining the threat climate change poses to the country’s financial system and economy and concluded that physical risks from disruptive weather events and transition risks from adapting to a lower-carbon global economy make economic activity and the environment inherently intertwined.  See Climate change threatens ‘both the economy and the financial system’ says Bank of Canada:

Another risk posed by climate change is infrastructure damage due to more extreme weather, such as fire and floods. A side effect of that is the exploding cost of insurance claims.

That impact on insurance companies has been the focus of the Office of the Superintendent of Financial Institutions, which regulates Canada’s banks, insurance and trust companies and pension plans.

But experts argue that the economic threats facing Canada go well beyond the physical impacts of climate change — that a resource-dependent economy is vulnerable to an eventual consumer-driven shift away from fossil fuels.

The implications for companies and investors are huge both in terms of mounting liability costs for harm companies have, and are, inflicting, as well as higher producer responsibility and full cost accounting, likely to reduce earnings and free cash flow for things like dividends and share buybacks.

Already these issues are shifting where investors and pensions place capital as well as regulatory changes aimed at constricting corporate practices and requiring more transparent financial reporting to the public.

This important article:  Why the future of the global economy is about climate change is longer than a tweet but the time invested is worthwhile.  New terms of reference and language are part of the necessary changes underway:

“Our entire monetary and financial system as a globe has to change to reflect the simple truth that are only really just as a species borrowing from the planet — and if we don’t repay that debt, with interest, we will end broke, as a civilization: collapsing into authoritarian-fascism, as we grow ever poorer, running out of resources, at each others’ throats”.