Wednesday, December 30, 2015

2015's Best of Pension Pulse?

In my final comment of 2015, I'm going to go over a few key comments of the year. To date, I published 238 posts this year and while I consider them all important, it's useful to highlight the ones which I think are worth remembering as we head to 2016.

January 2015

Outlook 2015: A Rough and Tumble Year?: I always start the year with my outlook which sets out my market views. If you read it carefully, you will see I made some bad calls on some biotechs (still like the sector) and small cap stocks in general but the big picture was bang on. In particular, I made great calls on deflation, shorting oil and the loonie and told my readers to keep steering clear of energy (XLE), Metals and Mining (XME), Materials (XLB) and commodities (GSG). That advice alone was worth more than a $1000 or even a $5000 annual subscription to this blog from major pensions and financial institutions!!

Prepare for Global Deflation?: A key macro theme I've been harping on for years is deflation. In fact, I laugh when I hear pensions like CPPIB, bcIMC or anyone else discussing "thematic investing." If you want to understand key investment themes, you better understand the advent of global deflation and what it means for all asset classes and thematic investments.

Will the Fed Make a Monumental Mistake?: Steven Roach just published a comment on Project Syndicate, The Perils of Fed Gradualism, but it  has been my contention all year that raising rates when the world ex-US is suffering from deflation is a major policy blunder. The Fed did raise by 25 bps in December but it's far from clear what the future path of interest rate hikes will be, especially if we get another emerging markets or financial market crisis.

Greece's Do or Die Moment?: Every couple of years we get another "Greek crisis" to remind us just how screwed up the eurozone truly is. As I wrote in that comment: "I'm very cynical on developments in Greece and the eurozone. I think too many people are being caught up in the theatrics of it all and a lot of investors are losing precious sleep over a lot of nonsense. More worrisome, they're not focusing on the bigger story, global deflation and the possibility of the Fed making a monumental mistake." 

February 2015

Will Deflation Decimate Pensions?: This is one of the most important comments of the year. As I've discussed plenty of times, declining rates are the primary driver of pension liabilities, especially when rates are at historic lows. In finance parlance, the duration of liabilities is a lot higher than duration of assets which means when rates are ultra low, a decline in bond yields disproportionately impacts pension deficits.

Will Longevity Risk Doom Pensions?: Another key risk to pensions is longevity risk. As people live longer, it means pensions will have to make more money to cover future liabilities. But make no mistake, longevity risk won't doom pensions anywhere near as much as the advent of global deflation.

The 'Inexorable' Global Shift to DC Pensions?: The world is moving away from defined-benefit (DB) pensions into defined-contribution (DC) plans and while it makes perfect sense for companies to unload retirement risk on to individuals, this trend should scare the hell out of us. Why? Because DC pensions are way more inferior than well-governed DB pensions, and companies are effectively unloading retirement risk on to the state which means higher social welfare costs down the road to deal with rising pension poverty. What else? the shift to DC pensions exacerbates global deflation at the worst possible time (ie., when all these baby boomers retire with little to no savings).

List of the Highest-Paid Pension Fund CEOs?: This was one of the most popular comments of the year but it makes Canada's pension plutocrats very nervous. They all make millions but some make a hell of a lot more than others and this comment highlights thorny issues on compensation including benchmarks used to determine compensation and why are we paying senior public pension fund managers with captive clients millions in compensation which is almost as much, if not more, than they'd be making in the private sector for a comparable job. Canada's pension plutocrats hate it when I shine the light on compensation, benchmarks and ask tough questions which their board of directors conveniently ignore (trust me, I hate writing on compensation too because it reminds me how woefully and ridiculously underpaid I am publishing this blog!!).

March 2015

Fully Funded HOOPP Surges 17.7% in 2014:  The Healthcare of Ontario Pension Plan is private (it should be public) but it's unquestionably the best large pension plan in Canada and the world over the last ten years. A lot of HOOPP's success is directly attributable to Jim Keohane, its CEO, who was instrumental in shifting the focus to asset-liability management after the 2001 tech crash. Unlike other large Canadian pensions, HOOPP does everything internally (is run like a multi-strategy hedge fund), has a much higher allocation to government bonds, and uses leverage and derivatives intelligently to deliver solid risk-adjusted returns over the long run. Their large bond allocation and fully funded status puts them in an enviable position, especially if global deflation materializes.

The Unwinding of the Mother of All Carry Trades?: Keep this comment in mind to understand trends in the U.S. dollar, bonds, commodities and emerging markets. It's all part of a massive global carry trade engineered by big banks and their big hedge fund clients which have leveraged this trade to the tilt. Importantly, if you don't understand carry trades, you will lose a lot of money in these markets.

America's Pensions in Peril?: An important comment which explains why America's public and private pensions are in deep trouble. In public pensions, there's a trillion dollar funding gap and in the private side, the great 401(k) experiment has failed. Of course, if you ask the conservative American Enterprise Institute, there is no retirement crisis (they are dreaming!!).

Transforming Hedge Fund Fees?:  Institutional investors are finally openly discussing hedge fund fees and terms. They're now realizing what I've been telling them for years, when it comes to hedge funds, it's all fees, no beef. In my opinion, all hedge funds should have a hurdle rate (like private equity funds), a high-water mark (to make up for losses before they start charging a performance fee again) and hedge funds managing multi billions shouldn't be charging any management fee whatsoever (if they're that big and that good, let them live and die by their performance).

April 2015

Fully Funded OTPP gains 11.8% in 2014: Along with HOOPP which I mentioned above, the Ontario Teachers's Pension Plan is one of the best and most recognized pension plans in the world. Teachers is bigger than HOOPP and it manages its assets and liabilities using internal and external managers. It too uses derivatives and leverage intelligently to juice its returns. Its CEO, Ron Mock, took over the reins from Jim Leech in 2015, and has done a great job leading this world class public pension plan.

Time to Short the Mighty Greenback?: Back in October 2014, I explained why the mighty greenback will keep surging to new highs, especially relative to the euro. I said that "I wouldn't be surprised if [the euro] goes to parity or even below parity over the next 12 months. There will be countertrend rallies in the euro but investors should short any strength." My thinking didn't change much since I wrote that comment. While everyone is talking about a recovery in Europe, they fail to understand this is a temporary boost due to the decline in the euro. I would be very careful trying to short the USD in this environment and pay particular attention to the Fed and the ongoing Euro deflation crisis.

Ron Mock Sounds the Alarm on Alternatives?: In late April, Ron Mock sounded the alarm on alternatives. He was part of a panel discussion which featured Michael Sabia, CEO of the Caisse and André Bourbonnais, CEO of PSP, when he stated his thoughts. In a world where every large pension and sovereign wealth fund is increasingly allocating more and more risk to illiquid alternatives, I think it's important to heed Ron Mock's wise advice and pay particular attention to pricing in the environment we are in.

May 2015

Are U.S. (Public) Pension Funds Delusional?: Of course they are, read this comment and you will understand why. By and large, they still cling to their pension rate-of-return fantasy. Unfortunately, NASRA is still smoking hopium and nobody wants to talk about the elephant in the room. I fear the worst for pensions as global deflation sets in, decimating them and forcing them to come to grips with the fact that 8% will turn out to be more like 0% or lower in coming decade(s).

CPPIB Gains a Record 18.3% in Fiscal 2015: It was a record fiscal year for CPPIB, Canada's largest public pension fund. Its CEO, Mark Wiseman, and his senior team delivered incredible results across the board. The value of its investments also got a $7.8-billion boost in fiscal 2015 from a decline in the Canadian dollar against certain currencies, including the U.S. dollar and U.K. pound (unlike PSP, CPPIB doesn't partially hedge its currency exposure).

The Bigger Short?: Another hedge fund guru, billionaire investor Paul Singer, came out with his thesis on why government bonds are the 'bigger short'. Singer and others, like the Maestro, warning of the scary bond market are simply wrong. Sure, bonds didn't perform well in 2015 but they didn't crater either and the point is while bonds are boring, they're important in preserving capital. Moreover, as I stated: "I couldn't care less what Singer says and neither does the bond market. I'm telling you there is no question whatsoever in my mind that  the titanic battle over deflation will not sink bonds. And if the Fed makes a monumental mistake and starts raising rates too soon, it will all but ensure deflation because this time is different."

June 2015

The Liquidity Time Bomb?: A comment that looked into liquidity issues governing the U.S. bond and stock market. While liquidity issues are a concern, I think it's the fear of global deflation which is weighing heavily on markets and fueling this insane volatility.

Against the Gods?: I attended a luncheon discussing volatility in markets and covered it here. There were many good points raised but the most important debate -- deflation versus inflation -- wasn't covered until Mr. Pension Pulse raised it to his ex-boss who was moderating the discussion.

CPPIB Bringing Good Things to Life?: CPPIB's acquisition of GE's Antares was unquestionably the biggest deal of the year and I think this will prove to be one of the best deals for the Fund over the very long run.

OECD's Dire Warning on Pensions?: No need to convince me, global pensions are screwed, which is one reason why I'm a strong proponent of well-governed DB plans.

CalPERS' Fiduciaries Breach Their Duties?: A look at whether CalPERS' fiduciaries breached their fiduciary duties by not disclosing all the fees paid out to their private equity general partners (GPs) throughout the years.

July 2015

Enfin, An Agreekment!: It was about time these Euro ditherers came up with a Greek deal. Unfortunately, it was more of the same, which means another Greek crisis will hit us some time in 2016 or 2017 (double sigh!!).

bcIMC Gains 14.2% in Fiscal 2015: British Columbia's giant pension fund posted solid gains in fiscal 2015 mostly owing to the China bubble. Hope they got out of that trade in time. As for Gordon Fyfe, bcIMC's CEO, I wish him a Happy and Healthy New Year and hope he's enjoying life out in Victoria (Gordon, "some things in life are tough" but you owe me a phone call...).

PSP Investments Gains 14.5% in Fiscal 2015: One of my best comments covering the performance of PSP Investments. It's important to note that PSP partially hedges its currency exposure which is one reason it underperformed CPPIB in fiscal 2015. Still, the results across public and especially private markets were very strong in fiscal 2015. I ripped into the benchmark PSP uses for Real Estate and continue to think it's a sham because it doesn't reflect the risks of that investment portfolio. Also worth noting that since writing that comment, there have been major departures at PSP. Bruno Guilmette, the head of Infrastructure, has left the organization and Jim Pittman, VP of Private Equity, also left PSP (the latter left on good terms out of his own volition but I find it very strange that two senior managers left so close together in December). It looks like André Bourbonnais is putting in his own people but if I was sitting on PSP's board, I'd be asking him very tough questions on these key departures in private markets where the performance was very strong in the last few years (I would also ask him the following: "Mr. Bourbonnais, do you want to surround yourself with a bunch of YES men and women or some truly great independent thinkers who will be able to challenge your views?!?").

August 2015

China's Big Bang?: By far the biggest global macro event of the year was the devaluation of the yuan. It heightened global deflation fears and it spooked the hell out of world markets. Remember, China pegs its currency to the USD, so a stronger greenback hurts its exports. More worrisome, China is struggling with deflation and if it allows its currency to depreciate, it will force Japan and other Asian countries to do the same, and this will mean America will import more disinflation and possibly deflation if an emerging markets crisis develops in 2016 (stronger USD = lower import prices!).

Trouble at Canada's Biggest Pensions?: More nonsense from the media which fails to understand the key difference between the Caisse, CPPIB, OTPP, PSP, etc. and other Canadian DB pensions is the former are better positioned to weather the storm ahead. Their fortunes aren't tied to the rise and fall of oil prices or the S&P/TSX because they are (for the most part) globally diversified across public and private markets.

Betting Big on a Global Recovery?: There are a lot of big hedge funds and other big funds betting big on a global recovery but 2015 hasn't been kind to them. This theme will be visited and revisited many times in 2016 and while I remain skeptical on any global recovery, it's an important one to keep in mind as we head into the new year.

September 2015

A Sea Change at the Fed?: While the Fed has traditionally emphasized the domestic economy in forming its monetary policy, it's increasingly looking at foreign developments and their impact on the U.S. dollar. This comment explains why this represents as sea change at the Fed.

The End of the Deflation Supercycle?: A comment I will be referring to many times as I simply see no end to the deflation supercycle, which spells big trouble for hedge funds, private equity funds, as well as global pensions and sovereign wealth funds.

A Looming Catastrophe Ahead?: September was a very rough month for stocks and corporate bonds. Lots of gurus like Carl Icahn came out to warn us of a looming catastrophe ahead. Of course, the only catastrophe I saw in 2015 was in Icahn's portfolio which is long a bunch of commodity and energy names that got killed this year!

October 2015

CalSTRS Pulling a CalPERS on PE fees?: It hasn't been a great year for CalPERS or CalSTRS, both of which were under extreme pressure to disclose all the fees doled out to all their private equity funds over the life of those programs. I'm a stickler for more disclosure on fees, benchmarks and a lot more at public pensions.

Prepare For Lower Returns?: Given my thoughts on deflation, the ongoing global jobs and pension crisis and demographic time bomb, I think it's safe to assume we're entering an era of lower returns. This is reflected in the record low bond yields around the world. Already, the CalPERS of this world are lowering their investment targets and I expect more U.S. public pensions to follow suit.

Can Central Banks Save the World?: Ray Dalio is worried about the next downturn but central banks have a few tricks up their sleeve and aren't going to go down without trying everything they can to stave off global deflation.

A Brutal Year For Top Hedge Funds?: No doubt about it, a lot of "hedge fund gurus" got clobbered in 2015. Even Bridgewater's risk parity strategies which some Canadian pensions replicate internally got whacked hard in 2015. It was a particularly brutal year for Bill Ackman, David Einhorn, and many other well-known hedge fund managers. And I expect this hedge fund shakeout to last for many more years. Still, don't shed a tear for these over-glorified billionaires. Despite huge losses, they're still collecting a 2% management fee on multi billions and spared no expense to party it up at their year-end shindigs.

Four Views on DB vs DC Plans?: There shouldn't be four, five or more views on DB vs DC plans. The sooner policymakers accept the brutal truth on DC plans, the better off hard working people all over the world will be over the very long run.

A Solution to America's Retirement Crisis?:  Yeah, Blackstone's solution, which ensures more money under management for alternatives shops (so they can collect ever more insanely high fees). When it comes to U.S. pensions, there's no justice as Congress panders to corporate interests and enables the quiet screwing of America.

The Subprime Unicorn Boom?: Who can forget the Theranos affair and the subprime unicorn boom?

November 2015

Towards a New Macroeconomics?: Larry Summers is right, secular stagnation is here to stay and the world desperately needs a new macroeconomic paradigm to address deficient aggregate demand.

Canada's Highly Leveraged Pensions?: A comment which discusses how some of Canada's premiere pensions use leverage to juice their returns and compensation!

PSP Investments' Global Expansion?: From leveraged finance to opening up offices around the world, PSP is on a global mission to bolster its public and private investments. They better start hiring the right people or else they're cooked!!

Forcing Green Politics on Pension Funds?: A critical and sober look at forcing green politics on pension funds.

AIMCo Investing in Renewable Energy?: A discussion with Kevin Uebelein, AIMCo's President and CEO on renewable energy and a lot more.

A Bad Omen For Private Equity Returns?: A must read guest comment on why investors need to temper their enthusiasm on private equity.

Elite Funds Prepare For Reflation?:  Oh boy, are they going to be sorely disappointed!!!

December 2015

Are Martingale Casinos About to Go Bust?: If you ask me, this is one of the most important macro comments of the year and it's a must read going into 2016. As central banks try to save the world from a deflationary disaster, they're sowing the seeds of the next financial crisis but have no fear, the Martingale casinos aren't about to go bust, at least not yet.

Overtouting the Canadian Pension Model?:  Did someone forget to remind me just how great Canada's large DB pensions truly are? While we have our fair share of pension fund heroes, we also have a lot of media "fluff" which typically distorts the truth on what Canada's large pensions are able to do internally.

Negative Interest Rates, Eh?: My former BCA colleague, Bank of Canada Governor Stephen Poloz, put on a brave face but negative interest rates are coming to Canada, and possibly to the United States, sooner than you think.

Will the High Yield Blow-Up Crash Markets?: No, it won't, but lower oil prices will continue to weigh heavily on high yield debt in 2016 and if the Fed goes berserk, watch out, it could really clobber the high yield bond market which is already reeling. This will hit many investors very hard but present great opportunities to a few buying up battered bonds through closed end bond funds.

Canadian Pensions Betting on Energy Sector?: A classic contrarian call which will undoubtedly pan out over the very long, long run but I think this is just hopeful wishing at this time as I see no end to the deflation supercycle wreaking havoc on energy and commodities.

Greek Pension Disease Spreading?: You better believe it is, just ask Illinois, Kentucky and many other states that are struggling with their chronically underfunded public pension plans.

Giant Pensions Turn to Infrastructure?:  Leo de Bever, AIMCo's former CEO, shares his thoughts on why giant pensions should invest in unlisted infrastructure. Great insights from the godfather of infrastructure.

No Enhanced CPP For Christmas?: What else is new? So far, Justin Trudeau's Liberals have failed to impress me. They committed the biggest pension gaffe of 2015 and are dithering on enhancing the CPP. Our politicians need to get to work and introduce real change to Canada's pension plan. Don't wait till the economy gets better, if you do you'll never enhance the CPP!

The Year Nothing Worked?: It was a brutal year for a lot of asset allocators who had no place to hide. Except for the every best short-sellers and top multi strategy hedge funds, 2015 was not an easy year to make money in markets.

As you can see, I was very prolific and provided my readers with great insights on pensions and investments in 2015. The amount of work I put into this blog is crazy and trust me, I'm woefully underpaid and greatly under-appreciated for the insights I provide you.

Still, I enjoy sharing my thoughts and I'm closing in on the 5 million page views mark after almost eight years of dedicating my time to this blog. Having said this, I need to move on and do something different to monetize on my efforts and I expect "Canada's pension powers" to help me.

I've sacrificed enough time and money publishing this blog and need your help to move on and get properly compensated for my efforts. Yes, I have progressive MS (and doing well), yes, I'm the furthest thing from a YES man and some may find me abrasive and overly critical at times, but I guarantee you won't find a more honest, hard working and dedicated person than me to help you navigate this uncertain investment landscape.

On that note, I wish you all a Happy and Healthy New Year and ask many of you who regularly read this blog to step up to the plate and join a few of Canada's top pension leaders who do subscribe to my blog and recognize and value the insights and work that goes into writing these comments (use the PayPal options on the top right side under my picture).

Below, CNBC goes over 2015's biggest headlines. Also, CNBC's Seema Mody details what 2015 looked like in markets around the globe, highlighting some surprising trends.

Lastly, Facebook posted an incredible video recap of the most-talked about events of 2015. If you ask me, it wasn't a great year for the world and I'm looking forward to saying goodbye 2015, hello 2016!!



Monday, December 28, 2015

The Year Nothing Worked?

Lu Wang of Bloomberg reports, The Year Nothing Worked: Stocks, Bonds, Cash Go Nowhere:
The idea behind asset allocation is simple: when one market struggles, it’s OK because an investor can jump into another that is thriving. Not so in 2015.

In fact, if you judge the past year by which U.S. investment class generated the largest return, a case can be made it was the worst for asset-allocating bulls in almost 80 years, according to data compiled by Bianco Research LLC and Bloomberg. With three days left, the Standard & Poor’s 500 Index has gained 2.2 percent with dividends, cash is up less, while bonds and commodities are showing losses (click on image below).


After embracing everything from Treasuries to high-yield bonds and technology shares amid seven years of zero-percent interest rates, investors found themselves with nowhere to run at a time when the Federal Reserve’s campaign of stimulus drew to an end. Normally it isn’t like this. Since 1995, practically every year has seen some asset deliver returns exceeding 10 percent.

“It’s been challenging from the point of view that the equity market and bond market are probably more joined at the hip than normal,” said Hayes Miller, the Boston-based head of multi-asset North America who helps oversee $35.8 billion for Baring Asset Management LLC. “We’ve had high cash exposure relative to norm because we felt cash provides one of the only good diversifiers against the risk-off trade.”

Bianco Research keeps track of the S&P 500, 30-year U.S. Treasury bonds, 3-month Treasury bills and the Thomson Reuters/CoreCommodity CRB Commodity Index to gauge performance in stocks, bonds, cash and commodities. The four are the most common asset classes considered by investors when an allocation strategy is designed, according to Jim Bianco, the founder.

While the depth of losses in equities and commodities is nowhere near as bad as in 2008, the correlation of declines highlights the challenge for money managers who seek to amplify returns by rotating among assets. Among other things it’s a recipe for pain among hedge funds, according to Bianco. The industry is heading for its worst annual performance since 2011, with closures rising, data compiled by Bloomberg and Hedge Fund Research Inc. show.

“The Fed stimulus lifted all boats, and then the Fed withdrawing the stimulus is holding the boats down,” Bianco said by phone. “If the argument is right that the economy is going into 2016 weak and earnings are negative, those conditions will continue and therefore on the asset allocation level, I don’t expect anything to break out just yet.”

S&P 500 futures slipped 0.2 percent and commodities fell at 9:56 a.m. in London, while Treasuries were little changed.

With nothing going up, exchange-traded funds that invest in different asset types as a way to diversify risk have struggled. Among 35 such ETFs tracked by Bloomberg, the median loss for 2015 is 5 percent. The iShares Core Growth Allocation ETF, which has a mix of 60 percent in stocks and 40 percent in bonds, has slipped 0.5 percent, and the First Trust Multi-Asset Diversified Income Index Fund is down 7.4 percent.

Uncertainty over the timing of the Fed’s first interest rate increase in almost a decade and its potential impact on the economy weighed on markets throughout 2015, according to Michael Arone, the Boston-based chief investment strategist at State Street Global Advisors’ U.S. Intermediary Business. Policy makers signaled the pace of subsequent increases will be “gradual” when finally tightening this month.

“The Fed has finally broken that cycle by beginning policy normalization, and hopefully this will provide the market some clarification and resolve in a more solid direction,” Arone said by phone. “If the market feels comfortable at the pace of which the Fed moves interest rates and the economy is recovering, risk assets like stocks could perform well.”

The S&P 500 has made little headway in 2015, adding 0.1 percent without dividends. Equities fared worse in dollar terms outside the U.S., with the MSCI EAFE Index dropping 3.1 percent while the MSCI Emerging Markets Index sinking 16 percent.

Commodities have fallen to a decade low as tepid global inflation dimmed the allure of precious metals, weak Chinese demand hurt raw-materials prices and a global supply glut sent crude oil tumbling. In the bond market, high-yield corporate debt is heading for first annual decline since 2008 amid a flood of investor redemptions from junk bond funds and concern rising borrowing costs will threaten corporate solvency.

According to Bianco’s study, gains from the best-performing assets had surpassed 10 percent in all but one year since 1995. During the last nine decades, 23 years, or a quarter of the total, saw at least one asset class returning more than 30 percent, and only four ended with gains smaller than 4 percent.
Let's face it, 2015 has been a brutal year, especially for hedge funds which just had their worst quarter since the crisis. I've been harping on hedge funds all year as many top funds have experienced serious losses and if you ask me, this latest hedge fund shakeout is far from over.

I mention this because I saw something on LinkedIn from UBS on hedge funds offering "superior risk-adjusted returns" over the next 5-7 years that made my eyes roll (click on image):


Amazingly, 145 people liked this chart. I just couldn't resist commenting on it: "What a joke, when are you all going to stop the hedge fund lovefest and just admit the bulk of hedge funds absolutely stink. They're nothing more than glorified leveraged beta chasers. It's ok, I expect a long period of debt deflation will wreak more havoc on the industry and weed out 3/4 of the funds over the next five years."

By the way, I'm not kidding, I expect the Fed's deflation problem to only get worse in 2016 and this will wreak more havoc on hedge funds and private equity funds which also have dim prospects going forward. There will be a shakeout in private equity too but I doubt it will be as brutal as the one hedge funds are experiencing (then again you never know).

The most important thing asset allocators need to understand is the macro environment. In particular, there's no end to the deflation supercycle and the ongoing global jobs crisis, pension crisis, and demographic time bomb keep weighing on inflation expectations. The Martingale casinos aren't about to go bust but there's an uneasiness out there that the Fed is committing a major policy blunder and that in the not too distant future, negative interest rates will rule the day.

Fears of deflation have prompted many large hedge funds and speculators to wisely abandon their short Treasuries positions a year after setting up their biggest bets against bonds (they would have been wiser to short the high yield market instead of government bonds).

The global deflation overhang has been particularly brutal on equities, especially in some sectors like emerging markets (EEM), Chinese (FXI), Energy (XLE), Oil Services (OIH), Oil & Gas Exploration (XOP), and Metals & Mining (XME), all of which are plays on global growth.

Not surprisingly, if you look at the worst performing S&P 500 stocks of 2015, you'll see names like Chesapeake Energy (CHK), Southwestern Energy (SWN), Consol Energy (CNX), Freeport McMoran (FCX), Kinder Morgan (KMI), Range Resources (RRC), Ensco (ESV) and Devon Energy (DVN). These stocks and many other stocks in energy and commodities are all down huge this year (anywhere between 50% to 80%++).

This is why I kept telling my readers to steer clear of energy and commodity stocks in 2015 and use any countertrend rally to get out or short them. And while some global funds are now betting on reflation and Canada's large pensions are betting on energy, I remain very cautious on energy and commodity stocks and would avoid them or trade them very tightly (ie. there will be countertrend rallies if people think global growth is coming back but these rallies will fizzle quickly once people realize global deflation is getting worse, not better).

But it's not just energy and commodity names that got hit in 2015.  A lot of retail stocks (XRT) like Macy's (M), Michael Kors (KORS) and Wal-Mart (WMT) also got clobbered in 2015 and this despite the huge drop in oil and gas prices. This is particularly worrisome because it means Americans are spending less, saving more and paying off their huge debts (all of which reinforces deflation coming to America). Stocks like Amazon (AMZN) soared in 2015 because in a deflationary world, price and convenience matter more than ever (still, be careful with this high flyer, as a pairs trade, I would short Amazon and go long Wal-Mart in 2016!!).

As far as large (IBB) and small (XBI) biotech, which remains one of my favorite sectors, 2015 was very volatile and brutal, especially if you were in the wrong stock. Here too, China's Big Bang not Hillary Clinton, was the culprit for the decline in this sector as investors and speculators feared the worst and took a RISK OFF approach. Still, I recommended buying the huge biotech dip in late August and stick by that call even if I know it will be very volatile.

But while nothing worked well in 2015, some short sellers made a killing and some of them are increasing their bets on major oil stocks. I think the best hedge funds are going to be the ones that are going to be the best stock pickers on the long and short end but in my experience, most hedge funds stink and are unable to deliver alpha, especially in their short book.

Anyways, hope you enjoyed this comment. I'm still in vacation mode, enjoying my holidays but think it's important to go over some end of year items as I prepare my Outlook 2016 next week. The bottom line is that global deflation matters a lot and that 2016 might be worse than 2015, especially if the Fed exacerbates its deflation problem by raising rates too aggressively (or even just raising them gradually!).

As always, please remember to donate and/ or subscribe to this blog at the top right-hand side and support my efforts with your wallet, not just your kind words. Most of you are freeloading off the generosity of a handful of individuals and that irks me off to the point where I'm considering going private in 2016 and sending my blog comments to people who actually take the time to subscribe.

Below, a Bloomberg panel discusses why nothing worked in 2015. A very interesting discussion which I recommend you listen to carefully bearing in mind my comments above.

Tuesday, December 22, 2015

No Enhanced CPP For Christmas?

Leah Schnurr and Randall Palmer of Reuters report, Ministers eye no action on Canada Pension Plan premium:
Canada's federal and provincial financial ministers are considering not raising premiums for the Canada Pension Plan (CPP), federal Liberal Finance Minister Bill Morneau said on Monday, despite a Liberal campaign promise to enhance the plan.

The ministers will be considering a range of options over the coming year "from doing nothing because of the economy to more significant changes," Morneau told reporters after meeting with his provincial counterparts.

The Liberals, elected in October, campaigned on expanding the CPP, but the Canadian Federation of Independent Business warned that a premium increase would boost unemployment, because it does not take profit into account.

The CPP is comparable to the U.S. Social Security program.

The minister said the province of Ontario, which has talked about starting an Ontario pension plan because people are not saving enough, would continue with its process. But he said the Canadian government's clear hope is that there can be something done nationally.

The seniors' lobby group CARP Canada criticized the ministers for failing to act on CPP.

CARP members ... have given a clear political mandate in two major elections on what they want - specifically a CPP increase. What part of that declaration was unclear to the finance ministers?" asked CARP Executive Vice President Susan Eng in a release.

Bank of Canada Governor Stephen Poloz also briefed the ministers and presented a view of cautious optimism about the country's economic road ahead, Morneau said.
Andy Blatchford of the Canadian Press also reports, Canada's finance ministers agree to revisit pension reform talks in the new year:
A federal-provincial gathering of finance ministers reached rare consensus Monday on the polarizing subject of Canada Pension Plan reform — they agreed to keep debating it.

Federal Finance Minister Bill Morneau emerged from two days of discussions with his provincial and territorial counterparts to explain that the group will reconvene midway through 2016 to continue their talks about CPP enhancement.

“Our goal is that in a year from now, we’ll have more to talk to Canadians about, but we did not get to conclusion to what exactly we would be proposing,” Morneau told a news conference in Ottawa.

“We did not commit to any end game, nor in fact was that our objective today. Our objective today was to begin a process to review the potential to move forward.”

Morneau aims to eventually get some consensus on enhancing the Canada Pension Plan, a goal outlined in the new Liberal government’s election platform. The party has not released specifics on what changes could be made to the plan.

Changing the CPP would require support from seven of the 10 provinces representing two-thirds of the country’s population as well as a green light from Ottawa.

But it’s unclear how much support the Liberals will attract when it comes to CPP enhancement, even though the provinces agreed Monday to continue discussing the subject in the new year.

Ontario supports CPP expansion, while other big provinces like Quebec and British Columbia remain unconvinced. Quebec already has a public pension plan and B.C. has concerns about the fragile economy.

Saskatchewan, meanwhile, opposes beefing up the CPP.

“We’re happy with respect to the fact there’s no immediate changes to CPP — we’ve been advocating that,” Saskatchewan Finance Minister Kevin Doherty said Monday after the meetings.

Doherty has voiced his concerns about the negative impacts from the plunge in oil prices on his province’s bottom line.

The economic realities of the country in 12 months will dictate how the provinces proceed with the CPP, he added.

“We’ve agreed on a path forward with respect to coming back a year from now to talk about potential options — including not doing anything,” said Doherty, who noted fellow oil producers in Alberta and Newfoundland and Labrador are also facing intense fiscal pressure.

Quebec Finance Minister Carlos Leitao said, at the other end of the spectrum, the group will also look at the possibility of doubling the size public pensions — like Ontario plans to do. Leitao said he’s wary of going that far, especially since Quebec recently increased its payroll premiums just to maintain the current benefits.

“Whatever happens we have to be very mindful of a potential fiscal shock,” he said. “We want to avoid that.”

Ontario Finance Minister Charles Sousa said he was encouraged the provinces are willing to discuss enhancing the CPP, particularly since he felt some had been “reluctant” and were “pushing back” on the issue.

In the meantime, Sousa will proceed with his province’s own program, the Ontario Retirement Pension Plan, which essentially mirrors the CPP for anyone who doesn’t already have a workplace pension. He said it’s necessary for retirement security.

“We’re going down both tracks because the timing is essential,” said Sousa, who added the province has “off ramps” if changes are made to the CPP.
And lastly, Thomas Walkom of the Toronto Star wrote a stinging comment, Trudeau government wimps out on Canada Pension Plan reform:
Since coming to power, Prime Minister Justin Trudeau’s new Liberal government has taken strikingly bold positions.

It has promised a radically different relationship with Canada’s first nations. It has thumbed its nose at balanced-budget orthodoxy.

It has vowed to fight climate change without nettling the provinces and pledged to fight the Islamic State without engaging in combat.

It has defied both the polls and its critics to welcome thousands of Syrian refugees.

But when it comes to their campaign promise to beef up the Canada Pension Plan, the Trudeau Liberals have wimped out.

They are not doing anything. They are not even bothering to make empty promises about doing anything.

After hosting a federal-provincial meeting this week that dealt with the CPP, all Finance Minister Bill Morneau could provide was a promise to study the issue further and meet again.

It was hardly an example of the federal leadership that Trudeau had promised during the election campaign.

Introduced in 1965, the Canada Pension Plan is a forced savings scheme that serves as the backbone of the country’s retirement system.

Technically, employers and employees split the costs of the CPP. But in the long run, workers bear most of the burden — in the form of wages that are lower than they otherwise would have been.

What these workers get in return is a guaranteed annual retirement pension tied to the rate of inflation.

It’s not a big pension. In 2015, the maximum annual payout was only $12,780. But the idea behind the CPP was that this — combined with workplace pensions and private savings — would provide for a comfortable retirement.

Since then, workplace pension plans have become a rarity as employers strive to cut costs. Moreover, individuals aren’t saving enough on their own.

All of this has put more pressure on Canada’s federal and provincial governments to boost the CPP.

At any given time, most governments think the CPP should be enriched. Even Stephen Harper’s Conservatives were, at one point, committed to increasing CPP premiums and benefits.

Governments reckon, correctly, that if people aren’t required to save enough during their working years, they are more likely to become a burden on public finances when retired.

But small-business employers hate having to pay any kind of payroll tax. Back in 2010, that was enough to turn the Conservative federal government away from reform.

As well, provincial governments get nervous about raising payroll taxes — particularly during the run-up to elections.

At one point, both Quebec and Alberta were opposed to CPP reform — which was enough to kill the idea (amendments require the agreement of Ottawa and seven provinces representing two-thirds of Canada’s population).

By 2013, enough provinces were on side to get something done. But the Harper Conservatives remained opposed.

That’s when Ontario Premier Kathleen Wynne announced plans to set up a supplementary provincial pension scheme in her province. She said she’d scrap those plans if a new government in Ottawa could be convinced to expand the CPP proper.

Her federal Liberal cousins promised to be such a government.

Last June, they issued a statement under the name of then seniors critic John McCallum arguing that the CPP “simply isn’t enough,” and that the Liberals would increase benefits gradually to improve it.

“Clearly, the time is right,” said McCallum, now immigration minister. “All that is missing is federal leadership.”

Alas, that federal leadership is still missing.

Currently, only Saskatchewan and British Columbia seem adamantly opposed to boosting CPP premiums and benefits. If Ottawa wanted to do something, enough other provinces are on side to satisfy the requirements of law.

As well, Morneau could easily mollify those worried about increasing payroll taxes during hard times.

As it is, the law requires a minimum three-year waiting period before implementing any legislated reforms to the CPP. This waiting period could be longer.

In a book called The Real Retirement that Morneau co-authored in 2013, the millionaire finance minister writes that there is no retirement crisis in Canada, that the elderly may work past 65 if their pensions are skimpy and that most seniors can live perfectly well on 50 per cent of their pre-retirement income.

This may explain his laissez faire approach to the CPP. But it isn’t exactly what his party and leader campaigned on.
So here we are, another Christmas goes by and our finance ministers are dithering, "debating" and worse, backtracking on enhancing the CPP (it was three years ago when we debated going slow on enhancing CPP!).

Let me enlighten our Canadian politicians. Canada is screwed, period. I've been warning of Canada's perfect storm since January 2013 and have been short Canada for a long time. Things aren't going to get better, they're going to get a whole lot worse. There is no end to the deflation supercycle and I foresee negative interest rates and other unconventional measures in the not too distant future.

But the country's dire economic situation shouldn't be a factor against enhancing the CPP now. In fact, quite the opposite, I believe the coming economic crisis is one more reason to start the process and get on with it because as I keep harping in this blog, enhancing the CPP is smart economic policy over the very long run.

I just finished blasting the Trudeau Liberals for the biggest pension gaffe of 2015. Their asinine policy of rolling back the TFSA limit is a dumb populist move to make them look as if they're going after the rich and helping the poor (in reality, this policy does the opposite).

I want you to all to once again read what a friend of mine sent me over the weekend on negative rates coming to Canada after he read the unintended consequences of negative interest rates in Switzerland:
"I found this article fascinating. Central banks around the world have been experimenting with the economies of the G20 countries since the crisis. They are doing shit that they have never done before and it is clear that the world has become their Petri dish.

All of this comes from one fundamental issue - a demographic bubble of baby boomers going through the system. The world (including Canada) is completely unprepared for this new economic reality.

When push comes to shove, it is this demographic bubble that will drive the Canadian economy over the next 40 years and, unfortunately, I do not see Canadian policy preparing for this at all.
For example, the country should have increased immigration in 1990s but it did not because the unions stopped it. Instead, they invited high net worth individual to move to Canada (i.e. we want your money without you stealing our jobs). The unintended consequence of this policy was that these "high net worth individuals" came in droves, most of them Chinese and Middle Eastern, and pushed real estate prices skyward in two of our major cities to the point where no one in their 20s can buy a home.

So expect more of the same, Justin is not a visionary. He is simply a populist Prime Minister (no different than Greek PM Tsipras). He got voted in because everybody hated the other guy. He is now implementing tax policy that completely ignores reality but will secure his populist promises (tax the rich - give to the poor). When the next election comes, he will be faced with an opponent who will try to one-up him and the race to bottom will continue.

My reaction to Justin's tax policy. At a 53% marginal rate, I have a whole bunch of tax advisors looking at what to do to minimize it. I am sure that they will find a loophole than hasn't been plugged yet. If they don't, I will just adapt and perhaps leave Canada when I retire with my future tax dollars in hand."
On bolstering the CPP, my friend sent me this:
"It's not about left wing or right wing politics. Enhancing the CPP is just a smart move. You're right, companies are unloading retirement risk on to the state and unless something is done, this demographic nightmare I'm talking about will explode in Canada and we'll see a huge rise in social welfare costs."
I suggest our politicians read all about the benefits of defined-benefit plans (they should know all about retiring in EU style) and think long and hard about my friend's comments on Canada's demographic time bomb and how we're ill-prepared for it.

Then I suggest our politicians get to work and introduce real change to Canada's pension plan. Don't wait till the economy gets better, if you do you'll never enhance the CPP. Start thinking long-term and start making decisions which will benefit the country over the very long run. If you do, I promise you Canada will be on much more solid footing the next time we get hit by a global economic and financial crisis.

On that note, I'm taking the rest of the week off and will be back next week to go over end of year items. I wish you all a Merry Christmas and Happy Holidays and want to particularly thank those of you who take the time to subscribe or donate to this blog. Thank you, I truly appreciate your ongoing support and hope others will join you and recognize the hard work that goes into this blog.

Below, BNN reports on the meeting of Canada's provincial finance ministers with the federal Finance Minister Bill Morneau in Ottawa where the economy and CPP were topics of discussion.

I'm glad there's a "new spirit of collaboration" but I hope this translates into concrete actions and enhancing the CPP once and for all. I don't want to see this debate going on till next Christmas and beyond.

Monday, December 21, 2015

Biggest Pension Gaffe of 2015?

Watching that awkward moment at the end of Miss Universe 2015 on Sunday evening got me thinking about the biggest pension gaffe of the year. Earlier this month, Adam Mayers of the Toronto Star reported, $10,000 TFSA limit gone to help fund tax cut:
Friday’s Throne Speech didn’t mention Tax Free Savings Accounts (TFSAs), but federal Finance Minister Bill Morneau didn’t leave us in suspense for long.

On Monday afternoon, as part of measures to help pay for a middle-class tax cut, Morneau — cheerfully and in a brisk boardroom manner — said the $10,000 annual limit introduced by Conservative Finance Minister Joe Oliver is gone.

The good news is that the $10,000 amount stands for this year and goes into your lifetime total. But as of Jan. 1, it’s back to the future for this popular savings vehicle, dubbed the Totally Fantastic Savings Account by Wealthy Barber David Chilton. It reverts to $5,500 a year.

The Liberals argued during the election that the higher limit only benefits the rich, but I doubt the rich care one way or another about TFSAs. When you have millions to save, the $41,000 in room we all have after seven years isn’t meaningful. The rich have plenty of other ways to take care of themselves.

“It comes down to how you define ‘wealthy’ — which nobody does when making such statements,” says Dan Hallett, a financial planner and vice president of Oakville’s HighView Financial Group.

“And that’s a critical point. Certainly, those who maximize the TFSA contribution limits are more affluent than those that don’t — on average. But that doesn’t mean a higher limit only benefits the wealthy.”

For middle-income Canadians, older Canadians heading into retirement and those already there, the higher limit — and any portion of it they could use — would have been helpful. Savings rates are at record lows, so encouragement to save would seem to be a good thing.

Morneau says the promised middle-class tax cut will average $330 a year for single earners and $540 per couple. He has to pay for that, and imposing a higher tax on those making over $200,000 won’t do the job alone. Rolling back the TFSA is a way to narrow the gap.

Here, the new government is out of touch with the people who elected it. An Angus Reid poll in the middle of the election campaign found that 67 per cent of Canadians opposed rolling back the TFSA limit. By party, NDP supporters liked the increase more than Liberals — 63 per cent vs. 62 per cent — with Conservative supporters highest at 78 per cent.

A study by the Canadian Association for Retired People (CARP) this spring found the same thing. Two-thirds of CARP members supported the extra saving room.

The TFSA has been of particular benefit to older Canadians. It has only been around for seven years and so is a new way to shelter a little more money in retirement. Those 55 and older hold almost half of all TFSA accounts, according to the CRA.

Strict rules force you to convert your RRSP into a Registered Retirement Income Fund (RRIF) when you turn 71. That’s because the government wants the taxes foregone when you put the money into your RRSP and got a refund.

But some older Canadians don’t need all that money to live, on so they use a TFSA to let it grow tax-free.

So here’s where we are:
  • The $10,000 TFSA limit introduced this spring stands for the year. If you don’t contribute the full amount, it becomes part of your lifetime limit.
  • As of Jan.1, the limit reverts to $5,500 per year, which will be indexed, which the $10,000 wasn’t.
  • Morneau said indexing will allow the TFSA to retain its real value. It is set to rise in $500 increments whenever inflation erodes the value by $250.

At a 2 per cent rate of inflation, that bump should come every three years or so, since the $5,500 is worth $110 less each year. The only increase so far was in 2013. It’s unclear when the next one will be.

In the end, the new government had to make choices about how to fund its ambitious agenda. A higher TFSA, cast as a perk for the rich, was an easy choice. But what the middle class is getting in a tax cut isn’t as large as what it’s losing in a higher TFSA limit.
But some people think the TFSA rollback while historic isn't a big deal. Jennifer Robson, an Assistant Professor at Carleton University, wrote a comment for MacLean's, The Liberal changes to TFSA contributions were actually historic:
The new government wanted to make its first policy move in the House substantive and symbolic, but it also managed to make it historic. On Monday, the government gave notice that it will introduce a motion (a Ways and Means motion, to be precise) to cut the second federal income tax rate (applied to taxable income between $45,283 and $90,563) and create a new tax bracket applied to taxable incomes of $200,000 or more.

It’s true that this is the first time since 2001 that the basic architecture of federal tax rates has been renovated in a big way. It’s also true that if your taxable income is $45,000 or less, then this tax cut isn’t for you. Finally, yes, it’s true that a person with a taxable income of $120,000 stands to save more ($783) on their federal tax bill than a person with a taxable income of $80,000 ($582).

No, no, that’s not the historic part in my view. Look, 2001 wasn’t that long ago and I’ve written loads before about tax credits and public programs that benefit the better-off.

I’m talking about Clause 9 of the government’s motion that scales back the annual contribution room available to adults who open a Tax-Free Savings Account (TFSA) from the current $10,000 limit introduced for 2015 to the $5,500 annual limit that had done just fine before an election loomed on the horizon. Don’t forget, unused contribution room rolls over each year and there is still no lifetime cap on contributions. This means that between exemptions for home equity, lifetime capital gains rules and the TFSA, it won’t be long before most households in Canada are able to shelter virtually all of their assets from income taxation.

Back before the election, federal officials were at pains to explain that the increase in the TFSA room was well, really, really necessary, because, you see, over a quarter-million low-income Canadians (making less than $20,000 a year) had managed to max out their TFSA room under the $5,500 limit. ”Don’t you understand that these low-income people are just trying to put away some savings? Why do you hate people who are just… frugal?” With the national household savings rate stumbling along at about four per cent these days, shouldn’t we reward those who were saving roughly half of their modest annual incomes?

Well, no, and here’s why: From what I can see, the phenomenon that was offered as”‘the problem” to be fixed is likely temporary.

Looking at data from the 2012 Survey of Financial Security (Statistics Canada) when the TFSA was four years old (offering $20,000 of accumulated room for every adult in Canada) is instructive here:

– Singles and families aged 65 and older are far more likely to own a TFSA than their working-age counterparts (38-47 per cent versus 25-34 per cent respectively).

– Median TFSA balances amongst all working-age singles (under age 65) were just $5,000 (or 25 per cent of that limit) but median balances for singles aged 65+ were $15,000 (75 per cent of the limit). That’s the median, meaning that half of single seniors had TFSA balances between 76 per cent and 100 per cent of their allowable limit.

– Among couples and families, the age-related gap in median TFSA balances persists: $10,000 at the median for working-age households and $20,000 for those aged 65 or older.

– Within the working age population, there are also important age-related differences. Median TFSA values for couples or families aged 35-44 suggest median deposits of about $1,000 per year. But closer to retirement (age 55-64), household TFSA balances suggest median deposits of a little more than $3,500 per year, still well below the old $5,500 limit.

Those older households are, in the vast majority of cases, unlikely to be saving “new” money. Instead, they may well be shifting assets from one source—maybe perhaps proceeds from the sale of a family house that is now too large for their needs; or maybe this is coming from taxable RRIF income that is being recycled into a different and non-taxable registered savings account. Recall that the TFSA doesn’t offer a deduction for (most) deposits, doesn’t create new tax liability on withdrawals and is exempt for the purpose of working out the key income-tested senior’s benefit, the Guaranteed Income Supplement (GIS). Seniors with $20,000 in total personal income have too much income to receive the GIS now, but they may worry about exhausting their savings and needing the GIS later on. In these cases, shifting assets into a TFSA just makes good financial sense.

But that’s not what the TFSA was supposed to be for.

When it was introduced in 2008, the late Jim Flaherty cheerfully called the TFSA “an RRSP for everything else in your life.” His budget communications documents that year offered examples of people saving for all kinds of short- and medium-term uses like vacations and “rainy days.” The literature dating back to at least a 1987 study by the Economic Council of Canada (of which, Liberals, please give thought to reviving that creature to complement the work of a beefed-up Parliamentary Budget Officer) saw tax-prepaid savings as a way to stimulate more saving and investment by giving households choices when RRSP incentives fail. The literature doesn’t seem to have anticipated asset-shifting uses among the already-retired.

Unless the TFSA undergoes more dramatic changes like a lifetime limit, future generations of seniors are unlikely to worry much about annual caps limiting their ability to shift assets around to gain the best tax and benefit treatment. A person aged 55 today will have nearly $100,000 in TFSA room by age 65. And while today’s seniors with low income but some savings may feel cheated by an accident of policy timing, there are many other ways to address some of their concerns—flexibility on RRIF withdrawals for example.

But I still haven’t given you the punchline, have I?

The TFSA is just one among five separate tax-preferred and registered savings instruments in Canada. The first was the RRSP, introduced in 1957. When Kenneth Carter recommended scaling back RRSP limits in his 1966 report on Canadian tax reform, he was summarily ignored. Instead, we have, through relentless incremental policy choices, grown a tax and transfer system that is schizophrenic in its treatment of savings—rewarding people who already have money for saving it but often penalizing small savers. In the last 58 years, there have been exactly zero reductions to annual contribution room to any of these instruments—that is, until now.

By scaling back annual TFSA limits, the new government can keep the flexibility that tax pre-paid accounts offer without encouraging as much asset-shifting among the already comfortable. Promoting economic growth is the stated motive behind this renovation to the income tax brackets. If the government is serious about making that growth inclusive, then removing regressive incentives is a good start at breaking a 58-year trend. But it’s just a start.
Jennifer Robson raises good points in her article but I think the Liberals' policy to rollback TFSA contributions is the dumbest most populist gaffe the Trudeau government could have done and I explicitly warned against this when I discussed real change to Canada's pension plan:
 There are other problems with the Liberals' retirement policy. I disagree with their stance on limiting the amount in tax-free savings accounts (TFSAs) because while most Canadians aren't saving enough, TFSAs help a lot of professionals and others with no pensions who do manage to save for retirement (of course, TFSAs are no substitute to enhancing the CPP!).
The point I'm trying to make here is that rolling back TFSA limits hurts a lot of hard working people who aren't rich, they're just trying to save as much money as possible for retirement because unlike the government bureaucrats that design these policies, they have no defined-benefit pension plan to rely on during their golden years.

And it's not just hard working people with no pension getting hurt with this asinine TFSA rollback. Neil Mohindra, a public policy consultant based in Toronto wrote a comment for the National Post earlier this month, TFSA rollbacks will hurt the needy:
The debate over maintaining or rolling back the TFSA limit of $10,000 has centred on whether middle class Canadians or only the rich benefit from the higher limit. But a rollback will disproportionately affect middle and lower income Canadians with limited work histories in this country, including new immigrants and Canadians who have spent time as caregivers.

Take the following fictitious example. Jonathan, a welder by trade, immigrated to Canada in his mid-forties with $175,000 in savings. During the three years he needed to qualify for this profession in Canada, he supported himself with minimum wage jobs. Every year he places $10,000 of his savings into his TFSA, to obtain a reasonable standard of living in retirement.

In Jonathan’s case, retirement income and savings in Canada will be limited. His CPP income will be lower because of fewer qualifying years and he will have limited RRSP space and no accumulated TFSA space on arrival in Canada. He will qualify for Old Age Security because of a social security agreement between Canada and his home country that will allow Jonathan to meet the minimum eligibility criteria. Despite earning a good living as a welder, Jonathan could be at risk of having inadequate income in retirement.

Many face Jonathan’s predicament. In the five years ending 2014-2015, 1.3 million immigrants arrived in Canada, 23 per cent of them over age 40 with limited work histories in Canada. While not all immigrants have savings, many will have real assets like houses or pensions that can be converted to savings and brought to Canada. Maintaining the TFSA limit at $10,000 instead of rolling it back to $5,500 allows these new Canadians to convert more savings into tax sheltered investments, reducing any disadvantage they may have relative to other Canadians.

Returning emigrants, people who work in boom-bust industries, and anyone whose working life is disrupted by a physical or mental disability could also be at risk of inadequate retirement income. A very significant group of Canadians at risk are caregivers. Take Mary, a recently widowed 67-year-old who worked full time for five years before quitting to raise children and care for a disabled sister. She worked part-time later in life. She has a modest inheritance from her sister’s estate of $50,000, and a payout from her husband’s life insurance policy of $250,000. Accumulated TFSA space will allow her to earn investment income on these amounts, and she will make modest periodic withdrawals to supplement her retirement income.

Mary, what Statistics Canada would describe as a “sandwiched caregiver,” may be representative of a significant number of Canadians. A Statistics Canada article, based on 2012 data, noted 28 per cent of caregivers, or 2.2 million individuals were sandwiched between raising children and caregiving. The article also indicated that in 2012, 8.1 million individuals, or 28 per cent of Canadians aged 15 years and older, provided some care to a family member or friend with a long-term health condition, disability or aging needs.

In Mary’s case, it is not the annual TFSA limit that is important but the accumulated limit. In her scenario, Mary would not have anywhere near the accumulated space that she needs, since TFSAs were only introduced in 2009. It will actually take 27 years before individuals will have the accumulated space they need for this scenario even at $10,000 per year.

A Broadbent Institute report criticized higher TFSA limit for not necessarily incenting Canadians to save more, rather to shift taxable assets into TFSA accounts. Jonathan and Mary provide counter examples. Maintaining the higher TFSA limit can play a role in helping low and middle income Canadians with limited work history in Canada successfully meet retirement goals.
Nevertheless, it's not all bad news. As provincial and territorial finance ministers gathered with their new federal counterpart in Ottawa on Sunday night to begin confronting the hard economic truths facing Canada, the good news is there seems to be enough provincial support to boost the CPP.

I can't overemphasize how crucial it will be to bolster Canada's retirement policy now more than ever. I've been warning of Canada's perfect storm since January 2013 and think our country will experience a serious crisis in the next few years which will bring about negative interest rates and other unconventional monetary policy responses.

Importantly, this isn't the time to rollback the TFSA contribution limit or to implement other populist policies "against the rich," but it's the time for the bureaucrats in Ottawa to finally get their heads out of their asses and closely examine all pension policies very carefully. Keep what works well and bolster what needs to be bolstered. 

And it's not just the rollback in TFSA limit that irks me. The age limit on converting RRSPs to RRIFs should be pushed back for seniors who continue to work in their seventies (there's a reason why they're working so why should they get penalized?). Also, Ottawa needs to significantly improve the registered disability savings plan (RDSP) which Jim Flaherty started to help Canadians with disabilities and parents with disabled kids to save money for their needs (the program is excellent but there should be an option to have the money managed by CPPIB).

What else? Dominic Clermont, formerly of the Caisse and now back from working at Barra in London sent me this interesting comparison to pt things in perespective:
In the UK, taxpayers can invest in an ISA which is equivalent to our TFSA. The yearly contribution limit for the fiscal year 2015-2016 is £15,240 which at current exchange rate is about $31,600 – much higher than the $10,000 which the Liberals found too high.

Interest rates are so low (you can find savings accounts paying 0.75% interest…), it doesn’t make much sense to tax small investors on such small interest. The first £1,000 of interest income is now non-taxable – that is more than $2,000/year of tax free interest income outside of the ISA (TSFA).

The maximum contribution to a pension scheme (employer or private – equivalent to our RRSP) is also much higher in the IK: £40,000 per year or about $83,000.

In Canada and particularly in Quebec, taxing the rich is always popular. The are such a minority that their vote is less important. The ultra-rich can afford to pay for the best fiscalist anyway. The regular rich can move elsewhere.
Also, a friend of mine shared this with me over the weekend on negative rates coming to Canada after he read the unintended consequences of negative interest rates in Switzerland:
"I found this article fascinating. Central Banks around the world have been experimenting with the economies of the G20 countries since the crisis. They are doing shit that they have never done before and it is clear that the world has become their Petri dish.

All of this comes from one fundamental issue - a demographic bubble of baby boomers going through the system. The world (including Canada) is completely unprepared for this new economic reality.

When push comes to shove, it is this demographic bubble that will drive the Canadian economy over the next 40 years and, unfortunately, I do not see Canadian policy preparing for this at all.
For example, the country should have increased immigration in 1990s but it did not because the unions stopped it. Instead, they invited high net worth individual to move to Canada (i.e. we want your money without you stealing our jobs). The unintended consequence of this policy was that these "high net worth individuals" came in droves, most of them Chinese and Middle Eastern, and pushed real estate prices skyward in two of our major cities to the point where no one in their 20s can buy a home.

So expect more of the same, Justin is not a visionary. He is simply a populist Prime Minister (no different than Greek PM Tsipras). He got voted in because everybody hated the other guy. He is now implementing tax policy that completely ignores reality but will secure his populist promises (tax the rich - give to the poor). When the next election comes, he will be faced with an opponent who will try to one-up him and the race to bottom will continue.

My reaction to Justin's tax policy. At a 53% marginal rate, I have a whole bunch of tax advisors looking at what to do to minimize it. I am sure that they will find a loophole than hasn't been plugged yet. If they don't, I will just adapt and perhaps leave Canada when I retire with my future tax dollars in hand."
I'm sure a lot of people sick and tired with dumb policies which supposedly favor the poor share my friend's views. Interestingly, we share conservative economic views and he completely agrees with me that bolstering the CPP is smart pension and economic policy:
"It's not about left wing or right wing politics. Enhancing the CPP is just a smart move. You're right, companies are unloading retirement risk on to the state and unless something is done, this demographic nightmare I'm talking about will explode in Canada and we'll see a huge rise in social welfare costs."
I hope someone in Ottawa will share this comment with the Privy Council and other offices in Ottawa. Unfortunately, the Conservatives made plenty of pension gaffes (and other gaffes) but raising the contribution limit on the TFSA wasn't one of them.

Below, Prime Minister Justin Trudeau says the Tories are "out of touch" with Canadians over tax-free savings account contributions after interim Conservative leader Rona Ambrose questioned him on reducing the annual limit to $5,500 from $10,000. If you read my comment carefully, you'll see that the Liberals and Conservatives are out of touch with the economic and pension reality our country is facing.

And in case you missed the crazy ending of the Miss Universe pageant, I embedded it below. I felt bad for both these ladies, especially Miss Colombia, but while Steve Harvey's epic gaffe will eventually be forgotten, an epic gaffe in our country's retirement policy won't be.