The clueless

                Remember all that political stuff we waded through last week as I announced my shocking withdrawal from the race to become the new Con leader? At least it cleared the way for Peter MacKay on the weekend. Now, barring the unexpected, he’ll be facing T2 in the next general election. It won’t be pretty.

                But back to policy. What should leaders do?

                High on my list was the need to teach citizens. We are so pooched, thanks not only to the lack of financial literacy, but the house lust and risk aversion that surrounds us. Most people you know don’t own ETFs, but flock to condos or seriously-leveraged houses. They save money instead of investing it. So every single poll and survey finds the same result: we’re getting less wealthy. Four in ten are a hundred or two a month from insolvency. Seven in ten have no assured pension. And yet people think investing in financial stuff is risky. Days like Monday don’t help. When stocks go down 1% after rising 30%, people freak. “See?’ they cry, “it’s a trap.”

                Well, Mike knows better.

                He passed this window poster of an expectant mom in Vancouver this week – in a HSBC branch…

                …and had this to say:

                Because when you have two kids and an extra $5000 kicking around, locking it in for 218-days at barely the rate of inflation after a required face-to-face (or over the phone) sales pitch with [email protected] is the best way to take care of your future… Your blog should be required reading before breeding! (Maybe advertise on condom wrappers?)

                That idea’s got legs. But what would we call them? (Please do not offer any suggestions. I can only imagine…)

                Mike’s right. Great example. The bank is offering to pay 2.18% annually in return for locking up your money at a time when inflation’s 2.2%. But wait. That offered rate is ‘per annum’ and an annum ain’t 218 days, even in YVR. It’s actually 60% of a year, so the real return paid on the GIC’s maturity would be 1.3%. Oh yeah, and unless it’s inside a registered account (and what a waste that would be), the money earned is taxable.

                The fact a major bank would post this in their window like it’s a… big thing… is an illustration of how much we need to educate the huddled masses. Why would anyone park their money for less than the inflation rate? Or choose to do it for 218 days? How is this possibly an example of ‘investing in your future’ when the customer will have less purchasing power when it’s over? Is it even ethical, let alone responsible, for a bank to be seducing customers into a losing deal? How did we get to this point?

                Ah, but this is just the start.

                This week another bank, the green one, reported that almost a third of us have no idea how a TFSA differs from an RRSP. Those confused little beavers said they‘d put money into a tax-free account in order to reduce their taxes. That confirmed exactly what another bank (the blue one) just found. People are clueless. Even a decade after TFSAs were created, and after millions of accounts have been opened. Almost half of us use TFSAs as savings accounts, for example. This is like marrying Jennifer Aniston and keeping her home making casseroles.

                For the record, of course, TFSA contributions are made with after-tax money. RRSPs are filled with taxable cash. So tax-free account income in retirement is not counted by the CRA. Retirement savings income, however, is fully taxed at your marginal rate, and can gut government pogey payments.

                By the way, bank surveys have found most people are using TFSAs for home renovations and saving for a down payment. In fact twice as many think a TFSA is best, despite the RRSP Home Buyers Plan which allows a couple to take out $70,000 and still collect the tax savings for making their contribution. Most of us don’t know we can put money into an RRSP and let it grow for years without tax, and not claim the deduction until later when our income – and the tax break – is higher. Or that a contribution in kind turns taxable assets into tax-free ones. Or how a spousal plan can seriously split income.

                Meanwhile four in ten say they don’t actually understand how a TFSA works, tax-wise compared to the other. Maybe we should do a chart. Put that on the condom, too. Might be lengthy, though.


                The panic

                She lived a couple of doors away in our townhouse complex in mid-town Toronto. One day yellow CAUTION tape went up around her front entrance facing the common courtyard. In the underground parking garage the guy living beside us had some information. “SARS,” he said.

                She was dead a week later.

                That was 2003, and the last time anything like this coronavirus now flooding every newscast (along with a deceased basketball guy) was top of mind. Some people say the Chinese government’s unprecedented quarantine of 50 million people is beyond extreme. Others fear the authorities are still trying to cover up a pandemic. In the middle of a developing problem – and in a world where nothing’s remote anymore – nobody knows.

                SARS was briefly terrifying. But the Toronto subways kept running. Nobody wore face masks. Ontario declared a state of emergency, but only hospitals were affected. In the end 44 people died in a city of six million. By comparison, about 3,500 are swept away each year by flu in Canada (eighty thousand Americans died of influenza in 2018). No headlines about that.

                Well, investors have been taking few chances. The Dow opened 525 points lower on Monday, oil swooned and Chinese prospects dimmed along with the yuan. Stocks have been flirting with record highs of late, so risk is taken off the table quickly when uncertainty arrives. If you’re a day trader, this spike in volatility is what you live for. If you’re a normal person, though, what now? One terrified guy emailed me at midnight Sunday saying he was turning his paper assets into bars of silver. What a disaster that’ll turn out to be.

                Well, here’s what we know. The virus is spreading and will continue to do so. Until it stops. Fewer than a hundred are dead globally. That may reach into the thousands. Perhaps it could be hundreds of thousands. In 1918 the Spanish Flu killed more than 20 million people after infecting a third of the world’s population. But that was then. Lousy, spotty health care. No vaccines. No global response. No containment. And a world exhausted and impoverished by WW1.

                The new coronavirus could end up being like SARS. Unlikely to be worse, but there’s absolutely no telling. What we do know is history. As a Scotiabank report stated Monday about the SARS crisis: “Arguably the biggest economic lesson from that experience is that fear is the biggest risk to the outlook.” If the 2003 experience were repeated now, the bank figures, our economy could be slightly impacted and the biggest result might be a Bank of Canada rate cut to counter it.

                The real issue is China. In a globalized world a plop by the No.2 economy would ripple across the world. It’s now the engine of the planet, like it or not. That’s why oil prices have dropped, anticipating a potential slowdown, along with copper, nickel and iron. No country, let alone the second-largest, can wall off 50 million people, extend national holidays, suspend tourism and shutter its financial markets for a week, without having an impact.

                So, stocks down. Bonds prices up. Yields down. Oil down. Gold up. Risk off. And this week brings with it a host of corporate earnings reports plus central bank announcements. Yes, turn off BNN, even if Ryan is broadcasting. It’s all just noise. In fact street vets who’ve seen this kind of panic over and again call it an opportunity. Buy the dips, they say. We’re in a strong, fact-based uptrend with strong market momentum and this shall pass. Like SARS. Iran. Brexit. Hong Kong. Impeachment.

                But for most people the best course of action is to do absolutely nothing. Certainly not go to cash. Or buy precious metals. Or a Glock. Or bury your retirement savings in a can in the garden (when it thaws). In fact make sure you’ve topped up the 2020 TFSA contribution, and start saving money for the annual RRSP deadline at the end of next month. If you have new money to buy assets with, a drop in major equity markets would make those ETFs even tastier. “It’s way too early for fear a global pandemic,” says one analyst. “Should it happen, however, we would see markets down 15%, give or take.”

                Markets that soared 30% in 2019 and have continued that incredible climb this year are ripe for a pullback. What better excuse for profit-taking than some weird, animalistic, Twitter-hyped mutant Asian flu bug? It came unexpectedly. It will peter out. Meanwhile corporate profits are solid, central banks have been supportive, the US economy’s hot and everybody’s making bank.

                Just don’t watch ‘Contagion’ tonight on Netflix. And wash your hands a lot.