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Tag: Adrian Walker
Beyond Protests and The Police
While protests may not be, strictly speaking, market-based news, the size and scope of the protests regarding police violence and black lives makes them hard to ignore regardless of context. So far, these massive public demonstrations have not had an impact on markets (though they may yet on the spread of Covid-19), and have garnered a mixed reaction in the wider society. Whether police will be held to a level of greater accountability for actions that result in death remains to be seen, and regardless of what reforming actions are taken by police departments its quite obvious that it will take years to overcome distrust of authorities in some communities.
A more interesting aspect of the protests have been calls to "defund the police", a rallying cry that either means exactly what it says, or sparks 15 minutes of explanations as it "doesn't mean quite what it sounds like". The arguments for it do make some sense though, and within some police departments there is sympathy for the idea that too much is asked of the police, resulting in a hodgepodge of policy goals foisted on a group simply not equipped to handle them. Currently the same people who have to deal with a domestic disturbance and oppose criminal gangs are the same people that have to help those with serious mental health issues and spend their days collecting revenue for cities. Not all these jobs should likely fall on the same person.
This raises an interesting point, which is how our political class has largely sidestepped any of the blame aimed at police departments. Police only enforce the laws that they have on the books, and true to any bureaucratic industry, we have lots of laws on the books. So many laws in fact that it is practically impossible to know what they all are. By-laws are added with little consideration for what has preceded it, speed limits seem set arbitrarily and may be subject to change, some laws are posted while others invisible. Which laws are enforced and where is left to the discretion of the police at the time. Many laws end up serving an unintended dual function, launched ostensibly to combat thing A, but end up serving issue B.
Consider that in 2008, Ontario passed a law making it illegal to smoke in a car in the presence of a minor, someone under the age of 16. This was part of a long campaign aimed at discouraging smoking in public that bore some superficial resemblance to other laws that discouraged smoking by making it harder to do in social settings. But where as smoking in public on patios and bars limited where you could go, this new law invited police into a citizen's private space and criminalized behavior that was, at least under the laws of the province, still kind of legal. But the real issue here is who the law inadvertently targets.
Despite continued drops in the number of people smoking, those people that do smoke are statistically more likely to be poorer with more minimal education. According to the CDC 30% of people below and 25% of those at or just above the poverty line smoke, while those at more than double the poverty level only smoke at a rate of about 15%. In short the people most likely smoking in their car won't be found in Leaside, but might be found in one of Toronto's less affluent but already heavily policed neighborhoods. This law isn't intended to target minorities or the poor, but put in the hands of police who are already tasked with policing higher crime areas (again areas that tend towards being poorer and with higher populations of minorities and new Canadians) it puts another class of previously non-offending people into potential confrontations with the police.
You may remember the death of Eric Garner in 2014. Another black American who died in the arms of a police officer that was caught on camera, Garner had been placed in a choke hold and had died from lack of asphyxiation. Garner's crime, that had led him to this confrontation with multiple police, was for selling "loose cigarettes". As part of a style of policing called "broken windows", police had been instructed by the highest levels of authority within civilian politics to crack down on minor crimes to scare off larger criminal enterprises. Tackling the "loose cigarette" problem ultimately involved "the deployment of special plainclothes unit, two sergeants, and uniformed backup" to arrest a man selling cigarettes for a dollar who had been arrested 12 previous times. At no point did anyone wonder if this was a useful deployment of resources, or whether re-arresting a man who had already been arrest 12 times might finally break his habit.
You might be tempted to imagine that police would simply look the other way when silly or impractical laws find their way onto the books, but this too is a problem. Indeed, we know that the police can sometimes be given directives to enforce some laws over others. But the law cannot function effectively when it is applied only at the discretion by those in authority. If a law cannot be practically enforced or only enforced unevenly, it probably shouldn't be a law at all.
Politicians remain responsive to their voters, particularly so at municipal levels. That can put enormous pressure on them to pass laws that are intended to fix social ills for moral reasons, but our politicians should be mindful that every law passed puts potentially puts citizens into conflict with the police. So long as the police remain the first line of citizen's interaction with the state's power, whether it be for jay walking, speeding, parking illegally, domestic disturbances, assault, or more serious illegal activity, any action can theoretically become fatal. Recently two young people died during police interventions in the GTA. The first was a young woman named Regis Korchinski-Paquet, who fell from a balcony during a mental health crisis when police showed up to take her to CAMH. The second, D'Andre Campbell was shot by police in his home in Brampton when police were called because he was having a schizophrenic episode. How culpable the police were in these events is the subject of much debate, but families in both instances have wondered aloud whether it is the police that should be the people who come during a mental health crisis.
While Canada's problems are mercifully not those of the United States (the proliferation of guns and the militarization of police are fortunately not major issues here), that shouldn't excuse politicians who make noise about police excesses while being quick to use the law to fix minor grievances. While the police continue to do their own reviews and consider reforms, politicians should perhaps begin considering an audit of the numerous laws that we keep and whether it still makes sense to be ticketing people for jaywalking, working out in a park, or issuing fines to children who run a lemonade stand, especially when these laws can not be enforced with any consistency. Whether our politicians can rise to meet even this challenge remains to be seen.
*In addition to the linked articles within this post, I have also referenced the book The End of Policing by Alex S. Vitale for anyone interested in the arguments of defunding or abolishing the police.
Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of Aligned Capital Partners Inc.
June 22, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc
Water and the Future of Global Conflict
It is hardly news that water is precious. Despite the planet being 70% water, only 2.5% is fresh and of that only 0.007% is available for human use. It should also not come as a surprise then that as societies get richer and develop their water needs grow to match industrial and personal consumption, making water not simply an essential resource for nations, but also between nations.
As nations in Africa and Asia continue to make great leaps forward in economic prosperity, water needs are putting those countries at odds with one another. Very few places are like Canada or Indonesia, self sufficient in water and not relying on shared water basins. Most nations share water with multiple other countries, necessitating treaties for its use. But even then, the changing economic fates of nations may mean that treaties become useless and fall out of date.
Farming along the Nile
In 1959 Egypt and Sudan signed a treaty to regulate water use between them ensuring that Egypt would receive the bulk of the Nile's water, but the world's longest river flows through 10 other countries, many thousands of kilometers away, all of whom need that water to economically develop. In the past few years, as African nations have grown and stabilized following the 1990s, their own economic goals have started to clash with the older and more established economy of Egypt. In 2010 Ethiopia, Rwanda, Tanzania, Uganda, and Kenya signed an agreement aimed at stripping Egypt's water rights from the 1959 agreement. It would create a new "Nile Basin Commission" to manage water sharing. In 2011 Burundi signed as well, and so far three of the countries have ratified the agreement.
In Asia water represents one potential flashpoint among many between China and any number of countries. Since Tibet was annexed by China in the 1950s the Chinese have secured the source of water to more nations than any other country, and today the most water that flows across borders from one country to another flows from China. Chinese actions to control water has meant that nations as diverse as India, Cambodia, Vietnam and Russia have all filed international grievances over shared water use. Water is also a flashpoint between Pakistan and India. The largely empty high altitude land of Kashmir, contested land that has been the source of three wars (two with Pakistan and one with China), is home to much of the tributaries that feed the Indus, which remains the primary source of water for agriculture in Pakistan.
An Indian soldier stands guard at the border with China in Kashmir
Sharing water isn't simply an issue between nations, but an issue within nations too. In 2016, the Indian the states of Karnataka and Tamil Nadu ended up rioting over shared access to water, resulting in burning trucks identified as coming from the other state. Water rights are hotly contested not just in developing nations, but in the West as well. In California, which is a experiencing its worst drought in 1200 years, water rights have farmers fighting with cities. Orange groves, almond farms and avocados are all water thirsty crops that compete with other local needs for water.
The price of Almonds has continued to climb for years as water needs have made the crop more expensive
In the last few years issues around water have revolved around cities facing water shortages, most notably in Cape Town, South Africa, which got dangerously close to "day zero", at which point the city would be officially out of water. Though rains finally returned before a full-blown crisis emerged, citizens of Cape Town spent months operating under water rationing while wealthier citizens paid for water to be delivered from other cities. Farmers were simply denied water for their crops, until finally they received a normal amount of rain for the rainy season (the first in four years).
But the ability to prioritize domestic and urban water concerns depends on a global order that is robust and sufficiently engaged to head off water conflicts between nations before they become more dangerous. But that world is eroding and with it the order that constrains nations.
It should not be a surprise that the decline of American global leadership coincides with increasing global tensions. India and China, having already fought one war, are currently engaged in ongoing military standoffs. Despite only sharing a few borders in largely remote places (in Jammu and Kashmir there exists only a frontier between China and India and there have been regular skirmishes in the past) Chinese and Indian military patrols regularly run into each other. Due to a treaty previously signed soldiers on either side are prevented from using guns to avoid escalation when two patrols meet (leading to some hilarious recounting of soldiers yelling, throwing punches and hurling rocks), but recently the response has been an increasing build up of military presence by both nations forcing an official diplomatic responses. The issue is not that China and India are about to go to war, but that the potential for war is increasing.
Far from heading into a period of increasing prosperity and international cooperation; something practically essential for tackling climate change, terrorism or pandemics, the global order is failing. Even before the age of Donald Trump and populist nativism it took enormous effort to corral nations into agreeing to restrictions on water use. The 1997 UN Convention on the Law of Non-Navigational Uses of International Watercourses, which aimed at establishing "equitable and reasonable use" of shared water systems and prohibited nations from using water access to impose significant harm on another state only ever had sixteen nations agree to it. In the current climate it is unlikely that any new nations would even consider such a binding restriction.
The 21st century continues to throw new challenges at a global order that seems, at best, sclerotic. That breakdown in the international order is putting new risks on the table, leaving countries, sub-sovereign states, cities and farmers to fight their battles with less support, and more vulnerable to actors with military or diplomatic muscle to flex. China is one such nation that has a great deal of its future connected to the control of water, both through access to waterways in the South China Seas, and to the very water that irrigates crops and powers industry to its neighbours. A resource so precious and important deserves a great deal more attention than its currently getting.
Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.
June 12, 2020 June 12, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc
Watching the Crisis Unfold in Real Time
The economic fallout of the pandemic has garnered many shocking headlines, from concerns over how many restaurants may fail to the sheer number of people seeking unemployment insurance. Some of this is economic rubber necking, basking in the shocking and outlandish statistics generated by the lockdown and pandemic. The real test is still in front of us, determining what is temporary and what is permanent.
Concern that a number of restaurants may not reopen seems a reasonable fear, since lots of restaurants don't survive normally. The impact to the airline industry will take years to work out, since you can't just put all those planes back in the sky. It will take time to determine which routes should be brought back first, how many people want to fly and the planes themselves will need considerable maintenance before any of them roll down a runway.
But hope springs eternal. Eight weeks into the lockdown and efforts remain underway to gradually reopen the economy, and in time we will see which parts of our society (not economy, but society) need real help to get back on its feet.
I remain largely optimistic about the speed of the recovery once it's safe to reopen, but remain cautious regarding existing problems within the Canadian economy that the pandemic will likely accelerate. Problems that were hidden just under the surface will find themselves in the cold light of day, and those problems will have repercussions, many of which will not be easy to predict.
As I wrote back in March (Will Covid-19 Make Real Estate Sick?)
"Problems rarely exist in isolation, and a problem's ability to fester, grow and become malignant to the health of the wider body requires an interconnected set of resources to allow its most pernicious aspects to be deferred. In Canada the problem has been long known about, a high level of personal debt that has grown unabated since we missed the worst of 2008. What has allowed this problem to become wide ranging is a banking system more than happy to continue to finance home ownership, a real estate industry convinced that real estate can not fail, and a political class that has been prepared to look the other way on multiple issues including short term rental accommodation, in favour of rising property values to offset stagnant wages"
The issue of debt, real estate and short-term accommodations may be one issue undergoing a seismic shift in real time. The website MLS paints a surprisingly changed picture of the rental situation in downtown Toronto. Condominiums like the Ice Condos, located at the bottom of York Street were written about last year because so many of the units were being used for Airbnb. Today they offer hundreds of long-term rentals. The story is not limited to a few buildings either, much of the downtown condo scene, once reserved for Airbnb customers, has suddenly opened to long term accommodation.
A snapshot of available rental in May 2020 in downtown Toronto
For a city that only a few months ago was running perpetually short of rentals this change has been rapid, but its fair to assume that many of these landlords are hoping that the crisis will pass and that things will return to normal, with lucrative business in short term rentals resuming. The effect of all these new rentals is not happening in a vacuum. According to Rentals.ca in their May 2020 report, the price of condo rentals in locations like the Ice Condos have dropped by 10%.
From Rentals.ca
The flip side of the real time change has been the sudden collapse in real estate sales. Reportedly year over year housing sales have dropped in Toronto by 67%, and new listing are down 64%. The selling and buying of houses has simply come to a grinding halt, and with it much of the city's revenue from the land transfer tax, creating a secondary crisis within cities that have depended on the land transfer tax for revenue growth. In a cruel twist on a well-intentioned effort to get government finances under control, Toronto isn't allowed to run a deficit, a constraint that has turned into a fatal weakness under the pandemic.
It is here that we should stop and consider a reality. In a few short weeks two major sectors of the Canadian economy within the city of Toronto (and Vancouver for that matter) have been radically altered. But this is also a period where we have seen the most government support and extensive economic intervention. Long term expectations have yet to shift. Airbnb hosts wish to remain Airbnb hosts. Homeowners hope to continue to use their houses to expand their financial footprint. But we should take a page from the city of Toronto reviewing its financial books, the real crisis has yet to truly unfold.
Our future contains, but has yet to have pass, the retreat of government financial support. It has yet to put people back to work, yet to reopen universities, yet to ramp up our manufacturing base, yet to know much of anything about moving past Covid-19. Clarity about what governments should or should not do are hindered by China's resistance to openness and transparency, while other nations that have already faced the pandemic and seemed to recover are running into second waves. There is no clarity about the future.
Real estate remains at the heart of the Canadian economic story for the last 20 years. Appreciating housing prices are the chief source for growth in Canadian families' net worth. Borrowing to buy houses and borrowing against home equity remain our chief sources of debt. Our politics revolves around the tension of needing more housing in certain highly desirable areas while preserving those areas from over development. That dynamic has revolved around a status quo that seemed to have no conceivable end. The pandemic may have radically altered the Canadian real estate landscape regardless of how people feel about it or what they want. Whether we can walk back changes of this magnitude remains very much unknowable. For now we can only watch the changes our society and economy are undergoing and hope that what we are witnessing will be for the best, those changes that have happened, and those yet to come.
May 14, 2020 May 15, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc
Journal of a Plague Year – In Defense of the Lockdown
While curves continue to be bent and geopolitics continues to become both more silly and more frightening than anyone ever thought possible, populations of countries remain unsure and troubled about whether they have made the correct choice of trying to beat COVID-19 through lockdowns and aggressive social distancing. Predictions of economic doom run rampant, ranging from serious recessions to the potential for a depression not unlike that of the 1930s.
With nothing to do but sit at home and twiddle our thumbs, either letting our house fall into total chaos or be cleaner than ever (a battle largely determined by how tired I am and how many cookies my kids have had) making predictions and considering alternative paths to beating this virus occupy considerable mental space. How will we know whether the unprecedented steps we have taken were the correct steps to take? What dark and strange future awaits us on the other side? I'm here to put your mind at ease, both because this situation is not unprecedented, and because we may not have had any other choice.
Let's start with precedent. In an interview with Australian talk show host John Anderson, historian Niall Ferguson mused that future historians would regard our response to the pandemic as a mistake. This is an understandable position given the continued uncertainty around much of the virus. Is it very dangerous? Does it only affect the elderly? Do we even know how many people have it? Undoubtedly the biggest threat from the virus is what we don't know about it.
But the assumption that it is the lockdown that is hindering the economy are belied by the available evidence. For instance, Sweden has been a focus through much of this since it hasn't locked down its economy fully. Though schools have been closed and people have been advised to socially distance, restaurants and bars have been allowed to remain open. But estimates are that business has dropped off dramatically. In fact, despite having more of their economy not under lock and key does not seem to have materially changed the country's fate, with early economic predictions of the contractions expected to be around 7% of GDP. That's in line with other European neighbors.
In a similar story, the state of Georgia's efforts to open early were met with disappointing results. People, worried about a virus that has a surprising amount of variability and high level of infection simply don't want to go axe throwing, drink in crowded bars and go bowling. With the virus still being prevalent the thing restricting economic activity is not the lockdown, it is the virus.
Much is being made of the 1918 Spanish Influenza and this is an understandable place to jump to; the last memorable global pandemic that seriously interrupted the lives of people. Economists studying that event have concluded that "cities that implemented early and extensive non pharmaceutical interventions (like physical distancing and forbidding large gatherings) suffered no adverse economic effects over the medium term. On the contrary, cities that intervened earlier and more aggressively experienced a relative increase in real economic activity after the pandemic subsided." Other lessons drawn from the 1918 pandemic were not to give up too early on restrictions and that a multi-layered approach was what worked best.
But precedent exists much farther back. In Daniel Defoe's work "Memories of a Plague Year", a book once thought to be a work of fiction, but now believed to be based on the diaries of Defoe's uncle who lived through the last great plague in London of 1665, all the hallmarks of our modern response can be found in that bygone era. Wealthier people escaping to their cottages? From Defoe: "It is true, a vast many people fled, as I have observed, yet they were chiefly from the West End of the Town; and from that we call the Heart of the City, that is to say, among the wealthiest of the people."
How about our daily obsession to see if the curve is "being bent" and watching the infection rates? In 1665 concern over the spread of the plague (called the distemper) caused people to look "towards the east end of town; and the weekly Bills showing the Increase of Burials in St. Giles's Parish…the usual number of burials in a week, in the parishes of St Giles's in the fields, and St. Andrew's Holborn, were from 12 to 17 or 19 each, few more or less; but from the time that the Plague first began in St. Giles's parish, it was observed that the ordinary burials increased in number considerably."
What of economic activity? It has been estimated that somewhere between 25%-30% of the economy has been restricted, but in 1665 "All Master Workmen in Manufactures; especially such as belonged to Ornament, and the less necessary parts of the people's dress, cloths, and furniture for houses; such as Riband Weavers, and other Weavers; Gold and Silverlace-makers, and…Seemstresses, Milleners, Shoemakers, Hat-makers and Glove Makers: also Upholserers, Joiners, Cabinet-Makers, Looking Glass Makers; and innumerable trades which depend upon such as these; I say the Master Workmen in such , stopped their work, dismissed their journeymen and workmen, and all their dependents." You get the idea. The economy shut down.
Worried that people believe lunatic conspiracies, burning 5G towers across the world? Conspiracies depend on context, and in 1665 there were plenty of people pushing nonsense ideas, including astrologers spinning stories, and a host of charlatans that were "a worse sort of deceivers…for these petty thieves only deluded them to pick their pockets, and get their money; in which their wickedness, whatever it was, lay chiefly on the side of the deceiver's deceiving, not upon the deceived." Amulets, charms and potions, signs of the zodiac and any number of other bogus ways to defend the person from the plague were sold widely to a gullible public desperate for protection.
But what of the predictions we keep hearing about? That life will be forever changed by the events we're living through? While I have a great deal more to say about the nature of prognostication, I'll keep my comments here brief. In general history shows that humans don't tend towards radical changes following big, but temporary upheavals. Instead, crises like the one we are living through emphasize existing weaknesses within the society.
In his book "The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty First Century", author Walter Scheidel points out that during the first big years of the plague, which came in the 1300s, the high death rates from plague changed the existing relationship between land and labour. For a society of feudal serfs this meant that serfs could demand wages from their lords, and the lords felt compelled to pay lest their lands remain fallow. Behaviours changed too, but only in as much that hedonism and charity increased to match the scale of the devastation people were living through. In response to our own situation charity, certainly that sanctioned by the government, has been widespread. Whether we might count the volume of baking as a form of hedonism will be left to others to decide.
But we should largely discount predictions of an economy collapsing and a society that will not wish to do anything ever again. Cruise ships, house sales, air traffic and eating out will return as confidence returns, though there will be losses along the way. But the real damage to the economy, and the people within it, will likely remain along lines that have already been established. As fewer Canadians work in good manufacturing jobs and more work in the service sector, earning marginal wages, they will continue to take the brunt of the economic hit of the lockdown. Just as likely will be that efforts to decouple production from China will lead to greater automation in manufacturing. In other words, more of the ingredients at the heart of the widening inequality gap.
The response to the coronavirus feels novel, to us. But in the scheme of history there doesn't seem to be many other viable options. Life will return to normal not when the lockdowns are lifted, but when the virus is gone. But if we're going to do something with our time it would be better spent figuring out how we're going to address a worsening crisis of inequality, or brace ourselves for the next round of populist agitation.
May 4, 2020 May 14, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc
On The Potential Elastic Energy of Deceased Cats in Free-fall
What is the "Dead Cat Bounce"? If you've been following the news you've probably heard the saying and it has become fairly common among financial professionals to describe the current market in such terms. So what is it?
The phrase has its origins on Wall Street, in that "even a dead cat, dropped from a sufficient height, will bounce." Charming. But it describes the very real experience of stock markets having a brief but substantial recovery before resuming a fall. The effect is brought on by buyers reentering the market having assumed that a bottom has been reached and encourages others to begin piling in before another sell-off begins. The dead cat bounce is the shadow of hope over an otherwise dire situation that has not yet been fully realized.
As such many have called the current market rally a "dead cat bounce" based on previous experience of other bear markets. The expectation being that this is merely a brief respite before we head into even deeper losses. On March 30th, the website Market Watch asked "Is this a dead-cat bounce or the bottom investors have been waiting for?". On April 15th Forbes reported "Don't Be Fooled By The Markets 24% Dead Cat Bounce" and on April 20th the New York Times ran "Can Investors Trust the Stock Market Rally?".
So what can you do with this new knowledge? Almost nothing.
As that Market Watch article points out, it is hindsight that indicates a "dead-cat" and it is not a predictive asset. Looking at the bear market of the early 2000s there were a number of rallies, some lasting for half a year. Some rallies were indistinguishable from the general volatility of the market and seemed like neither a correction or a rally. Similarly, in 2008 there were a number of rallies before the market finally bottomed and began its long march back (see charts below). Importantly these periods of rebound, while followed by another dip, didn't hurt investors in the long run. Had you invested in any of the bounces none of the subsequent downturns proved permanent to the long-term investor.
So if the "dead-cat" isn't a useful predictor, either of time, recovery or depth of the next fall, why is it so ubiquitous? The answer is because it is a non-position, a place holder until something more tangible can be grasped and a way of saying that you don't know what's going to happen framed like you do. Just as most predictions at the beginning of the year were for a moderately positive year in market returns, today people are making a claim that markets that go up may also go down, a decidedly underwhelming statement about the nature of market performance.
If there is a benefit to the proclamations of a dead cat bounce it is to advice caution to investors, waving them off getting too excited about positive market volatility in periods of extreme danger. Would it be wise to rush into a market showing a tentative recovery, buying every highly risky investment on the chance we'd hit bottom? The answer is clearly no. The warning of the bounce provides a mental check on how fast we should proceed and reminds investors to reconsider worst case scenarios.
Lastly, the dead-cat reflects a bias towards how we understand current conditions. This form of bias isn't isolated to the financial markets. In the business of predicting weather there is something called a "wet bias" by companies like Accuweather and The Weather Network. If there is a 5% chance of rain, weather forecasters are likely to say its 20%, hedging their prediction. If the chance of rain is 50%, they will likely round up to 60% since 50% is considered less accurate by the public. In other words, the accuracy of the prediction is less valuable than how accurate the prediction feels.
This makes sense. If someone goes on TV today to argue that the recovery will be swift, that the economy will be unscathed, and that we will put this whole ordeal behind us with little societal memory this sounds inaccurate, like a prediction completely detached from reality. Arguing that we are in a "dead cat" style rally is plausible, a sensible take on the current situation that gives the illusion that aspects of this unprecedented situation have precedent and can be known.
We can conclude that the dead-cat bounce is a kind of shorthand that serves as both a warning and an explanation. That doesn't mean it doesn't have value, but it is a little short on providing guidance. Instead I advise that people who wish to get back into the market consider the following things.
Do you need the money? If you were fortunate to have cash on hand when markets began falling, and can deploy that money today, do you need it? If you are hoping to invest money that is technically ear marked for spending in the near future, think twice about how you would fair without it.
How risky is it? Let's say you want to buy a blue-chip dividend paying company, a theoretically conservative investment, how well did it perform when markets fell? Did it perform better than the average market return, or was it relatively in line with it? The safety of stocks may be largely illusionary when markets sell off.
Are you building on your financial plan, or abandoning it? Stocks at a discount may represent an opportunity to better round out your portfolio in aid of your financial goals, but if it weren't for the sudden discount on the value of the company would it have still made sense for your portfolio?
Will you be comfortable with a short-term loss? Just as you would hope that markets continue to recover, its important to consider the possibility that markets will indeed retreat and with it so will the value of your new investments. Can you live with an immediate drop between 10% to 20%? If this is early in the bear market, could you ride out multiple potential drops of up to 20% each time?
The dead-cat bounce is part of the lingua franca of the investing world, but it explains very little and doesn't really provide advice. Whether you want to get back into the markets, or are fearful of doing so, the same due-diligence and questions about comfort of risk still apply. If you can answer those questions you should be able to benefit from the market volatility of bad markets.
May 1, 2020 May 7, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc
Who Is Most Endangered by Negative Oil?
In a year filled with random and unexpected events, hopefully not likely to be repeated anytime soon, the price of oil going negative may stand out as a particularly unusual one. People are familiar with the idea of investments suffering losses and posting negative returns, but for an investment to be negative, to literally be worth less than zero is unique in our history.
All this, we may say, has been precipitated by an oil war being fought between Russia and Saudi Arabia, made worse by a pandemic that has slashed global demand by 30% and the cumulative effect of a global shift in oil production over the last decade that turned America into the world's largest producer of oil. We may also assume that the worst hit in this mess are the oil producers themselves.
Certainly in Canada it is easy to assume that it is Canadian producers most at risk from the collapse in oil prices, already suffering trying to get their oil to market more efficiently and cheaply than by train. But while the collapse in oil prices is indeed a headwind for producers, they are not the most at risk at being hurt by the volatility in oil's spot price.
No, the one most at risk is you, the average investor.
It is important to remember that "financial services" are exactly that, retail products in the financial space. Products that you invest in may reflect a real need by investors, but they also reflect demand. As such it shouldn't be surprising to discover that products exist that are not needed but are wanted. If someone thinks they can make money providing a vehicle of investment it will likely find its way to the market, for good or ill.
Exchange Traded Funds, the popular low-cost model of investing that has become very common, is where all kinds of investments like this appear. Reportedly there are something like 500 different ETFs in Canada alone. All this variety is good for the consumer, but maybe not for the citizen merely trying to save for their retirement.
Let's turn our attention back to oil and to fate of investors that, having sensed that the price of oil was so low, they considered investing in the commodity was a "no lose" scenario. In the week before the price of West Texas Intermediate (WTI) went negative, investors put $1.6 billion into the United States Oil Fund LP (USO ETF). USO was one of a handful of investments that allows investors to try and invest in the actual commodity of oil and skip investing in an oil producing company.
What many of those investors likely didn't realize is that to get close to the price of oil you have to buy oil contracts that expire very soon. USO did this by holding contracts that mature within the month and then roll those contracts to new contracts for the following month, and so on. This keeps USO's price and performance close to the spot price (the price the oil is trading for at that moment). But it also means that USO must sell those contracts it holds onto other buyers every month or it risks having to take physical delivery of the oil it holds the contracts for.
The problem should become self-evident. As the May month end contract was approaching, and with oil prices low and storage at a minimum, oil buyers didn't want USO's contracts, and USO couldn't physically receive the shipment of the oil. It had to get rid of the contracts at any price, and that's just what they did, paying buyers to take the oil contracts off their hands.
ETFs, Mutual Funds and a host of other investments make it seem as though investing has few barriers, with ease of access making experts of us all. But that isn't the case. The unique qualities of a product, the mechanics of how some investments work and ignorance about the history of a market sector can spell danger for novice investors that assume markets are simple. In Canada there are only a few investments that deal directly in the commodity of oil; the Auspice Canadian Crude Oil ETF (due to be closed May 22 of this year), the Horizon BetaPro Crude Oil Daily Bear and Daily Bull ETFs (HOD and HOU respectively, both of which may have to liquidate. Horizon ETFs have advised investors NOT TO BUY THEIR OWN ETFS!) and lastly the Horizon's Crude Oil ETF, which uses a single winter contract to reduce risk but will radically alter the performance compared to the spot price.
Many investments are not what they seem, maintaining a superficial exterior of simplicity that masks the realities of a sector or structure that can be a great deal riskier than an investor expects. In 2018 investors that had purchased ETFs that traded the inverse of the VIX (a "fear gage" that tracks investors sentiment about the market) suffered huge losses when the Dow Jones had its (then) largest one day drop ever, wiping out 80% of the value of some of these investments. Then, like now, investors had a poor understanding of what they owned and were easily blindsided by events they considered unlikely.
As I'm writing this I see reports out that suggest the price of oil could once again go negative. Whether they do or not is irrelevant. It is enough to know that they can and that investors will have little defence against a poorly constructed product that has the ability to go to zero. Before last week the USO ETF owned 25% of the outstanding volume of May's WTI contracts. That was a concentration of risk that its investors just didn't realize or understand. Today its clear just how dangerous that investment was. Investors owe it to themselves to get some real advice on what they invest in, and make sure those investments fit into their risk profile and investment goals.
April 29, 2020 May 7, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc
The End of Globalization?
I'm not one to indulge in predicting radical transformations to the world order. As a rule, change remains slow and while its end can't always be guessed, its direction is often telegraphed. So, while I'm reluctant to make any grand pronouncements about the future after the lockdowns and life resumes a more normal trajectory (like people no longer working in offices!), I think there is enough evidence today to say that the globalized world is under heavy threat.
The COVID-19 global pandemic has highlighted some strategic weaknesses that must be addressed, and that governments will be unlikely to tolerate into the future. Chief among them is the large dependence on China as a source of medical supplies, including 80% of global face mask supplies and (at least in the US) 30% of personal protective equipment.
We might assume that this is a problem with China, but it isn't. This is actually a problem with globalization and how dependent it is on a global leadership structure. As supply chains have become global their operation depends on a strong global framework that keeps trade open and coordinates needs across borders. That means that there must also be leadership that can fight (more metaphorically than literally) to keep those chains open in a crisis. That role has been traditionally occupied by the United States, but under Trump's management the country has taken a big step back from such a global leadership role with other nations making a similar retreat.
As the coronavirus was starting to make inroads in Europe and North America it became impossible to get masks from China, regardless of which factories made them (Medicom, a Canadian manufacturer has three factories in China but none of those masks ever made it back to our borders) as the Chinese government simply requisitioned all masks for their population. Other countries have also taken similar steps, restricting the transportation of some drugs and medical supplies. Finally, in a moment of clarity for Canadians regarding their relationship with the US, Trump invoked a Korean War era law to halt the sale of N95 masks to Canada. That was eventually rescinded, but the message was received loud and clear. Nations have no friends, only interests.
This is true with large international organizations as well. The World Health Organization is facing a lot of scrutiny over its early handling of the pandemic and for its perceived subservience towards China. The WHO, which can only operate in China with the government's permission, had limited access to people on the ground in Wuhan, accepted the Chinese explanation of no "human to human" transmission, and in respecting the Chinese position on Taiwan can not engage or work with the Taiwanese government to understand how they have very successfully curbed the outbreak. All this has raised eyebrows about how useful this group is. In the past this might prompt more engagement from its largest backers, the United States, and fought for reforms to improve its responses. That's not the case today, as instead Trump has opted to cease funding to the WHO as both a retaliatory act and a way to shift focus from his own administration.
For sometime globalization has been coming under increasing pressure as a result of the erosion of industrial domestic manufacturing, inequality, and populism. But the pandemic seems to be hastening that process as opposed to repairing it. At a time when a global coordinated effort is desperately needed, no nation is inclined to fill that role. This effect has been described by political scientist Ian Bremmer in his book Every Nation For Itself as a "G-Zero World", a world with no global leader.
That role has traditionally fallen to the United States, which has seen its own prosperity connected to considerable soft power. But as domestic issues and populism have risen voters of wealthy Western nations have become increasingly inward turning. Some might think that China would fill that role, but China is too nakedly self-interested in its own ambitions, making it difficult for nations to embrace the country's "help". Meanwhile, as other nations continue to develop economically they are growing less willing to accept the terms of IMF and World Bank help, and more committed to their own national wants.
Whenever the world begins its return to normal we should expect countries to decouple some of their supply chains from China purely for the public good when it comes to health and medical supplies. But other businesses are taking note that during this crisis they have also been held hostage by China. Apple intends to have its new budget phone assembled in Brazil, and the ongoing trade war with China (now rapidly turning into a cold war) is unlikely to be eased when this is put behind us. Instead we should expect it to accelerate.
A Case For the Best Case
*In an act of hubris I have written this before companies have begun releasing their earnings reports. I can only assume I will be punished by the animal spirits for such reckless predictions!
The news has been grim. The number of people seeking EI has spiked so much, so quickly that it reduces the previous unemployment numbers to a flat line (this is true in both Canada and the United States, US EI graph below). Countries remain in lockdown and some of the worst hit countries like Italy and Spain are starting to plateau, adding ONLY between 500 to 1000 deaths a day. In Canada the numbers continue to climb and the economy has been largely shut down, with governments rolling out unprecedented quantities of money to stem the worst of this. Talk of a deep economic depression has been making rounds, while the Prime Minister has reluctantly suggested that we may be in a restricted environment until July.
These two charts show the unemployment rate in the US just before the coronavirus, and after. From Refinitiv
And yet, I suspect we may be too negative in our outlook.
First, just how restricted is the economy? Despite the wide-ranging efforts to restrict the social interaction that daily economic activity produces, much of the economy continues to function. Office and white-collar jobs have quickly adapted to remote working. Few have been laid off in that respect. Industrial production is down, unless they are deemed essential, but the essential label has applied to a lot of businesses. Until the recent additional restrictions applied on Sunday April 5, 2020 in Ontario, Best Buy, Canadian Tire, Home Depot and a number of other stores remained open to the public. Those businesses have had to restrict access to their stores, but remain functioning through curb pick and online delivery.
Even the service economy is still largely functioning. Most restaurants remain open providing take out and delivery. Coffee shops, gas stations, grocery stores, convenience stores are all open, as are local grocery providers like butchers and bakers (and candle stick makers). Its' true that large retail spaces like Yorkdale or the Eaton Centre are closed but this too tells us something.
The government has helped make it easier to get money since people have been laid off, and many of the people who have been let go will only be out of work for a short time. They are the waiters, union employees and airline pilots who will be rehired when the society begins to reopen. Even in the period I began writing this, Air Canada rehired 16,500 employees, West Jet will be rehiring 6,500 employees, and Canadians applying for the new CERB (Covid-19 Emergency Response Benefit) have reportedly already begun receiving it.
You might be reading this and thinking that I'm being callous or simply ignoring the scope of the problem that we are facing, but I want to stress that I am not. I recognize just how many people have found themselves out of work, how disruptive this has been, how scared people are and how this pandemic and its response has hit the lower income earners disproportionately more. But just as few people correctly saw the scale of the impact of the coronavirus, we should remain cautious about being too certain that we can now anticipate how long the economic malaise may last, or how permanent it will likely be, and what its lasting impacts will look like.
The sectors of the economy worst hit will likely be those already suffering a negative trend line. The auto sector, for instance, is one that has been hemorrhaging money for a while, with global car sales in a serious slump. Some retail businesses, already on the ropes from Amazon's "retail apocalypse" may find they no longer can hold on, though government aid may give them a limited second life. Hotels and travel will likely also suffer for a period as they carry a high overhead and have been entirely shut down through this process (sort of).
Longer term economic problems may come about from mortgage holders who have struggled to fulfill their financial obligations to banks, and it may take several months to see the full economic fallout from the efforts to fight the pandemic, so some of the effects may be staggered over the year.
But even if that's the case, the current thinking is that the market must retest lows for a considerable period, with few people calling for a rapid recovery and many more calling for a "W" shape (initial recovery then a second testing of previous market lows) and in the Economist this week "one pessimistic Wall Street banker talks of a future neither v-shaped, u-shaped or even w-shaped, but 'more like a bathtub'".
That pessimism is well warranted, and I count myself among those expecting markets to have a second dip. But I admit to having my doubts about the full scale of the impact to the real economy. There will no doubt be some fairly scary charts, like thre were from China, showing the drop off in cinema goers and people eating out. But the more certain, the more gloomy, the more despairing the outlooks get, the more I wonder if this is an over compensation for having overlooked the severity of the virus, or if it is the prevailing mood biasing these predictions? Only time will tell, but I am taking some comfort in knowing that there is still a case for the best possible case.
A Broken Clock That's Right Only Once
Ray Dalio: 'We're disappointed because we should have made money rather than lost money in this move the way we did in 2008' © Reuters
In 2009 I was working for a large mutual fund company in Western Canada. It was the peak of the financial crisis and I was given the opportunity to take a promotion but had to move to Alberta. I was eager to move up (I was only 28) and jumped at the chance though I had no great desire to live in Edmonton. It was a difficult time. It was lonely in Alberta, and people weren't eager to speak to a wet behind the ear's wholesaler right after the biggest rout in modern financial history.
One particularly vivid memory for me was back in 2009, walking into an office at the tail end of conference call being given by Christine Hughes, a portfolio manager of some note during the crisis. Hughes was at the top of her game. She had outperformed much of the market by holding 50% cash weighting and had correctly predicted the financial crash. In later appearances she would complain that the company she worked for had prevented her from holding more and would have had been allowed to. But at this moment, in 2009, it was late summer, and markets had been rebounding for several months, having hit bottom in early March. Hughes was adamant that "the other shoe was going to drop" and that's when things would really go wrong.
For much of my time in 2009 Hughes, and her fund, was the story that challenged me. Having made the correct call in 2008, advisors were eager to listen to what she had to say and believed that her correct prediction in 2008 meant she knew what was coming next. Many people followed Hughes and her advice, which led primarily nowhere.
Hughes' time subsequent to 2008 was not nearly as exciting or as successful as you might have guessed. She left AGF, where she had made it big, and went on to another firm before finally starting her own company, Otterwood Capital. The last time I saw Hughes it was in 2013 and she was giving a presentation about how close we were to a near and total collapse of the global financial system. Her message hadn't changed in the preceding four years, and to my knowledge never did.
Hughes may not have prospered as much as she hoped following her winning year, but others who made similar predictions did. One such person is Ray Dalio, the founder and manager of Bridgewater Associates. Dalio is a different creature, one with a long history on Wall Street who had built a successful business long before 2008. But 2008 was a moment that launched Dalio into the stratosphere with his "Alpha Fund" largely sidestepping the worst of that market and by 2009 his hedge fund was named the largest in the US. Since then Dalio has grown a dedicated following beyond his institutional investors, with a well watched YouTube video (How the Economic Machine Works – 13 million views) and a series of books including one on his leadership principles and a study on navigating debt crises (I, of course, own a copy!). Yet when the corona virus rolled through Dalio's funds faired no better than many other products (I'm sorry, this is behind a paywall, but I recommend everyone have a subscription to the Financial Times). Once again past success was no indication of future returns.
I'm not trying to compare myself to a hedge fund manager like Dalio, a person undoubtably smarter than myself. However its important to remember that being right in one instance, even extreme and unpredictable events, seems to offer little insight into when they will be right again.
If you've read many of these posts you may know that I am a fan of Nassim Taleb, the author of The Black Swan and Antifragile. Early in the book Black Swan, Taleb makes the case that "Black Swan logic makes what you don't know far more relevant than what you do know. Consider that many Black Swans can be caused and exacerbated by their being unexpected." This is an important idea that I think can be extended to our portfolio mangers that gained notoriety for getting something right and then getting much else wrong.
A complaint I have long held about experts within the financial industry is both their desire to position themselves as outsiders while being likely to share many of the same views. Having a real contrarian opinion is more dangerous than being part of the herd, after all if things go wrong for you as a contrarian, they are likely to be going right for the herd. On the other hand, if things go wrong for the herd, the herd can use its size as a defense: "We were all wrong together."
Some of this group think can be applied to the failure of governments to get a jump on the coronavirus situation. Far from not listening to experts, governments took the safest bet which was also the most conservative view, that the virus posed a low risk to the population of countries outside China. People who thought the virus was a large risk were taking a more extreme view; that the virus posed a serious risk and required extreme measures such as travel restrictions, aggressive testing, encouraging people to wear face masks and socially distance. As a politician which choice would you make?
The point for investors should be to treat the advice of financial experts who rise to prominence during outlier events as no more special than those that got big financial events wrong. This is not because their advice isn't good, just that the thing they got right may not indicate wide ranging knowledge, but a moment when they understood something very well that other people did not. Investors should avoid personality cults and maintain a principle of uncertainty and scepticism to prophets of profit. The rise of COVID-19 and the global pandemic response, including the rapid change in the market, will produce a number of books and talking heads who will parlay their status as hedgehogs into that of a foxes! (If you don't know what I'm referring to, please read this from 2016).
Dalio remains a very successful manager, but his correct reading of 2008 did not prepare him for 2020. In his own words: "We did not know how to navigate the virus and chose not to because we didn't think we had an edge in trading it. So, we stayed in our positions and in retrospect we should have cut all risk." Christine Hughes on the other hand seems to have disappeared, her fund gone and she in an early retirement. I know of no financial advisers eager to hear her views.
April 9, 2020 April 9, 2020 by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc
What To Do When You Need To Sell in Bad Markets?
Following up from a previous video (Why investors are told to stay invested in bad markets), we must recognize that we can't always pick and choose when we need money from our savings. So how should we pick what investments to sell in a poorly performing market? Here's one strategy to consider and help guide you!
As always, I'm available to talk any time and can be reached on my cell phone, through our office number or via email!
Adrian Walker