On friday Statistics Canada released the June 2009 Employment Numbers. From May to June 09 Canada lost around 7,400 jobs. The graph below illustrates employment in Canada over the last two years for all Canadians 15 and older.
The absolute number of jobs losses appears to have levelled off from what we exeprienced from the peak in October 2008 until March 2009. However when you dig into the numbers you’ll notice that Canada is still losing a decent number of full time jobs (-47,500 from May – June) while part time jobs are being created (+40,100 from May – June) which is giving us this net sideways trend. See the graph below that displays the month over month growth in full time and part time employment.
With the recent month over month job losses in combination with an increased number of people actively looking for work the unemployment rate jumped from 8.4% to 8.6% from May to June 2009.
The key takaways from this data is that Canada still continues to lose full time jobs and unemployment continues to creep upwards. Although the decline in employment is not as bad as it was in Q1 we are still not outr of the woods just yet. Take this into account when making any projections about the timing of an economic recovery.
One of the investment newsletters that I regularly read from an investment manager is Eric Sprott’s “Markets At A Glance” which he publishes monthly at Sprott.com. His latest newsletter for June titled “The Solution… Is The Problem” talks to the specific issue of US Government debt and the future implications for investors given the amount of money that the US Federal Reserve is printing in order to finance this debt.
In 2009 the US Government must sell $2.0 trillion in new debt in order to finance an expected budget deficit of $1.85 trillion and $196 billion for the wars in Iraq and Afghanistan. The large budget deficit is due to all the money dished out this year in the form of bailouts (GM, Chrysler, AIG etc..) and economic stimulus aimed at breathing some life into economy. To put these numbers in perspective the 2008 US budget deficit was $455 million which is by no means small in itself.
So what does this all mean? It means that the US Government will have to find buyers for 3x the amount of debt that was issued last year. This is all fine as long as there are enough investors out there willing to buy all this US debt.
In the newsletter Sprott analyzes each class of investor who could potentially be a buyer of this $2.0 trillion in new US debt and comes to the following conclusion.
Given the current state of the economy, it seems frighteningly apparent that a threefold increase in debt purchases by the account holders listed above is a mathematical impossibility. There is simply not enough money in the present economy to support a tripling bond issue in the normal course of business.
So if there are no buyers out there with any capacity to absorb all this US debt what will happen? The US Federal Reserve will step in to support the US debt market as the lender of last resort. How will the US Federal Reserve fund the purchase of all this new debt? You have probably already guessed it, by printing new money.
The Federal Reserve’s ‘solution’ to the debt problem is the problem. It has resulted in the Federal Reserve doubling the monetary base of the United States over the span of a mere nine months. Rather than stimulate the real economy, the QE program has instead resulted in increasing weakness in the international market for US bonds.
The future solvency of the United States as a nation state is currently in jeopardy. It is in far deeper trouble than the mainstream press cares to admit. There are simply not enough new buyers of debt on this planet to support the spending programs of the United States government – and it appears that current holders of debt are beginning to sell. Because it is impossible to balance the budget from outside sources
of capital, the only source of funds left for the US, in all reality, is continued money printing.
The Federal Reserve’s policy of Quantitative Easing is failing. The US budget is ludicrous, spending is out of control, spending promises are out of control, the world knows it – and we know it. For all the pundits who see the economy improving over the next year, we invite you to explain to us how this debt crisis will resolve itself without significant turmoil.
Implications For Investors
Potential long term devaluation of the USD
Threat of increased inflation in the future is high due to rapid expansion of the monetary supply
Will a loss of confidence in the United States bring the recent rally to a grinding halt and send us back to test the March 2009 lows of the TSX Composite?
Like him or hate him Michael Moore is going to be releasing a new video this upcoming October that discusses the events of the most recent global financial crisis. I am definitely interested in viewing his latest documentary to hear his opinions on the global meltdown. You know he is sure to implicate the government and big banks in all of this.
Today I was looking into the state of US housing prices to determine if the market has hit a likely bottom or if we can expect to see further declines. I was also curious to see if the US housing data could provide me with any insights into where Canadian housing prices are likely to end up if they follow US trends. Now I realize that Canadian mortgage lending practices are much stricter then our neighbours to the south and we will not likely experience the same magnitude of housing price declines, but it is interesting to look at the general trends and duration of the decline in prices.
In my opinion the future of the US financial markets will be heavily influenced by the trends in the US housing market. After all it is the US housing market that first initiated this dilemma that we find ourselves in today. If US housing prices have stabalized from their free fall over the last 2 years then it is good support for hopes of an economic recovery in the next year or two. The networth of many Americans is tied up in thier homes so if housing prices are continuing to decline then it will cause a continual decline in personal consumption which is a core component to a healthy economy. If people aren’t willing to spend then corporations post lower earnings which leads more job losses, higher unemployment and further a reduction in personal spending. A viscious cycle.
The best US housing price data that I have come across is the Case-Schiller Housing Price Index by Standards and Poor. The index publishes national average US housing prices on a quaterly basis dating back to 1987. This length of back data is ideal for analyzing the long term trends of US housing prices.
As you can see from the graph above US housing prices peaked in 2006 at 190 where they had increased 90% from Q1 2000 when the index was 100. Since mid 2006 US housing prices have been on a sharp decline and are currently down 32% from the peak at the Q1 2009 index level of 129. From Q4 2008 to Q1 2009 US housing prices have decreased 7.5% which signals that prices have not finished declining.
The second graph illustrates the year over year percentage (%) decrease in the housing price index. From this graph it is evident that the % year over year decrease is increasing which doesn’t give much hope for prices stabalizing any time soon. Given this investors should be cautious about their expectations for a continued rally in the stock market and a quick return to economic growth.
One of my long term savings strategies revolves around consistently making the maximum contributions to my Tax Free Savings Account (TFSA) and avoiding any major withdrawals over a significant time horizon. In fact, my goal is to have enough savings built up in my tax free savings account to fund my retirement income 35 years down the road.
The tax free savings account is a great tool for building long term wealth due to the fact that all capital gains and dividend income is allowed to grow and compound tax free similar to an RRSP account. Although TFSAs do not offer any tax deduction benefit on initial contributions like an RRSP, all savings within a TFSA can be withdrawn tax free at any time.
Through the power of compounding returns, a long investment time period and the ability to withdraw my savings tax free I hope to build a sizable capital base which will generate enough income to enjoy a decent lifestyle in retirement. To give you an analogy I like to think of my TFSA strategy in terms of a small snowball that you gradually begin to roll down a hill. After a while that small snow ball transforms into a much larger snowball as it gains momentum. My TFSA will act in a similar fashion as the small snowball and over time grow through the compounding of tax free returns until it is spitting out enough tax free cash to comfortably fund my retirement.
In order to quantify the potential of this strategy I have developed a Tax Free Savings Account Calculator. Please feel free to download it and plug in your own inputs which match your unique situation.
To provide some background I am currently 23 years old and am looking to retire in about 35 years at the age of 57 which is consistent with the maximization of my corporate pension.
TFSA Calculator Scenario:
Investment Term: 35 Years
Starting Year: 2009
Current Age: 23
Starting TFSA Value: $0
Annual Contribution Amount: Maximum Allowable
Annual Nominal Return on Investment: 10.00%
Average Annual Inflation Rate: 2.1%
Given the conservative inputs above I will have $1,780,951 in 35 years when I am 57. This is not bad considering I can withdraw it all completely tax free. At a 10% nominal return on investment my TFSA account will be producing around $162,000 in capital gains and income in when I am 57. That is certainly enough to retire comfortably with a withdrawal rate that does not eat into my capital base.
Here are a few interesting facts that I read in an article from Statistics Canada today regarding pension plans in Canada.
Total Membership in Registered Pension Plans (RRPs): 5,900,000
Public Sector vs. Private Sector
Private Sector Plans: 3,000,000
Public Sector Plans: 2,900,000
Gender
Male Percentage of RRPs: 51.5%
Female Percentage of RRPs: 48.5%
RRP Participation
Total RRP Participation: 38.3%
Public Sector RRP Participation: 83.9%
Private Sector RRP Participation: 25%
RRP Type
Percentage of RRPs that are defined benefit: 77%
Percentage of RRPs that are defined contribution: 16%
Percentage of RRPs that are a combination: 7%
Final Thoughts
I would have guessed that public sector participation in RRPs would be as high as 80%+ given that most government sponsored pensions are defined benefit, indexed to inflation and have high employer contributions. I was a little surprised by the fact that participation in the private sector is around 25%. Consider yourself lucky if you work for a corporation with any pension plan at all. Consider yourself even luckier if your corporation sponsors a defined benefit pension plan. The article doesn’t break out the stats, but I would be willing to be that the % of private sector defined benefit pension plans is significantly less then the 77% average for all RRPs.
Statistics Canada released the Canadian employment number this morning and it is not looking good. For the month of May we lost 42,000 jobs in Canada which pushes our employment rate up 0.4% month over month to 8.4%. This the highest level of unemployment that Canada has seen in 11 years.
This is in comparison to April where the economy unexpectedly created 35,000 jobs. The April job figures were a nice surprise and gave me hope for a recovery perhaps in Q3/Q4 of this year, but after seeing the May job numbers it looks like the April increase in employment was just a blip.
As you can see from the graph below employment peaked around October of last year. Since then the Canadian economy has shed around 363,000 jobs.
Just how valuable is an education over the course of an individuals career? That is the question I seek to answer throughout this post. It is a worthwhile question to answer because many people know instinctively that higher education is correlated to higher incomes, but most people don’t know the absolute dollar value of increased earnings power based on a level of education over the course of a career.
The Data
The best data that I could find on the relationship between education level and income was found on Statistics Canada. Stats-Can has data from the 2006 census which breaks out median income based on education, age group and sex for the entire country as well as broken down by metropolitan area. Although 2006 census data is a bit dated I think it will still be accurate enough to depict the value of different levels of education.
Education vs. Median Income
The following data represents median (before tax) income levels based on the highest education level achieved. The data is for both male and female sexes for all of Canada.
Some obvious trends to point out is that income increases with education level and income increases with age as you gain more experience.
However the magnitude of how much earning power increases with age across different education levels is quite interesting. In the 25-34 age group an individual with a post graduate degree only earns 175% of what an individual with no high school diploma earns. By age 55-64 however that individual with the post graduate degree is earning 237% of what the individual with no high school diploma is earning.
Life Time Value
For simplicity I am going to keep everything in today’s dollars and not future value the median incomes numbers to take into account inflation which would drive nominal wage increases over time.
As you see in the chart above an individual with a post-bachelor degree will earn approximately $1.4 million dollars more over the course of a 40 year career then someone without a high school diploma. A University bachelor degree will earn about $1 million dollars more over the course of their lifetime then someone without a high school diploma. The largest increase in career earnings per education level achieved seems to be from the University below bachelor level to a University bachelor degree. If you are currently in university and are debating whether it is worth it to complete the 4 bachelor degree the numbers say it is definitely worth it.
Things To Consider
All my calculations were performed using before tax (gross) incomes. Since Canada has a marginal tax rate system the higher income earners with higher education levels will have their after tax income diluted by paying a higher proportion of their before tax income in taxes at higher marginal tax rates. However this is partially offset by the fact that higher income earners with higher education levels will on average invest a higher proportion of their after-tax income which will further increase their future income whereas individuals with lower earnings may not have this opportunity.
Another big thing to consider is the cost to obtain the education. Some post graduate programs take years to complete after a bachelor degree and can cost over a hundred thounsand dollars in tuition. To determine if someone is actually better off by achieving a higher level of education you must consider that a proportion of their higher income will go to pay for their education costs. To make the calculation more complex you must also consider that the government offers tax credits for education costs which will offset a proportion of the tax that a higher educated, higher income earner would have to pay once they begin generating an income.
Conclusion
Based on the numbers it seems very worthwhile to pursue higher levels of education as the difference in career income between education levels is quite substantial.
I came across an interesting graph published by Financialgraphart.com which illustrates the time and magnitude of all bear markets since 1929. The bear market that that we are recently experiencing hit its low point in March of 2009 when the TSX and the Dow Jones declined about 50% from the peak. It took the market about 75 weeks to reach those lows. In comparison the the bear market of the 1929-1932 depression took about 150 weeks to decline almost 90%.
The current day bull market doesn’t seem like it is going to match the 1929 depression bull market as stock indicies have been on the rise for since the lows hit on March 9th 2009.
If you are a DIY (do it yourself) investor like myself then i’m sure you are well aware that the internet offers a goldmine of information on stocks that can aid you in making better investment decisions
One of these sources of information that I use in my own stock research process is the website Stockchase.com. Stockchase is a compilation of expert (mostly CFAs /Portfolio Managers) opinions on Canadian equities that trade on the TSX and TSX Venture. The majority of expert opinions are derived from shows such as BNN’s MarketCall which is aired each day with different expert guests. On Stockchase you are able to see each expert’s opinion on a particular stock as well as a Buy/Hold/Sell recommendation.
This type of information is extremely useful because it provides you with excellent insight into how the professional money managers are looking at each stock. It also raises points that you might not have thought about when analyzing a specific company that somebody who does a deep dive into the numbers as part of their job would know.
So before you make any equity investment decisions in Canadian stocks take a stop by Stockchase.com and see what the experts are saying.
