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At the 2009 Odlum Brown Annual Address, as the Global Financial
Crisis was in the process of climaxing, we toldclients that there wouldn’t be a depression becausegovernments and central banks were administeringmassive amounts of monetary and fiscal stimulus.Still, we didn’t think the recovery would be “V”shaped or robust. Instead, we said the economywould stabilize later in the year and then muddlethrough for an extended period of time. The term“new normal” was popularized to describe the expected slow-growth economic environment.
While slow growth has indeed been the economicreality for the last several years, there is nothingnormal about the present situation.
According to Jim Grant, editor of the renownedGrant’s Interest Rate Observer, no less than one-quarter of European sovereign bonds have negativeyields. For example, two-year German bonds have a yield of -0.16%. That means that lenders are paying for the right to own bonds. Frankly, it’s amind-boggling concept.
Many European institutional fund managers acceptnegative yields because they are mandated to ownlarge amounts of high quality government securities;they have no choice but to accept what is offered,even if it is unappealing.
There is no doubt that central bank bond buying,weak growth and low inflation are putting down-ward pressure on bond yields, but there is another
major factor at play. Yields on European bonds areultra-low and even negative on the highest qualitygovernment bonds because there are more lendersthan borrowers. The private sector in Europe isdeleveraging – saving more and paying down debt– and the overall European economy is stuck in thedoldrums because governments are not borrowingand spending enough to offset the retrenchment inthe private sector. In large part, interest rates arelow because there is a lack of credit-worthy individ-uals and corporations wanting to borrow. Indeed,most of the major advanced economies, includingthe U.S., U.K. and Japan, are suffering from thesame ailment.
The global economic recovery has been uninspiringbecause much of the developed world is in themidst of a balance sheet recession. Balance sheetrecessions emerge after the bursting of a debt-financed asset price bubble that leaves many privatesector balance sheets with more liabilities than assets. In order to repair balance sheets, the privatesector moves away from profit maximization to debtminimization. Consequently, economies sufferingfrom a balance sheet recession shrink, unless thegovernment sector borrows and spends enough tooffset the contraction in the private sector. Fiscaldeficits are necessary.
Balance sheet recessions are fundamentally different than traditional recessions. Not only dothey last a lot longer, as has been the case in Japan,but they also require radically different policy
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ODLUMBROWNREPORT
02 2015
INSIDE THIS ISSUE
Page 1Nothing Normal About the “New Normal”
Page 3Maturity Options for Registered Retirement Savings Plans (RRSPs)
Page 4Odlum Brown’s 21st Annual Address
Nothing Normal About the “New Normal”
2
NOTHING NORMAL ABOUT THE “NEW NORMAL” Continued from page 1
remedies. There is a new book – The Escape fromBalance Sheet Recession and the QE Trap byRichard Koo, Chief Economist of Nomura ResearchInstitute – that provides an excellent framework forunderstanding the world in which we live today.
Mr. Koo argues that monetary policy is ineffectivein a balance sheet recession because individualsand corporations are focused on paying down debt.Fiscal policy is the more effective and preferred policylever, yet it is not being used enough because biggovernment and fiscal deficits are regarded as evil.Such thinking is rational and reasonable in a normaleconomic cycle, but not in a balance sheet recession.
Premature fiscal austerity was a major contributorto the depth and length of the Great Depression in the United States. Likewise, poorly timed fiscalrestraint has contributed to the more than two-decade stagnation in Japan’s economy. Europeanauthorities haven’t learnt from history and are attacking the problem with the wrong tools andwithout enough intensity. They are applying in-creasing amounts of monetary stimulus at a timewhen more fiscal stimulus and structural reform are needed.
The U.S. recovery has been faster and stronger because the U.S. government has been more aggressive with both monetary and fiscal policy. Importantly, China’s economy has remained rela-tively robust because the authorities appreciatedthe challenges posed by balance sheet recessions,and therefore cranked up fiscal spending at theheight of the financial crisis. Nonetheless, China’seconomy is now slowing because its credit-fuelledinvestment boom is losing momentum. There is arisk that China too will experience asset deflationand enter a balance sheet recession.
The recent plunge in oil prices and global bondyields are signs that balance sheet recessions areongoing and that deflation is a near-and-presentdanger. While we think the significant drop in oilprices and interest rates will help stimulate privatesector demand and keep the world economy on apositive muddle-through path, it is increasinglyclear that we have to accept that growth will beslow for a long time.
Recently, the International Monetary Fund (IMF)downgraded its 2015 global growth outlook to 3.5%from 3.8% in October. The IMF cut its forecast forevery major economy except the United States,where it sees growth accelerating from 2.4% in2014 to 3.6% in 2015. Canada’s growth forecastwas reduced to 2.3% in 2015 and 2.1% in 2016,down from the previous call for growth of 2.4% inboth years.
The Bank of Canada reacted to the oil price shockand dimmer growth prospects by cutting adminis-tered interest rates by a quarter of one per cent to0.75%. While there is no doubt that lower interestrates, and the consequent decline in the Canadiandollar, will help, we feel it was a poor decision.Lower interest rates will likely stimulate the hous-ing market and encourage greater consumer debt,rendering the Canadian economy more vulnerableand potentially subject to a painful balance sheetrecession down the road.
While we expect our unconventional views to raisesome eyebrows, the overarching point is to appreci-ate that slower growth will be the economic realityfor the foreseeable future.
Experience has taught us that it is a mistake to sac-rifice quality as a bull market ages, and we thinkquality is even more important in a slow-growthworld with too much debt and sub-optimal govern-ment policies. Risks are simply greater than usual.
Consequently, we remain steadfast in our view that investors should concentrate on high qualitybusinesses in less cyclical sectors. We are comfort-able with a measured exposure to leading businessesin cyclical sectors; yet we are resisting the tempta-tion to meaningfully add to positions in beatendown areas of the market.
We would rather own high quality businesses withvaluations on the high side of fair than shares of average businesses that are statistically cheap. Average businesses are more likely to struggle in a sluggish economic environment and remain out-of-favour.
The high quality businesses that we favour generateabove average returns on capital. Therefore, theyhave the means to survive and thrive. They havethe cash flow to invest in their people, products andservices; develop new markets and geographies;gain market share; make acquisitions; buybackstock; and increase dividends.
We recently recommended three above averagebusinesses that have outstanding management:Colfax (NYSE: CFX), Microsoft (NASDAQ: MSFT),and Oaktree Capital Group (NYSE: OAK). Despite a slow-growth environment, opportunities still existand we will discuss companies like these at our upcoming Annual Address.
MURRAY LEITH, CFA
Vice President and Director, Investment Research @murrayleith
Consequently, we remain steadfast in our
view that investors should concentrate on
high quality businesses in less cyclical
sectors. We are comfortable with a
measured exposure to leading businesses
in cyclical sectors; yet we are resisting
the temptation to meaningfully add to
positions in beaten down areas of the
market.
“
”
3
Maturity Options for Registered Retirement Savings Plans (RRSPs)
Registered Retirement Savings Plans (RRSPs) must be closed by December 31st of the year in which you turn 71. If you have a maturing RRSP, it is important that you
understand the three options available and determine which one best suits your needs.
The first option is to withdraw or collapse the entire RRSP. This is the default and theleast attractive option from a tax perspective, as the lump sum is taxable as income.
The second option is to convert the maturing RRSP into a Registered RetirementIncome Fund (RRIF). This allows the account holder to keep most of the same investments in a RRIFand provides the most flexibility. Once an RRSP is converted into a RRIF, contributions stop and a minimumamount must be withdrawn each year and taxed as income. This minimum withdrawal is calculated based on a set percentage of the market value of the assets held in the RRIF that can range from 7.38% at age 71, to a maximum of 20% at age 94. If more income is needed, you can simply withdraw any amount you wish, in excess of the required minimum. For the balance of the funds held in a RRIF, there is the opportunity for continued investment growth on a tax-sheltered basis.
The third option is to purchase a registered annuity with all or part of theRRSP assets. Annuities are well-suited for individuals who would like guaranteed income payments without exposure to market volatility. This income is often higher than that of other non-guaranteed or GIC-type products. Most importantly, an annuity provides a predictable and guaranteed source of income that you or your spouse cannot outlive.
Annuities can be purchased on a single life, joint and last survivor (with or without reductions on the firstdeath), or term certain to age 90 basis. They can also be purchased with funds from a RRIF at any time up to age 80, if you choose to defer an annuity purchase until after age 71. The income provided by an annuity purchased with registered funds is fully taxable.
How much income could you receive from a life annuity?Here are some examples of the guaranteed lifetime monthly income payable from a life annuity, purchasedwith $100,000 of registered funds, providing a minimum 10-year guarantee.
It is important to note that if the annuitant(s) dies during the guaranteed period purchased, the balance of the guaranteed payments would be provided to the estate or the beneficiary named. If the annuitant(s) livesbeyond the guaranteed period, he or she will still continue to receive payments for the rest of his or her life.
For more information regarding the options available for annuity products and whether an annuity may besuitable for your retirement income needs, please contact us through your Odlum Brown Investment Advisoror Portfolio Manager.
RITA AGER, CFP, CLU, CHS, CPCA, FEA
Insurance SpecialistOdlum Brown Financial Services Limited
Odlum Brown Financial Services Limited is a wholly-owned subsidiary of Odlum Brown Limited, offering life insurance products, retirement, estate and financial planning exclusively to Odlum Brown clients.
Age 65 70 75 80
Single Life Male $530 $625 $698 $782
Single Life Female $483 $564 $632 $724
Joint Life Annuity * $440 $510 $575 $674 Rates Source: Cannex Financial Exchanges Limited as of January 12, 2015. Rates are subject to change.* The Joint Life Annuity is based on a male and female of the same age for illustration purposes.
ODLUM BROWN FINANCIAL SERVICES LIMITED
Odlum Brown is proud to continue
its support of the Forum for Women
Entrepreneurs (FWE) as the Title
Sponsor of the SOLD OUT 2015 Gala:
Get Social!
FWE is a non-profit organization that
educates, energizes and empowers all
women, encouraging them to become
wildly successful entrepreneurs.
For more information, please visit
fwe.ca.
4
DISCLAIMER & DISCLOSURE
Odlum Brown Limited is an independent, full-service investment firm focused on providing professional investment advice and objective research. We re-
spect your right to be informed of relationships with the issuers or strategies referred to in this report which might rea-sonably be expected to indicate potential conflicts of interestwith respect to the securities or any investment strategies dis-cussed or recommended in this report. We do not act as amarket maker in any securities and do not provide investmentbanking or advisory services to, or hold significant positionsin, the issuers covered by our research. Analysts and their associates may, from time to time, hold securities of issuersdiscussed or recommended in this report because they per-sonally have the conviction to follow their own research, butwe have implemented internal policies that impose restric-tions on when and how an Analyst may buy or sell securitiesthey cover and any such interest will be disclosed in our report in accordance with regulatory policy. Our Analysts receive no direct compensation based on revenue from in-vestment banking services. We describe our research policiesin greater detail, including a description of our rating systemand how we disseminate our research, on the Odlum BrownLimited website at odlumbrown.com.
This report has been prepared by Odlum Brown Limited andis intended only for persons resident and located in all theprovinces and territories of Canada, where Odlum BrownLimited's services and products may lawfully be offered forsale, and therein only to clients of Odlum Brown Limited. Thisreport is not intended for distribution to, or use by, any personor entity in any jurisdiction or country including the UnitedStates, where such distribution or use would be contrary tolaw or regulation or which would subject Odlum Brown Limitedto any registration requirement within such jurisdiction or country. As no regard has been made as to the specific investment objectives, financial situation, and other particularcircumstances of any person who may receive this report,clients should seek the advice of a registered investment advisor and other professional advisors, as applicable, regard-ing the appropriateness of investing in any securities or anyinvestment strategies discussed or recommended in this report.
This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has beencompiled from sources we believe to be reliable, however, wemake no guarantee, representation or warranty, expressed orimplied, as to such information’s accuracy or completeness.All opinions and estimates contained in this report, whetheror not our own, are based on assumptions we believe to bereasonable as of the date of the report and are subject tochange without notice.
Please note that, as at the date of this report, the ResearchAnalyst responsible for the recommendations herein, associ-ates of such Analyst and/or other individuals directly involvedin the preparation of this report may hold securities of the issuer(s) referred to directly or through derivatives.
No part of this publication may be reproduced without the ex-press written consent of Odlum Brown Limited. Odlum BrownLimited is a Member-Canadian Investor Protection Fund.
Odlum Brown Limited respects your time and your privacy. If you no longer wish us to retain and use your personal information preferring to have your name removed from ourmailing list, please let us know. For more information on ourPrivacy Policy please visit our website at odlumbrown.com.
Odlum Brown’s 21st Annual AddressWe are pleased to invite you and your guests to the 21st Annual Address, Odlum Brown’ssignature speaker series, which features presentations from:
Ms. Hewson will provide an overview of Odlum Brown’s successful approach to investing. Mr. Leith and his team will explain how to be a better investor, identify great companies and compound wealth in a slow-growth world.
DEBRA HEWSONPresident and Chief Executive Officer
MURRAY LEITHVice President and Director, Investment Research
KELOWNATuesday, February 24, 2 PMCoast Capri HotelBallroom1171 Harvey AvenueRSVP to Chantal at 250-861-5700 by February 17.
WEST VANCOUVERWednesday, February 25, 7 PMKay Meek CentreMain Stage Theatre1700 Mathers Avenue RSVP to Caitlin at 604-844-5336 by February 18.
COURTENAYThursday, February 26, 2 PMCrown Isle ResortBallroom399 Clubhouse Drive RSVP to Terina at 250-703-0637 by February 19.
VANCOUVERMonday, March 2, 2 PMThe Fairmont WaterfrontWaterfront Ballroom900 Canada Place WayRSVP to Caitlin at 604-844-5336 by February 23.
SOUTH SURREYTuesday, March 3, 7 PM – SESSION FULLNew afternoon session added – 3:30 PM!Morgan Creek Golf Course3500 Morgan Creek WayRSVP to Caitlin at 604-844-5336 by February 24.
CHILLIWACKWednesday, March 4, 2 PMCoast Chilliwack HotelRosedale Room45920 First AvenueRSVP to Taylor at 604-824-3376 by February 25.
VICTORIAThursday, March 5, 2 PMDelta Victoria Ocean PointeBallroomNew entrance! 100 Harbour RoadRSVP to Monica at 250-952-7775 by February 26.
RSVP electronically! Visit odlumbrown.com/rsvp to register online.
Reserve seating early as space is limited.
