It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness. The opening of Dickens' A Tale of Two Cities often rings in my head as I contemplate the future for my wife and three young adult children.
My wife and I are at the tail end of the boomer generation. This is when you really start to think about the next phase of life, when there is nothing more important than health, well-being, grandchildren and your retirement years. Next month, my first child is leaving the nest. I wonder how he will ever be able to buy an entry-level condo like we did 26 years ago without a forgivable loan from the Bank of Mom and Dad. Most kids don't have that luxury; we sure didn't when we started out. Having bought that condo near the peak of the market, we netted just $100 by the time we sold it in 1995 so that I could work on Wall Street.
THE BOOMER SHIFT: Read the Globe's series on Canada's baby boomers
These are the best of times for lots of reasons. World life expectancy has more than doubled in the past century. When the Old Age Security (OAS) program started in Canada the 1950s, life expectancy was less than 70, and when the Canada Pension Plan (CPP) started in 1966, life expectancy was about 71. Today, life expectancy is in the mid-80s and according to an article in the Economist magazine this week, kids born today could live to 120.
It is now the worst of times. The recent increased tax plan for the CPP is not the solution. The math used to work if you retired at 65 and lived, on average, to 71, but it no longer works – the payout is almost 20 years and getting longer. Like it or not, the solution is that we have to work longer because we are living longer. The Liberals' campaign promise to roll back eligibility for OAS payments to 65 from 67 is mathematically flawed and will unfairly cost my kids and yours billions in future tax dollars just to fund the aging population. Policies need to address the fact that we are living longer. This all means we have to invest smarter.
Last week, there was some talk of the Bank of Canada cutting interest rates again, given that the employment and trade picture in Canada has deteriorated significantly in recent months. Central banks cutting rates to near zero and lower to stimulate growth has caused a massive misallocation of capital and it will likely end badly.
This is the age of foolishness. Low rates are effectively stealing investment returns from the same retirees who won't likely have enough savings to last and is making real estate unaffordable for the next generations. We have talked about so-called helicopter money as the next policy tool in our July 25th column. There is currently about $12-trillion worth of sovereign government bonds with negative yields and the yield to maturity around the world is about 1 per cent. There is no safe fixed-income return any more. If you think that can't happen in Canada, you're wrong.
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The age of wisdom will arrive when investors act prudently in this difficult economic environment. Currently, it is not buying into overinflated real estate, equity or bond markets. One thought is about how to play the potential inflation that central banks so desperately want. There are a few ways to hedge inflation risks when central banks and governments basically just give people money: Gold and real return bonds come to mind. Perhaps having a little of both in your portfolio could be prudent.
I have not liked gold much for several years. I started to buy some gold equity ETFs when gold fell below $1,100 (U.S.), but got out when gold hit $1,200 because the longer-term trend was still weak. But that has changed in recent months as a bullish catalyst has emerged in the desire to tolerate more inflation from central banks. I have started to accumulate bullion again on weakness. (GLD.N GLDI.N). I don't have a really good target, but we could get close to $1,500 if the right combination of events plays out in Italy and with the U.S. election this fall.
Real return bonds are currently showing good value. The break-even rate (the spread between nominal government bonds and inflation-linked bonds) is about 1.2 per cent, the lowest since 2009, suggesting the market believes that inflation will be well contained. Talk to your advisers about shifting some of your fixed-income portfolios to inflation-linked ETFs (ZRR. T, XRB.T). These ETFs are not without risk. They are more volatile than government bonds, but they will offer much better protection and yield if inflation starts to turn up.
Larry Berman is co-founder of ETF Capital Management. He is a Chartered Market Technician, a Chartered Financial Analyst charterholder, and is a U.S.-registered Commodity Trading Advisor.
Larry Berman