The flaws in Canada’s financial adviser system

Barrie Mckenna

OTTAWA— From Saturday’s Globe and Mail
Published Friday, Feb. 17, 2012 6:42PM EST
Last updated Tuesday, Feb. 28, 2012 7:22PM EST

http://www.theglobeandmail.com/globe-investor/the-flaws-in-canadas-financial-adviser-system/article2342799/page3/

In the investing industry, the line between what’s best for the client and what’s good for the adviser is easily blurred.

Advisers want their clients to enjoy high returns, but they need to make money, and the potential for large rewards is tempting.

That creates an inherent conflict of interest in many client-adviser relationships, critics say, and too many investors are left in the dark about the fees they’re paying to advisers and the effect those fees have on returns.

Many investors assume financial advisers have a duty to act in their best interests. But that’s not the standard regulators currently demand. The requirement in Ontario, for example, is to act “fairly, honestly and in good faith” – the duty-of-care model. That’s a long way from explicitly mandating that financial advisers’ first obligation is to the client – a so-called fiduciary duty – such as exists for lawyers, accountants and portfolio managers.

Canadian regulators are examining steps that would follow the lead of Britain and Australia, both of which are pushing ahead with legislation to regulate adviser fees and clarify the duty of advisers to serve their clients. The Ontario Securities Commission, under new chairman Howard Wetston, has pledged to build “confidence in the investment process” by exploring the pros and cons of mandating a fiduciary duty. The commission is expected to release a discussion paper on the issue this spring.

“The adviser-client relationship … is an area of focus for the Commission because of its importance to retail investors,” said OSC spokeswoman Carolyn Shaw-Rimmington.

Critics say changes are needed in part because there’s a side to the investment business many Canadians don’t see.

Take the so-called cash payout grid, industry parlance for the mechanism that determines the pay of many brokers. The more investments they sell, the greater the share of the fees they get to keep – sometimes in excess of 50 per cent.

Fail to meet minimum revenue targets at the bottom of the grid and a young broker can soon be looking for a new career.

“The grid is the enemy of savings,” says Donald Ross, a former Vancouver-based mutual fund wholesaler for a major bank-owned investment dealer. “It creates an incredible amount of pressure to generate volume.”

Throw volatile equity markets and near-zero interest rates into the mix and what your broker earns can be the difference between you making money or owning a shrinking nest egg.

John Tak, 57, of Vancouver, and his wife say they’ve endured a decade of frustration over embedded fees and subpar returns. They’re now on their third financial adviser.

“I can’t think of another field where you don’t get a clear bill and you don’t know exactly what you’re paying for,” said Mr. Tak, an executive at a health products manufacturer. “I don’t think they’re dishonest or trying to trick me. It’s the nature of the industry.”

The standard risk profile that clients sign becomes a way for advisers to duck their responsibility to generate better returns for investors, Mr. Tak said. “They’re making money, whether we’re losing money or making money,” he complained.

A nationwide survey by Genesis Public Opinion Research for The Globe and Mail found that most Canadians generally trust their financial advisers (52 per cent gave their advisers marks of 9 or 10 on a 0-10 scale).

But they’re also deeply dissatisfied with the returns they’re getting, disillusioned with the stock market in general and wary of their own investment ability. And less than half of respondents give their brokers top marks on such critical measures as recommending investments that suit their financial goals and selling products clients fully understand.

The data suggest many investors don’t have the necessary tools to assess the quality of the advice they’re getting.

“Many retail investors don’t know any better,” said Genesis pollster Dave Crapper.

Experts say too many Canadians don’t understand what’s behind the investment advice they’re getting, and more importantly, how much they’re paying for it. In many cases, the financial advice investors get is coloured by the adviser’s needs, including a desire to keep their job. Buying, selling and just holding on to mutual funds, many with high fees, for example, is a common way for advisers to earn a living.

“A lot of people don’t understand what they’re paying for. They think the advice is free,” said Ilana Singer, deputy director of the Canadian Foundation for the Advancement of Investor Rights.

“Their own knowledge is so low they don’t know how to assess the value of the advice they’re getting … If you think you’re getting free advice, your opinion of that advice will be higher.” Ms. Singer said many investors are unaware that the cost of the advice they’re getting is often buried in the mutual funds they’re buying, through trailer fees and management expense ratios.

Mr. Ross, the former mutual fund wholesaler, said brokers sometimes face pressure to dump the perfectly good funds already in a client’s account in order to buy new ones, simply to generate fees needed to make their pay “grid.” He said the mutual fund industry helps feed this thirst for income with a steady stream of new closed-end funds, which pay the broker up-front fees and may be sold at an initial discount to their book value to drive sales.

“The public doesn’t have any idea what goes on,” added Mr. Ross, who now works in real estate. “They don’t have a clue.”

Just to break even, investors typically must generate annual returns of 5 to 8 per cent to cover fees, commissions, trading costs and inflation, estimates Victor Therrien, a mutual fund industry veteran and former executive vice-president of Brandes Investment Partners.

“Investing is a zero-sum game, right out of the gate,” said Mr. Therrien, who left the industry in 2008, disillusioned at the way investors were being treated.

“Investors don’t understand. If you have commissions, it makes that mountain you have to overcome so much more acute.”

Clarity around an adviser’s fiduciary duty would be a step forward. But the OSC isn’t making any promises. Ms. Shaw-Rimmington said the issue is complex and the OSC wants to review the implications of imposing a “best interests” or fiduciary standard before moving forward.

Early next week, the OSC-funded Investor Education Fund is releasing new research on adviser relationships and investor decision-making.

There’s also interest in Ottawa. Ursula Menke, commissioner of the Financial Consumer Agency of Canada, agrees that imposing a fiduciary duty for advisers would clearly be good for investors.

“The compensation model, by its very nature, creates a conflict of interest,” she said in an interview.

Dumping the current duty-of-care model in favour of something more stringent is likely to face stiff resistance from the industry, which maintains that Canadians have ample legal protections now.

But Ms. Singer, the investor advocate, said imposing a fiduciary duty is the right thing to do, particularly at a time when governments and employers are gradually shifting the burden of providing for retirement onto the shoulders of individuals.

“This kind of duty is important to the fabric of the country,” she argued.

“Canadians have to rely more on their own savings to get them through their retirement years. And if your savings are placed with a financial adviser, it is even more important now that greater responsibility is placed on the shoulders of the people providing the advice.”

The grid: Many advisers are paid according to what’s known as the grid, typically a one-page table that spells out how gross fees are shared between the adviser and their brokerage firm. The more fees the adviser brings in, the more of that cash they keep. An adviser generating fee and commission revenue of $200,000 a year might get to keep, say, 25 per cent. One earning $400,000 would get 35 per cent. Some brokers impose a minimum amount the adviser is expected to generate.

Fees: Some brokers charge an all-inclusive flat fee, typically in the range of 1 to 1.5 per cent, based on the size of your portfolio. A broker may also operate on a fee-for-service basis, either by the hour or based on the specific services they provide. Many other advisers offer what appears to “free” service, when in fact they are compensated via a vast array of fees on the investment products they put in your account. Many of these fees are not readily apparent to the investor.

Front-end sales or load commissions: You buy $10,000 of a mutual fund, and your adviser gets 2 per cent or $200. So your net purchase is actually $9,800.

Back-end or deferred fees: You buy a $10,000 mutual fund, $10,000 goes into your account and the adviser gets a commission. But sell that investment before a set period and you will be charged a fee.

Redemption fees: Paid by the investor to the fund when you sell units in a mutual fund.

Switch fees: Fee charged to investors when they switch funds within a family of funds.

Trailer fees: Annual fee the mutual fund pays your adviser and his or her firm to keep you in a particular fund. Rates are typically in the range of 0.25 per cent to 1 per cent a year.

Management Expense Ratios: This is the percentage of a mutual fund’s assets that are deducted annually to cover operating costs, trailer fees, marketing, and fund manager salaries. MERs range from less than 1 per cent to 3 per cent or more. This comes right out of your return. So if a fund’s investments generate a 5-per-cent return and the MER is 3 per cent, your return is about 2 per cent. Published returns are after fees are deducted.

McKenna, Barrie. “The Globe and Mail.” Home. Globe and Mail, 17 Feb. 2012. Web. 01 Mar. 2012.

It’s that time of the year again when we look back at how our Dec 31, 2010 BNN predictions fared. BNN December 31, 2010

2011 was a year marked by uncertainty and volatility, to say the least.  With only a few more days to go, 2011 thus far has given investors a rough ride with many feeling bruised and battered.  The swings were sharp while the down days dominated the headlines.

2011 YEAR IN REVIEW

Investors began the year with high hopes.  The recovery was on firm footing and the worst of the great recession was supposedly behind us.  More than 70% of the corporations continued to beat analyst earnings expectations and CEOs revived investor optimism boosting guidance numbers and forecasted profitability.

With greater confidence, both the US Fed and the Bank of Canada started to embark on tighter fiscal policy; ending stimulus programs such as QE2 and raising interest rates from historical lows.  With an ever increasing positive outlook for the global economy, the Canadian dollar appreciated to a high of 1.0607 against the US greenback on July 26, 2011.

Then August 3^rd hit and what a difference a week makes. Who knew back then that the year would eventually be defined by economic turmoil, the topple of three European governments and a grassroots protest against Wall Street that spread worldwide.

Investor misery began with an unprecedented US debt downgrade – the result of a dysfunctional US government and a political unwillingness to resolve key issues such as debt reduction and tax planning in spite of an eleventh hour agreement. This was then sharply followed by fears of a Greek default and the eventual realization that the whole Euro zone was dangerously at risk.

A fiscal disaster a decade in the making for “too big to fail” countries such as Italy and Spain conjured up memories of Lehman Bros and its swift descent into oblivion.  At about the same time, economic forecasters started to slash their forecasts for worldwide growth, down from 3% to the 1-2% range.

In the four business days leading up to August 11th, the US stock market was down 600 points for two consecutive days (equivalent to a daily loss near 5.5%), which was then followed by two consecutive days of 400 points up.  Never before had the Dow Jones had four consecutive days of 400 price movements, irrespective of direction.

By October 4th, the Toronto Stock Exchange and S&P 500 were down 21% and 16% respectively from their 52 week highs.  Since those October lows, the markets have crept back.  The S&P 500 is now flat on the year while the TSX is down 11%.

DEC 31, 2010 BNN TOP PICKS BNN December 31, 2010

Our top picks for 2011 established on the Business News Network (BNN) with Frances Horodelski were:

• McDonalds (MCD)
• Pepsi (PEP)
• National Oilwell Varco (NOV)
• Deer Co. (DE),
• Caterpillar (CAT)
• Finning (FTT)

The stocks were chosen for their dominant brand and competitive position, emerging market potential, history of dividend increases, proven management expertise, and strong fundamentals.

If the group was purchased in equal weight the total return would have been 2.4% excluding the impact from currency.

By comparison the TSX is down 11.0% and the S&P 500 is up 1.0%.

HOW GOOD WAS OUR 2011 FORECAST

In our Dec 31, 2010 interview, we mentioned that we were modestly bullish.  We expected a year of slow growth and modest gains for the market.  Furthermore, we felt that investors needed to approach the upcoming year with caution.

We specifically liked McDonalds for its conservatism and its potential for upside surprise.  In the interview, we felt the company had a high probability of achieving an overall total return of 8% between dividends and capital gains, We also liked the company for its emerging market business, a common theme amongst all our stock picks.

As Frances alluded to in the interview, McDonalds did not seem to be an exciting stock pick.  We agreed and let it be known that it was unlikely to produce the type of ‘home run’ that many investors look for on a show like BNN.  That being said, McDonalds turned out to be one of the top performing stocks in the Dow Jones Industrial Average returning well over 22% in 2011.

Our worst performer turned out to be Finning which was down 17%.  The company’s problems had less to do with the economic shift and more to do with poor implementation of an enterprise wide supply chain system.  We continue to recommend Finning as a good long term buy as its business metrics and fundamentals remain sound.  (Note: We continue to own stock in Finning)

INTEREST RATES SPIKE PREDICTION

Our prediction in the interview that interest rates could suddenly spike 400 basis points at any time, interesting enough, did prove true for many on the globe – as Italy, Spain and Greece found out.  While Greece is a basket case, Italy and Spain are highly A rated countries.  Even France, which is rated AAA, the highest credit rating possible, saw a 120 basis points jump in November (equivalent to a 50% rise) — something that would have been unheard of only a few months ago.

FEARS ABOUT INFLATION

Inflation was a concern highlighted as a key risk in 2011.  Admittedly, neither Canada nor the US had to deal with runaway inflation in 2011.  As a result, fixed income type investments maintained their values for the most part.  Preferred shares, REITs, and 10 year investment grade bonds continued their returns of 3-5% on average with little fanfare.

However, we continue to believe the risk of inflation remains.  Canadians are now starting to see inflation rear its ugly head.  Both national newspapers (National Post and Globe and Mail) in Canada reported on December 20th that food inflation in Canada is now running at a 20 year high and the “era of cheap food” is coming to an end.  Inflation should definitely remain a key risk for investors with medium to long term horizons.

Next week we look at our 2012 Market Forecast.

Jeff Kaminker

www.frontwater.ca
www.fwcapital.ca

Wall Street Journal

Federal Reserve officials modestly upgraded their outlook for growth last month, but indicated little inclination to lessen their extraordinary support for the economy this year.

Fed policymakers boosted their projections for 2011 growth in U.S. gross domestic product to between 3.4% and 3.9%, up from the 3% to 3.6% they estimated in November, according to the forecasts released Wednesday along with minutes of the meeting of the central bank’s Federal Open Market Committee in January. Increased consumer spending, stronger exports and a boost from the tax-cut package approved in December all contributed to the brighter outlook.
The officials, however, voted unanimously at the meeting to leave intact their $600 billion bond-buying program given the slow improvement in unemployment and inflation.

Despite the improved growth forecast, “the pace of the recovery was insufficient to bring about a significant improvement in labor market conditions, and measures of underlying inflation had trended downward,” the minutes said.

Some Fed policymakers have raised the prospect of scaling back the purchases of longer-term Treasury securities, now scheduled to run through June, if growth prospects improve significantly in coming months. But most of the committee appeared to show little interest in such a move.

“A few members noted that additional data pointing to a sufficiently strong recovery could make it appropriate to consider reducing the pace or overall size of the purchase program,” the minutes said. “However, others pointed out that it was unlikely that the outlook would change by enough to substantiate any adjustments to the program before its completion.”

The Fed officials still could change their minds, if events unfold differently than they expect. “Members emphasized that the committee would continue to regularly review the pace of its securities purchases and the overall size of the asset purchase program in the light of incoming information…and would adjust the program as needed,” the minutes said.

Despite mounting worries about rising prices for oil, grains, metals, and other global commodities, central-bank officials continue to expect very slow increases in the U.S. consumer-price level. They forecast overall inflation of 1.3% to 1.7% in 2011, barely up from the 1.1% to 1.7% they estimated in November, based on the Commerce Department’s price index for personal consumption expenditures. Excluding food and energy prices, inflation is expected to be between 1% and 1.3% this year–well below Fed officials’ informal target of just under 2%.

Some Fed officials said at the meeting that climbing commodity prices, along with higher prices for imported goods, posed risks for higher inflation. But others noted that the pass-through to consumers “had generally been fairly small,” the minutes said. “Some participants expressed concern that in a situation in which businesses had been unable to raise prices in response to higher costs for some time, firms might increase them substantially once they found themselves with sufficient pricing power.”

Fed officials estimated that the unemployment rate in the final quarter of the year would be between 8.8% and 9%, a slight improvement from the 8.9% to 9.1% projected at their prior meeting.

Policy makers indicated stronger confidence about the durability of the recovery, and less concern about the possibility of a persistent decline in the consumer price level, or deflation. Officials “generally agreed that the downside risks to their forecasts of both economic growth and inflation―as well as the odds of a period of deflation―had diminished,” according to the minutes.

The US unemployment rate attracts a great deal of media attention, especially during recessions and tough economic times. Generally, the national unemployment rate is defined as the percentage of unemployed workers in the total labor force. It is widely recognized as a key indicator of labor market performance.

One misconception about the unemployment rate is that it is derived from the number of people filing claims for unemployment insurance (UI) benefits. But the number of UI claimants does not provide accurate information on the extent of unemployment, since people may still be jobless after their benefits run out, while others may not be eligible for benefits or may not even have applied for them.

Counting each and every unemployed person on a monthly basis is also be a very expensive, time-consuming and impractical exercise.

Therefore, the U.S. government conducts a monthly sample survey – known as the Current Population Survey (CPS) – to measure the extent of unemployment in the nation. The CPS has been conducted monthly in the U.S. since 1940. The CPS sample survey targets approximately 60,000 households, or about 110,000 individuals. This sample size is deemed to be representative of the entire US population. A typical household that is included in the survey is interviewed monthly for four consecutive months and then again for the same four calendar months a year later.

The basic definitions used for compiling labor statistics are quite straightforward:

* people with jobs are employed
* people who are jobless, looking for jobs and available for work are unemployed
* people who are neither employed nor unemployed are not in the labor force

The definition of “workforce” is meant to include all those who are either employed or unemployed. Those who are not in the labor force – comprises of people who have no job and are not looking for one, such as students, retirees and homemakers.

The criteria for being considered to be unemployed are rigorous and well-defined. For example, actively looking for work includes such measures as contacting prospective employers, attending job interviews, visiting an employment agency, sending out resumes, responding to job advertisements and so on.

Hence, out of work people who only partake in passive methods of job searching such as attending a training course or scanning the job advertisements in newspapers, would not necessarily be considered unemployed by the US government.

By now, you can begin to see the emerging controversy around the definition of unemployed. The following situations are examples of individuals who would not fit the official definition of “unemployed” as they would be deemed “not in the labour force”.

A single mother who has been unemployed for three months, but is unavailable for work for the past two weeks in order to care for her sick child, would be classified as “not in the labor force.

On the flip side, a sales executive with a family to support and bills to pay has been unable to find full-time work after six months of unemployment. He finally takes up a three-month contract that entails only six hours of work a week. Even though this person is only working temporarily in a position that under utilizes his skill set, he would be considered “employed” by the government.

The strict definition of unemployment more often than not results in understating the magnitude of the actual unemployment situation. It is therefore advisable to look beyond the headline unemployment number, as it may not convey the whole story.

No matter the category: gold, silver, copper, uranium, wheat, sugar, cocoa if it was a commodity, it pretty much kicked butt in 2010. Any way you slice it, commodity prices erupted on the backend of 2010.

Gold was the clear standout in 2010. It traditionally has been viewed as a classic shelter investment, often used as a hedge against inflation. That kept it idling for much of the decade before the global financial crisis emerged in 2008. Then, as central banks started taking dramatic actions to stimulate their economies, gold starting moving higher as interest rates dropped to record lows and some currencies fell in value. That led some investors to predict higher inflation is inevitable. Other precious metals, like silver, also moved higher.

On Friday, gold closed at $1,421.40 an ounce, 31 percent higher for the year after an almost uninterrupted climb since January. This was also the 10th consecutive year in which gold appreciated. Gold should continue to rise well into the second half of 2011. Political instability, such as military tensions on the Korean peninsula, coupled with further stimulus plans and bailouts in Europe mean gold’s safe-haven status will keep it in high demand.

Industrial metals, used to make everything from computer parts to automobile engines, also gained as global consumption and manufacturing started to recover. Copper in particular surged more than 40 percent, rising from just over $3.00 a pound to close the year at $4.4470.

Meanwhile, 2010 marked one of the most profitable years ever for farmers in the U.S. Midwest. Smaller reserves of corn and soybeans this year couldn’t satisfy ever-growing global demand, sparking a price rally over the summer that has yet to abate. Wheat prices also climbed as droughts, fires and heavy rains around the world slashed the amount of grain for harvest. With Russia’s post-fire grain export ban likely to remain in place throughout 2011 and European exports expected to be exhausted in January, the U.S. looks increasingly likely to be the supplier of last resort in the coming year.

Grains and soybeans closed higher on Friday. March wheat rose 9.5 cents to settle at $7.9425 a bushel, March corn rose 13 cents to $6.29 a bushel and March soybeans added 27 cents to close at $14.03 a bushel.

Oil prices ended the year at levels many analysts considered unachievable just six months ago as oil surpassed $90 a barrel this month and remained above the threshold to close the year at $91.38 a barrel. Increased demand from China and India has also helped stoke the rise in oil and energy prices in the second half of the year. Oil prices hit a low around $70 a barrel late in May as traders worried that debt problems in Europe and high unemployment in the United States would keep economic growth stagnant and energy demand low. But increasing demand in the developing world has changed all that.

Undoubtedly, the jump in commodity prices has been driven by China’s seemingly insatiable demand for raw materials and speculators betting that they could profitably ride the momentum higher. Investors are looking to get out of the dollar, and stocks have run up so much that commodities are looking like a good alternative. Expect further price increases, and volatility to continue well into 2011.

Jeff Kaminker

Be it a bushel of wheat from Kansas, a ton of rice from India or a barrel of crude from Saudi Arabia, prices for all manner of commodities are on the rise across the globe, a trend that is starting to pinch consumers.

Copper prices in particular have surged about 50% since June, reaching US$9,091 a tonne on news that JP Morgan had bought up more than half the copper on the London Metals Exchange (LME).

Prices of many other raw materials continue to surge, with gold, silver, cotton and sugar reaching record highs. The effects are rippling from financial trading floors to local stores, forcing consumers to shell out more for everyday basics — a cup of coffee, a box of cereal, a gallon of gasoline.

Those increases are being driven in part by short supplies of some crops and raw materials caused by poor weather in major producing regions and robust demand from emerging markets such as China and India. Investors and speculators also are pushing up prices as they jump into rising commodity markets. They are being drawn to these so-called hard assets to hedge against inflation and the risk of further devaluation of the dollar and other paper currencies.

But that fear of inflation could ultimately be the fuel that feeds it, analysts warned. Billions of dollars are moving into oil, and then it becomes a self-fulfilling prophecy.

This year alone, raw coffee prices on commodity exchanges are up 60%. Corn and soybeans, the basic feed for hogs and cattle, have risen 39% and 26%, respectively. Wheat, a dietary staple for many cultures, is up 33%, and sugar is up 23%. Crude oil prices are up 9% this year to nearly $87 a barrel.

Even napkins and tablecloths to set the table have grown more expensive to make: Cotton prices have leapt 100% this year, to $1.51 a pound, a high not seen in this country since the Civil War.

This latest run-up in commodities, which began in late August, so far has boosted prices only modestly for consumers. But next year the impact could be far more serious, particularly if harvests for major crops are poor, Wall Street and agricultural analysts warned.

This weekend, China announced inflation had soared to 5.1%, well above its targeted rate of 3%; led by food inflation which was up more than 11% year over year. One should expect a similar trend to take hold in the US and Canada.

Retail food prices in the US have already started to rise after remaining relatively flat for the first half of the year. General Mills Inc., citing higher costs for grain and other ingredients, is raising prices on some of its breakfast cereals this month and some baking products in January. Kraft Foods Inc. said during a call with analysts last week that it had raised or planned to raise prices on about 40% of its products sold in the U.S., including coffee and cheese.

Starbucks said it would charge more for some its larger drinks because the cost of its coffee beans is skyrocketing. Rival Peet’s Coffee & Tea Inc. already has jacked up prices, blaming the run-up in raw coffee. In September, the Emeryville, Calif.-based chain tacked on 10 cents to the price of most of its drinks and 8% to the price of bagged beans sold in its stores.

Citing cotton costs, apparel makers Jones Group Inc., Hanesbrands Inc. and VF Corp. have said they expect to boost clothing prices by as much as 10% early next year. From grocery stores to gas stations and most other consumer stops in between, price inflation is shaping up to be the biggest economic story ahead. Even if traditional measures of consumer prices aren’t yet showing major increases, consumers know what they see.

The big danger with inflation in today’s current economic environment lies in the fact that US unemployment remains stuck at 9.6 percent, wages are mainly stagnant, and the housing market is still near recession lows. As prices of every day consumer staple items go up, that leaves less money available for discretionary items.

Inflation with unemployment, otherwise known as stagflation, is undeniably a major headwind for the economic recovery. Stagflation also tends to poses a dilemma for the Fed Chairman. When the Fed wants to fight unemployment, it lowers interest rates. When it wants to damp inflation, it raises them. It is not possible to do both at the same time. In the late 70’s and early 80’s, Chairman Paul Volcker at the time conquered stagflation, but only by dramatically boosting interest rates, causing a severe recession in 1981-82.

Thus far, Fed officials have taken comfort that surveys and bond-market behavior suggest the public expects the inflation rate to fall. But that credibility is now in endangered as bond yields increased contrary to the Fed’s best efforts to keep rates low via its Q2 easing.

Jeff Kaminker

The problem with bringing down the stubbornly high unemployment rate is that employers are learning to do more with less.

Employers still aren’t hiring enough. Just look at November’s disappointing employment report, which barely eked out a gain in jobs. Or better yet, look at the holiday workers at your local mall. If you can find them.

Retailers, who are reporting a strong start to the holiday shopping season, are apparently doing so with less help than in the past.

The US Labor Department reported a drop of 28,000 retail jobs in the month in its employment report once it adjusted the numbers for seasonal factors. Except for 2008, when the economy was in the process of falling off a cliff, there hasn’t been such a weak November for retail payrolls in in 29 years.

The push to do more with less help isn’t limited to stores. It can be seen in offices and factories across numerous industries Businesses simply are not certain that the recovery is for real so they are taking their time in hiring. And because of productivity gains, they don’t need to hire as many people.

Businesses were forced to figure how to be more productive and change the way they did business, in order to survive during the recession. And that isn’t going away anytime soon, he said.

It’s not just getting people to do more. Companies have also stopped doing things that were niceties to have but added marginal value. As one senior executive said: ‘It was a nice to have those extra 23 reports we used to do every week, but we don’t have the people to do them.’ That’s not going to change.”

It is no surprise therefore that the job market has remained stuck in the mud. While gross domestic product, the broadest measure of the economy, has recovered 84% of the output that was lost during the recession, the labor market has recouped only 11% of the jobs that were lost.

The US is now producing almost as much as it did before the recession but with 7.5 million less people. The difference is going into the productivity numbers and corporate profits.

The latest reading on productivity, which measures the economic output of each hour Americans work during a quarter, was up 2.5% from a year ago in the third quarter, the Labor Department reported this week. It’s the sixth straight quarter of gains of that level or higher.

Unbeknownst to most Canadians is the fact that most households are nearing the financial tipping point that Americans reached only a few years ago — a tipping point which plunged the US into the deepest recession since the Great Depression.

Canadian households are now more overextended than households in the US as low borrowing costs have sparked a dramatic increase in Canadian consumer credit. The debt to income ratio among Canadian households now stands at 150 per cent — up from 145 only six months ago. This is the highest level on record since quarterly record keeping began in 1990. It means that for every $100 of personal disposable income, Canadians now carry $150 in debt.

In fact, Canadians are also now even more extended than were most Britons and Spaniards prior to the bursting of the housing market in their countries.

At the same time, a number of Canadian banks including CIBC and BMO have issued reports stating the housing market as being overvalued by anywhere from 10-14%.

With the Harmonized Sales Tax firmly in place now, we are seeing housing markets in Ontario and BC completely dry up. Sales have fallen off a cliff. What was a sellers market only a few weeks ago is now a buyer’s market as owners are being forced to discount their home prices by 5-10% just to drive traffic so they can showcase their home.

If true, this has huge implications. Decreasing home prices are a slippery slope. As we saw in the US, a decrease in housing prices creates a vicious spiral downwards – largely due to the domino effects of banks having to take over defaults and foreclosures and reselling them at distressed prices. Basically, foreclosures lead to lower house prices which leads to more foreclosures which leads to lower house prices and so on. Most people forget that in the last Canadian housing bubble n 1989, it took five years for house prices to reverse their downward trend and to finally stabilize.

Interesting enough, few Canadian banks are actually taking their own advice. One would have thought that the Canadian banks would have learned something over the last two years from their foreign counterparts. Logic and history would suggest that the big banks adjust their risk model to recognize the higher probability of credit default but this is not the case.. With the big six banks so focused on maintaining and growing market share, the threat of rivalry blinds them to the large economic risks out there.

For now, we Canadians have been very fortunate in that we have diverted most of the economic malaise facing most other countries in the world. But the recent fall in Canadian home prices and the increase in unsold homes on the market are warning signs that should not be taken lightly. In all likelihood, it is no longer a matter of ‘if’ but when.

Jeff Kaminker
President, Frontwater Capital
www.frontwater.ca
www.fwcapital.ca

By Brian Love, European Economics Correspondent

PARIS (Reuters) – A return to recession is unlikely in the euro zone and a drop in the value of the euro should help offset the toll that debt-shrinking austerity measures takes on economic growth, the OECD’s chief economist said.

Pier Carlo Padoan argued in an interview with Reuters that governments need to pursue fiscal consolidation, combine that with growth-increasing reforms of pension systems, labor and other markets, and show they are working in unison to convince skeptical financial markets that their strategy is credible.

The OECD authorized the release of this Reuters interview, originally programed for 0845 GMT release on Wednesday, after French newspaper Le Figaro published comments from Padoan earlier on Wednesday, on condition that it not include OECD macroeconomic forecasts, also due for release at 0845 GMT.

Padoan told Reuters that even if austerity hit growth in the euro zone, it would be partly offset by Asian-led demand for euro zone exports, made more competitive by the drop in the euro’s exchange rate, he said.

The euro exchange rate versus the dollar has fallen by about 14 percent this year, while its trade-weighted value has slipped more than 10 percent, according to a measure the European Central Bank watches closely.

“Is there going to be a double-dip (recession) in Europe? I don’t think so,” said Padoan, who said massive debts following the 2007-09 global recession were “not just a European story,” but one that Europe was about to tackle faster than others.

Euro zone exporters stood to do well from rising foreign demand, helped by a weaker euro exchange rate, Padoan said.

“If you combine the two — high growth in Asia and a weaker euro — that could add quite a boost to European exports,” said Padoan. “The weak euro, in the short- to medium-term, is a welcome development.

“In any case it would be good for the global economy if … nominal exchange rates changed a little bit. The euro certainly has been overvalued for some time and the renminbi has certainly been undervalued for some time.”

Dave Carpenter, AP Business Writer, On Monday May 24, 2010, 6:41 am EDT

CHICAGO (AP) — Economists forecast the pace of U.S. growth to pick up in the year ahead as consumers and businesses alike accelerate spending, according to a new survey.

The assessment by leading forecasters is set to be released Monday by The National Association for Business Economics. It finds them more bullish than when the survey was last surveyed in February, with a majority expecting the economy’s performance to exceed the long-term norm in 2010 and 2011.

The outlook amounts to an encouraging report card on the economy at nearly the one-year mark of the recovery, which the experts date to June 2009 when the recession hit bottom.

“Although risks involving Europe have recently escalated, the outlook in this country has improved in most respects,” said Lynn Reaser, the group’s president and chief economist at Point Loma Nazarene University. “Growth prospects are stronger, unemployment and inflation are lower, and worries relating to consumer retrenchment and domestic financial headwinds have diminished.”

While the economy is in “reasonably good shape,” she said, forecasters are extremely concerned about the impact of large federal deficits in the future.

The panel of forecasters boosted its expectations for growth in 2010 to 3.2 percent real gross domestic product, up from 3.1 percent in its February outlook. It also pegged the 2011 growth rate at 3.2 percent.

Household spending, while still lagging the overall economy, is still expected to grow significantly this year. The forecasters attribute part of that to consumers being less thrifty, with the saving rate for 2010 seen dropping to 3.4 percent from the 4.6 percent they predicted just three months ago.

Business investment also is expected to fuel the recovery. The economists expect higher operating rates and rising corporate profits boosting companies’ spending on equipment and software, while retailers restock inventory.

Unemployment is forecast to decline to 9.4 percent by year’s end and 8.5 percent by the end of 2011.

Forecasters have scaled back their expectations for the housing growth after setbacks to the setback earlier this year. But 65 percent of survey respondents said last year’s lows in home sales and home prices will not be retested.

Inflation is expected to remain low in the near term, in line with the outlook from Federal Reserve Chairman Ben Bernanke and his colleagues. But panelists showed increasing concern about higher inflation over the next five years.

The NABE survey of 46 professional forecasters was taken April 27 to May 7.