Something is wrong in Canada when it comes to household finances

Roseman: Canadian consumers are weaker

April 04, 2010

Ellen Roseman

Something is wrong in Canada when it comes to household finances.

We think we're in good shape. We made it through hard times, thanks to healthy banks and tight mortgage rules, and we feel confident about the future.

All this is self-delusion, some economists say, pointing to the ugly reality lurking beneath the complacent veneer.

Maclean's magazine reported last February that Canada is virtually the only country where households have taken on more debt during this recession.

While total U.S. household debt shrank 1.7 per cent over the past year, debt levels here jumped 7 per cent. Most of the increase has come as a result of the huge mortgages people are taking out to buy homes at today's soaring prices.

On April 1, CIBC economist Benjamin Tal published a report, Canadian consumers – more confident but less capable, that said the surge in household consumption is not backed up by rising consumer fundamentals. Tal has created a consumer capability index that looks at Canadians' ability to spend, not their willingness to spend.

He sees some worrisome signs:

• Disposable income growth has been going down for the past year. In the year ended last February, household debt went up more than three times faster than income growth.
• Canadians have seen their liabilities rising twice as fast as their assets over the past two years – despite the rebound in stock valuations and the recent surge in home prices.
• The gap between real estate gains and income growth is also widening, with the ratio of house prices to income hovering at a 20-year high.

While there are also encouraging signs – a recent increase in the savings rate and a low long-term unemployment rate – "the balance is still weighted toward the downside," he says.

"Canadian consumer fundamentals are weaker than they have been in almost 15 years."

With higher interest rates on the way, household spending can't keep growing. It's not sustainable. And that means our consumer-driven economy may start to flag.

To me, this is a financial wake-up call. It's time to prepare for a less prosperous future.

So, what does the behavioural change involve?

Try to pay off your mortgage more quickly to avoid the shock of coming rate increases.

Don't take on more debt to buy houses at today's elevated prices. The accelerated growth in real estate values could level off soon.

Cut out frivolous spending.

Finally, think long-term. Thanks to medical advances, you may quit working in your 60s and have to stretch your retirement savings until your 80s or 90s.

Toronto sociologist Lyndsay Green looks at the challenges raised by longer life spans in a new book, You Could Live a Long Time: Are You Ready? (Thomas Allen, $19.95). Many seniors she spoke to found it helpful to plan ahead and establish some clear goals.

"Thinking about your financial future could mean a future where you won't need to think about finances," Green says.

In the upcoming Money 911 columns each Sunday, we'll look at how to plan for life beyond full-time work. How much do you need to save? Are you on the right track? What if you haven't started yet?

Carrigan: Good time to load up on exchange-traded funds Bill Carrigan

I have spent the last several months presenting technical arguments to support the reality of the current bull market, but we also need to examine the structure of the current bull in order to better manage our investments.

Two weeks ago I defined a bear market, as measured by the S&P500 or the S&P/TSX60 indices, to post a series of new 52-week lows within a rolling, 26-week time period. The last 52-week low in either market was posted 12 months ago and with most global stock indices at 18 month highs the bear market argument is without any technical foundation.

We also know the average bull is at least 30 months in duration and with the origin of the current bull somewhere between the November 2008 and March 2009 window we could anticipate another 15 months of advancing markets.

Unfortunately that may not be the case because this is a rare rebound bull, such as we had in 2003. The rebound bull will usually follow a granddaddy bear, which is a sharp, nasty bear introduced by some crisis. The last modern granddaddy's were the Fed tightening shock of 1987, the technology bubble of 2000 and the U.S. housing bubble of 2007.

A rebound bull emerges from a deeply oversold bear market and is normally of great upside magnitude, but also of shorter duration than the average bull. Rebound bulls tend to have an in like a lion and out like a lamb structure with the subsequent bear market being typically mild and also of short duration, much like the 2004 to mid-2005 window.

In the early stages of the rebound bull all stock sectors tend to have a high degree of price correlation, which produces a broad linear advance without any significant corrections. That was the condition operating during the great March 2009 to July 2009 advance. There was no need for stock picking or sector selection during this period because any long strategy worked. The idea was to recognize the new bull and get invested.

As the rebound bull matured through mid-2009 the high sector correlation unwound and introduced a sector rotational period when in late 2009 the materials sector advanced and the financials sector drifted lower through year end.

We had a shift of capital away from the front end of the market as represented by the interest rate sensitive financial, consumer and telecom sectors and into the inflation sensitive back end as represented by the energy, metals, materials and precious metals sectors.

In early 2010 the process reversed and we experienced a shift of capital into the front-end sectors which, led by the banks, enjoyed rolling series of new 52-week highs through late March 2010.

We know the early bull market strategy of getting invested in the broader stock indices will not work during periods of sector rotation. That means we have to identify investment products that will give us exposure to specific stock sectors.

This is when we take advantage of the growing exchange-traded fund complex. Sector ETFs are baskets of related stocks that trade on the TSX like individual stocks. That means with the purchase of one security an investor can "own" the entire TSX financial index or the TSX materials index.

Currently the TSX financial sector is cooling off and the red-hot stock sector is the TSX diversified metals and mining sector.

Now here is how we can get into trouble when we search out a mining sector ETF, because in this case we wish to gain exposure to the hot metals and mining sector. The S&P/TSX capped diversified metals and mining index has 14 names of TSX-listed base metals companies.

Now the only metals and mining ETF I could find is the Claymore S&P/TSX Global Mining ETF that "seeks investment results that correspond generally to the performance, before the fund's fees and expenses, of an equity index called the S&P/TSX global mining index.

This ETF has 50-plus names having exposure to several diverse metals groups such as aluminum, diversified metals and mining, gold, precious petals and minerals and coal and consumable fuels.

Our chart is the weekly closes of the TSX diversified metal and mining index plotted above the TSX Claymore Global Mining ETF spanning about 20 months. We can clearly see the upper plot has surpassed the prior May 2009 price peak and the lower plot is well below the same relative peak. Clearly these two stock sectors while with similar names are entirely different asset classes so investigate before acting.

Bill Carrigan, is an independent stock-market analyst