BOH Knows Dough A No Bullshit Canadian Financial Blog

Idle No More…

Idle No More...

Don’t even get me started on this “movement”...
A very wise man told me many, many, years ago that the very first thing you need to do to be successful in any aspect of your life, any aspect, the number one thing you need to do is to except responsibility for where you currently are. Period.
I think that is enough to say on this topic.

Unethical Rich?? WTF??

This week I’ve read a number of articles all relating to a study done by some professors at the University of California, Berkeley, and Toronto’s Rotman School of Management, regarding the questioned ethical behavior of the “rich”. My not commenting on such a study would be almost…well…unconscionable.

First of all the study looked at the driving habits of people at an intersection on a busy Californian street and determined that people driving more expensive cars were far less courteous than those that drove “less high status vehicles”. Hence the conclusion seems obvious..; “rich” people are more likely to be lying, cheating, bastards. Come on!! High-status vehicles?? You mean the same ones driven by gangsters and people that can’t afford the houses they live in, in California…those are gauges of social status??

Now to be fair, they did some other equally dim-witted tests “in the lab” in which students, no less, rated themselves on their social class before they competed in certain experiments to determine their propensity to cheat. Same conclusion…the “rich” lie, cheat and act downright unethical. Which begs the question…maybe “the liars” also lied about their social class too. Hmmm…(professors at Universities actually get paid to do this stuff??)

Regardless of the methodology used, these studies and their conclusions created a lot of headlines in the media around the world. Especially in the United States where this is perfect fodder for their current “class warfare” election going on this year. And the headlines were comical. “Cheat, lie, break the law? Chances are, you’re rich”, was the one in the Globe & Mail. I love it…perfect kindling for the “Occupy crowd”.

Well, here’s a news flash for you. Rich or poor is no determination of individual ethical behavior. (Of which the authors of the study are quick to point out, but most media copy writers brushed over that fact in order to create more sensational headlines and editorials.) Like, “we already knew the rich are all corrupt and this just provides it.” OK…I guess that’s why our prisons are overrun with “rich” people.

Wealthy or high social status (whatever that means) doesn’t mean pretending you are rich. That’s fraud. So my guess is many of the so-called “rich” in the study, where liars to begin with.

But more importantly, wealth just makes you more of what you already are. If you are a liar, more wealth just makes you a bigger liar. If you are unethical, wealth will make you more unethical. There is no mystery to this. Just look at lottery winners. The good ones are extra good and the bad ones are a disaster. No study needed. If you’re a poor prick and now you have money, well I guess then you become a first class prick, but a prick none the less.

Fuck the studies. Don’t confuse wealth with being an asshole.

Occupy Wall Street – Both Sides of the Coin

These Occupy Wall Street Protests (OWS) remind me of a brand new laptop computer without any virus protection. It can be very powerful, yet so vulnerable and easily hijacked.

I should have written this in two parts as there are really two main issues to my comments on this. The first is why I think these protests are bang on and sending the right message. It’s about time that people stood up and said something (read my April 7, 2011 Blog). The second part is what I see happening and why I think it could easily be headed in the wrong direction.

If these protests are about the failings of Wall Street and how it has brought the world to the brink of disaster then I’m all for it. I’ve written and spoken the about this for some time now. I’m in the financial industry and I’m appalled at what has been going on with new and unregulated financial products that have the power to bring down nations.

Financial instruments of mass destruction are what they are: derivatives, credit default swaps, collateralized debt, dark pools and yes even ETF’s that are springing up on every street corner now. These are products that only a handful of people in the industry have any clue about how they operate yet they have the power in their size to sink a nation and bring the world to its knees. We saw it happen in 2007-2008 and we are still seeing it today. With these instruments there is almost zero transparency, next to no regulation, no oversight, they produce no goods or services and are only there to create profits for the very few that use them. These “creative contracts” were designed by a select few in some very large banks and hedge funds that have gotten us into the world wide financial mess we have now. Then when things turn sour on these contracts, taxpayers are asked to pick up the tab. This is a bill that will last for generations and it’s ridiculous.

On top of that, regulators and law makers are systematically being bought off and in many cases actually employed as lobbyists by these same financial institutions to help keep new regulation designed to get a handle on these things, weak and so full of holes that basically nothing changes. It’s far less expensive to offer a top regulator who maybe makes a $100-200k per year in salary an offer of $1-2 million per year to work as a lobbyist and fight for your cause than to give up billions in potential profits. And human nature being what it is, you know how this movie will end. You have a lot of Wall Street suits working in and for government and, surprise, surprise, a lot of retired politicians working for Wall Street. It’s an outrageously, incestuous situation that needs to end.

So, on this point I’m “All In” with the protestors. We need really big changes in this area and I’m hoping that people are willing to stand up to the very rich and powerful to make change happen.

Ahhh…but alas, my fear is where this movement is headed? The protests seem like they are being hijacked by the “Tax the Rich” crowd. It’s turning into a fight about class warfare with those claiming to be in the 99% thinking the top 1% are getting a free ride. Now you have every left wing wannabe politician, union leader, and movie maker (I’m sure Michael Moore is peeing his pants with excitement over this OWS movement) all in flamboyant support. This kind of shit makes me sick to my stomach as much as the bunch that screwed up our financial system that I spoke of earlier.

The “rich” are not the issue here folks. Let’s review the facts. Almost 40% of all working adult Americans between ages 25 and 64 pay no tax at all (35% in Canada). The top 10% of taxpayers pay 80% of all the tax revenue. Warren Buffet made a famous comment recently that his tax “rate” was less than his secretary. Probably true, but he paid more in tax dollars than all of the secretaries he employs in all his companies combined. He paid $7 million personally; his company paid $5.6 billion, and based on his share of the company, that works out to another $1 billion in tax that could be attributed to him directly. Plus consider this; if you took all the assets away from the top 1% of all Americans it would only produce an amount enough to run the government, for the other 99%, for a matter of months. So this tax the rich notion is also ridiculous. It might make for good television and political sound bites but it’s divisive and highly unproductive.

I deal with the “rich” and they are not like the protesters. They have a totally different mind set. If you took away all their money and possession, in a few short years they would have worked to have it all back and more. Now you might say, (like the protesters are saying) well, they would have a tough time getting a job right now. No they wouldn’t! They would create their own job, and hire a few others to work with them at the same time. That’s the difference. What America needs is MORE rich people not less. And you can’t create that by adding more taxes to the very group that currently pay for everything and create jobs for everyone else. You can’t make the bottom 99% better off by bringing down the top 1%. So if this is where these protests are headed, and I think they are, especially if they are coming to Canada, (who have nothing to whine about), then it will be a big disappointment and a waste of a great opportunity to forge some worthy changes that need to be made to the U.S. financial system.

Uncle Sam really wants a piece of you…dead or alive.

I’m back!! It’s been an interesting summer. I learned a lot about cyber crime and identity theft this summer…but more on that another day, so stay tuned. Today I want to talk about how the United States government is going after Canadians in their quest to bring in tax revenue. Two items you need to be aware of if you own U.S. property; are a green card holder or, are an American that lives and works in Canada.

Did you know Canadians are the largest buyers of U.S. property? Not the Japanese, or the Chinese, but Canucks. So while a lot of us are getting out of the harsh winters up north for the warmer climates of Arizona, California and Florida, we might also be stepping into a tax and estate planning nightmare that makes us wish we would have rented that condo instead of buying it. The new U.S. property tax laws that are coming into effect in 2013, drops the exemption level on estate tax for owners of U.S. property from $5 million to $1 million. And the maximum rate goes up from 35% to 55%. Now I know what you are thinking….”One million dollars is still way over what I paid on that property in Phoenix”. Yeah…but…here is the kicker…this exemption includes your Canadian assets. This means things like your RRSP’s and life insurance, assets that may not even be considered as part of your estate in Canada, are considered part of it south of the border if you own property in that country. How is that for a kick in the crotch! We try to help bail them out of their housing crisis by buying up inventory and inadvertently get shit kicked by their estate tax laws. My advice…get some advice.

Here is an even better one. Did you know that the United States is the only country that requires its citizens to file a U.S. tax return no matter where they live and earn their money? So now there is this new program, it’s called the IRS Offshore Voluntary Disclosure Initiative. Under the program if you are a U.S. citizen, dual citizen or even a Canadian citizen but holding a green card (even if you don’t work in the U.S.) you are required to file tax returns (form 1040) for each year back to 2003. I’m not shitting you! Eight years worth of returns you must file or face the penalties…and they can be very stiff. You might not owe any taxes at all (due to foreign tax credits that are available) but the obligation is that you must still file a return, for each of the last 8 years. Period! Oh, and I should mention, if you own an RRSP or a TFSA these are considered foreign grantor “trusts” under U.S. law and a separate return must be filed for each one, for each of the 8 years (Form 3520). The real bad news on this…..the deadline was August 31…..like a week ago.

Had enough…well there is more. If you are one of the unfortunate ones I mentioned in the paragraph above and you have more than $10,000 in Canadian accounts, including a Canadian bank account, brokerage account, RRSP and RRIF accounts, you must file a “Report of Foreign Bank and Financial Accounts” (FBAR) return listing details of each account. This is new under the U.S. Bank Secrecy Act.
The penalties for not filing returns can be harsh. They are not screwing around. Under the general rules, civil penalties for “willful” failure to file an FBAR can be as high as $100,000 or 50% of the account balance for each violation, whichever is greater. It could also result in criminal penalties of up to $500,000 and/or a prison term of up to 10 years. Even non-willful violations can trigger penalties of $10,000 per account, per year FFS!
Folks, the United States is under the gun to find more revenue, and what a better way to do it than to get it from people that don’t vote: foreign property owners and tax payers beyond their borders.
Again, if you are in one of these categories of people, get some good tax and estate planning advice and do it soon…..Uncle Sam is looking for you……

Who do you think pays for government pension plans??

A debate has broken out in the financial world in Canada after Statistics Canada reported that for the first time ever, the majority of those that have workplace pensions are government employees. The statement also points out that about 80% of public sector employees have a pension plan, while only 25% of private sector employees do. But not to worry, about 30% of all working Canadians are employed in some type of government funded work place. (This includes the military, police, hospitals, schools, city workers, etc.)

This all points to a glowing disconnect between public and private sector workers especially over the last recent recession. Many of the jobs lost in the recession were private sector jobs, so of course less workers means less private pension contributors. Governments, on the other hand, both provincially and federally added employees (some would say as part of a national stimulus plan to tackle an increase in unemployment.) Not only did private pension plan workers take the brunt of the recession by being laid off, but at the same time pension plans in the private sector have been scaled back, and sometime eliminated all together to keep the business afloat.

Some of the companies that faced troubled times like GM and Chrysler had bailouts to help keep the workers working and pensions in place. (So “private” kind of became “public” in a sense.) Other private firms like Nortel simply folded up shop, pension plan and all.

Now you can put some kind of political spin on all this and draw a number of conclusions if you wish. The fact is that anyone that pays any tax in this country helps finance a public sector pension plan. Good, bad or otherwise this is just a fact of the way things are.

So now here is the real interesting part of this. Just before the end of April the CRA (Canada Revenue Agency) released a statement that reported that 33.4% of adult workers in Canada did not pay any tax at all in 2009. And half of those people were in their prime money earning years between the ages of 25 and 64. I was shocked by that statistic because when you add it all up…who is “paying the freight” in this country?

A full one third of the working adult population pays no tax at all. Another third work for the government in some capacity, which means that the final third, pay tax to fund the pensions of not only the first 2/3rds but all the retired pensioners and people that that do not work at all. Holy shit! No wonder they have no money left for their own private pension plans.

Women rock at this retirement thing…well, kind of…

I was going to write about U.S. Fed Chairman Ben Bernanke’s first news conference Wednesday afternoon (boring), but I got to reading this recent report by Harris Decima Research for BMO on gender differences in retirement planning and thought I would pass along some of it’s revelations (with comments of course). You may have noticed that I find the psychological aspects of finance far more interesting than the mundane, day to day, number crunching and usually dry aspects of the investment world. I also believe it to be a more important and yet rarely discussed topic in any significant degree in the financial community. The “why” people do things is usually far more important than the “how” or “what” they do.

In this report the authors outline the obvious difficulties and differences between men and women in establishing and reaching retirement goals, but also the most intriguing point they make is that women are “happier” once they reach retirement. Which is fascinating given as the report suggests, that women earn 80% less than men and live significantly longer. The life expectancy of a woman who reaches age 65 is age 86, and that is a good half decade longer than men…..I suppose that in itself should make most women happier right there!

On the planning side, only 36% of single women, (which includes, widowed, divorced or never married) have a retirement plan, which is 15% below their male counterparts. This is an issue.

Men are rated as twice as “aggressive” in terms of investing and investment style as women, who prefer much more guaranteed types of investment vehicles. As such, women report financial security as 15 to 20 times more important than money related status or respect. Men like to brag about their investments and “show it off”…women on the other hand like to simply pile it up, quietly yes, but also very slowly. On the surface that may sound like a good investment strategy but as the report points out it leaves women with rates of return in their portfolios at much less than those of men. Fear is the motivator here…over 50% of women feel the fear of someday becoming a bag lady.

A full 40% of all women will divorce before their 30th wedding anniversary which is a little statistic I had read someplace before, but a number I had not seen before was that the average age of widowhood is 56. That is not very old to be left on your own. Women in turn, draw strength from their family, friends and close relationships. Men on the other hand are all about the identity they get from their work and that makes retirement a struggle for many males. Men need something to do in retirement (if you are counting on your spouse to keep you occupied…think again.)

So lets get this straight. Women make less over their lifetime so invariably save less. Their portfolios make a much smaller rate of return. They live longer, and will almost certainly be on their own at some point in their lifetime. Yet with all that is stacked against them, the majority of ladies are not only “happier” as they get older (unlike men), they describe retirement as “very successful”. Awesome!! If that in itself does not prove without a shadow of a doubt that there is a lot more to retirement than simply having money, nothing else will. The question is “Why”?

I could write a book on “why”, but the report offers a very brief summary of reasons in this little chart:

Now, is that not the greatest little chart ever! Is it not concrete proof that women have it figured out when it comes to retirement? This, fellow Dudes, is outstanding insight into what we are missing. For the guys, it’s a monumental shift in thinking to make us happier in retirement. For the ladies, this is easy….a little more time on planning and portfolio management and you can just keep on smiling!

What political commentary, seal hunts and ponzi schemes have in common…

OK…I watched the federal leaders’ debate. The English version. The next day I read a number of newspaper articles and on-line comments about the debate itself. I was astonished at the difference between what I actually saw on TV and what I read about in different media. The spin was incredible. Of course it’s done on purpose, even though the author of the written articles, and the readers of such, might not even know exactly why it happens.

It’s called confirmation bias. It’s a little human flaw in our thought process that can get us into all kinds of trouble. The definition of confirmation bias is really quite simple: we seek out information that confirms our already held beliefs. So with regards to the political debate, a Liberal leaning voter will think their candidate did very well (and that is what they think they actually saw), and they will write about it; and they will choose to seek out articles to read that confirms that belief. Conservative leaning voters do precisely the same thing. It’s a fact of human nature, and it’s a strong, self convincing motivator. If you are certain about the good, or the bad, of “something” (insert whatever you want here…Liberals, seal hunts, climate change, oilsands, heath care, taxes, who shot JFK, or any other issue with maybe two or more strong viewpoints) you can easily find whatever “evidence” you need to support and reinforce your view.

We humans do this in all aspects of our life. We will buy a car and then read articles on how great that car is in order to confirm the brilliance of our purchase. Confirmation bias is wired into our thought process to combat our cognitive dissonance. In the world of investing, people do exactly the same thing, sometimes with disastrous results. They buy an investment and then try to confirm that what they did was a really smart idea. Sorry….sometimes wishful thinking doesn’t make it so. This kind of action is one reason why ponzi schemes get so much traction and spread like wild fire. People that get screwed over don’t know it, and certainly don’t believe it, and then they go on to convince themselves and others that it’s a great idea. It’s classic. It doesn’t have to be an outright fraudulent investment to cause you problems, it just might not be the right investment for you, but now that you are in it, confirmation bias takes over and you “find evidence” seemingly without even looking, that reinforces the outlay.

How do you combat this? Well…most importantly, don’t get fixated on an investment, and be objective after you buy it. No matter how much you have sunk into something (like an in-laws wonderful business idea) don’t throw good money after bad without talking with your advisor or doing some research yourself. Don’t just convince yourself that this will be simply wonderful without getting all the unfiltered facts. Confirmation bias can be a real killer when it comes to investing. You simply can’t fall in love with a financial instrument.

There are few aspects of one’s life that confirmation bias is ever a good thing…I guess you could argue maybe picking and keeping your spouse might be one of those situations but even with that, sometimes research, objectivity, and reliable third party information can be pretty damn helpful.

Bernie Madoff was an amateur compared to these bankers…

If you ever had any doubt that the largest banks in U.S. have government leaders and regulators in their back pocket it was all erased last Sunday (April 3rd) during a broadcast of the CBS television show, 60 Minutes. Everyone in the world that has been affected by the financial crisis of 2008-2009 (which is, pretty much ‘everyone in the world’) should watch it. It is a fascinating piece that outlines everything that is wrong with the U.S. banking, financial, and regulatory systems. Why people do not go to jail over this is simply beyond me. They should be building special labor-camp style jails in the United States just to house the people that knew this was going on or should have known it was going on and stood by and did nothing about it.

The largest banks in the United States created the sub-prime mortgage mess to earn a shit load of money…then they securitized it (basically turned it into investments) and sold those investments around the world to unsuspecting investors making a shit load more money. The regulators saw and did nothing. The rating agencies that rated these investments gave the whole mess a green light and rated everything “top grade”. (Of course they were getting paid by the very investment banks designing and selling this stuff.) The regulators again, saw and did nothing. We all know what happened then…a financial shit storm, and the whole world is still in a mess. But the banks got bailed out by the taxpayers and are actually doing quite fine again thank you very much.

Now we have mortgage fraud on a mass scale and the banks are in on it. Just watch the video if you have not seen it.

The regulators are still doing nothing. No one has gone to jail on this or anything that happened during the entire financial crisis. No one has even had charges laid against them. It is simply unbelievable! How do they get away with it? It’s astonishing. I can not believe the citizens of the United States don’t rise up and put a fucking end to this shit.

Don’t get me wrong. If you default on your mortgage you should be held responsible and tossed from your house. But the guy sitting on his porch in Florida that’s about to lose his house sure as hell didn’t invent the sub-prime mortgage, or a mortgage backed security (or a derivative of such) and start this mortgage fraud fiasco to cover their asses! Where the fuck are the guys that created this shit? (Wait…see the blog below…I bet they are designing these gold ETFs.) It just makes you wonder what our neighbors to the south are thinking. Sometimes I just shake my head. I guess great empires don’t last forever…just ask the Romans…

Be careful, this could be the next great financial “scam” of our time…

A couple of years after I started in the financial industry (which was three decades ago) gold traded briefly at just over $800 U.S. per ounce. But as quick as it rose, it dropped off to spend the next quarter of a century trading in the $300 – $400 range, and it left a lot of investors holding the precious metal wondering wtf happened. Back in those days if you wanted to “own gold” you either owned the actual physical bullion, or shares of gold mining companies. In 2006 something happened, the SPDR Gold ETF (GLD) was devised, and since then gold has seen a steady rise in price to where it is today at around $1,400 U.S. per ounce. Now, I’m not saying that the two events are correlated (there are a number of reasons why the price of gold has been rising) but it is kind of interesting on an optical level. The point I’m going to make is far more fascinating than that; it has to do with gold ETFs themselves and retail investors piling into them.

Gold has long been thought to be a hedge against inflation and also protection against financial collapse or crisis. Well you have seen what has been going on the last few years in the financial markets and also the value of the U.S. dollar (which is the world’s reserve currency and is not backed by gold anymore I might add). So it’s little wonder that gold has risen in value. But now investors that want to “own gold” have this other option called gold EFTs, which are traded on stock exchanges around the world. The SPDR Gold ETF (GLD) is by far and away the largest of the gold ETFs with an AUA of about $60 billion U.S. and growing at an astronomical rate. The largest individual holdings of GLD are hedge funds. (The hedge fund Paulson & Co. alone own close to $4.5 billion.)

The problem is the ETFs are not backed by gold. Some estimate the actual gold bullion secured by these gold ETFs to be less than 10%. This isn’t fear mongering on my part, or a surprise to those that have done the research on this industry, but it is a quiet little secret that the promoters of these ETFs are not too overly excited to talk about. These funds are all fractional reserve holdings, and because a lot of these funds have also been sold short, it becomes a “fraction of fraction”. Everything else in them are derivatives and swaps. Basically “paper promises”.

This begs a whole lot of questions that may not be answered until the next financial crisis. In fact, these questions could spark a financial crisis in this market itself. Without all this manipulation and fancy paper shuffling, what is the real price of gold? What happens when the large hedge funds decide to take their profits and pull out of these ETFs? What happens in time of crisis if investors demand to cash out the units and want the gold (naively thinking that is actually what they own)? And what if the counterparty or sponsors of any of these arrangements goes bankrupt? Who is responsible to the investor? Oh believe me…this is going to be nasty! My advice: Don’t get involved.

If you think you are smart enough to speculate in the price of gold then at least know the risks, but if you actually want to own some gold in your portfolio then actually own some gold ffs!! Not paper promises of something that is not there. Investors that get caught in this mess are the very ones that want to own gold to avoid the mess caused by owning “paper promises” in the first place. How fucking ironic is that!