Weekend Reading – Worldwide recession coming edition
Welcome to a new Weekend Reading post: that a worldwide recession is coming edition.
You can check out other recent posts below:
This recent Weekend Reading edition offered up some ideas and thoughts about what my semi-retirement plans might look like – and some considersations about the current retirement landscape in Canada.
I recently got back from some very fortunate Florida travel, so I put together these top travel trips in case you have some travel plans coming up in 2023…
I also recently highlighted our latest monthly dividend income update for assets compounding away inside our non-registered accounts and our TFSAs. With one month to go, I hope to crack another income milestone!
Weekend Reading – Worldwide recession coming edition
According to the largest asset manager firm in the world (BlackRock), policymakers will no longer be able to support markets as much as they did during past recessions – so we have been warned – a team of BlackRock strategists led by vice chairman Philipp Hildebrand wrote in a report titled 2023 Global Outlook.
“Recession is foretold as central banks race to try to tame inflation. It’s the opposite of past recessions,” they said. “Central bankers won’t ride to the rescue when growth slows in this new regime, contrary to what investors have come to expect. Equity valuations don’t yet reflect the damage ahead.”
The report went on to say “The old playbook of simply ‘buying the dip’ doesn’t apply in this regime of sharper trade-offs and greater macro volatility. We don’t see a return to conditions that will sustain a joint bull market in stocks and bonds of the kind we experienced in the prior decade.”
I reflected on this report recently. How is an investor to cope?
Well, I think the “old playbook” is actually something I’ve already started to think about for the “new playbook” and maybe you have as well…
- Directionally, i.e., longer-term than one year or so, stay with equities. Lots of them. In fact, to be specific, consider infrastructure stocks in particular. BlackRock: “We see some opportunities in infrastructure. From roads to airports and energy infrastructure, these assets are essential to industry and households alike. Infrastructure has the potential to benefit from increased demand for capital over the long term, powered by structural trends such as the energy crunch and digitalization.”
- Tactically, i.e., within the next year, if you need that money balance, consider bonds. Yes, consider fixed income again. According to BlackRock: “In fixed income, the return of income and carry has boosted the allure of certain bonds, especially short term. We don’t think leaning into broad indexes or asset allocation blocks is the correct approach. We stay underweight long-term nominal bonds as we see term premium returning due to persistent inflation, high debt loads and thinning market liquidity.” Meaning, if you are going to own some bonds, stay short and own short-duration bonds.
I come back to Ben Carlson’s thesis (that I agree with) after reading this recent BlackRock global outlook report when it comes to bonds. There are absolutely good reasons to own bonds, but it’s more for the near-term variety:
- Bonds can help your investing behaviour – helping you ride out stock market volatility – including being strategic to buy more stocks soon.
- Bonds can be used to rebalance your portfolio – helping you keep your portfolio aligned to your investing risk tolerance and therefore asset allocation (mix of stocks and bonds).
- Bonds can be used for spending purposes – where some fixed income is “king” for major, upcoming, near-term spending.
The main reason I would keep any bonds (and I still don’t have any right now) is if I was saving for a major purchase in a few years (e.g., secondary residence?). Then, I would like rely on some form of fixed income between now and then to help secure that purchase. Otherwise, an interest savings account in the short-term will do that and/or some 1 or 2-year GICs are a great consideration as well as part of any bucket strategy.
Personally, I believe the main role of fixed income in your portfolio is essentially safety – not the investment returns and not the cash flow needs. In other words, if all else fails per se, if/when stocks crash, then bonds should historically speaking offer a flight to safety for preserving principal.
So, they are there for diversification purposes.
As Andrew Hallam, a Millionaire Teacher has so kindly put it over the years: when stocks fall hard, bonds act like parachutes for your portfolio. Bonds might not always rise when the equity markets drop. But broad bond market indexes don’t crash like stocks do.
Is that enough to own bonds in your portfolio? Maybe.
For now, I’m going to continue living with stocks: a mix of dividend paying stocks (including infrastructure stocks that BlackRock likes for the year or so ahead) AND owning low-cost equity ETFs for growth.
I will also grow my cash wedge to my desired safety net by the end of 2023 too. That’s one years’ worth of spending/expenses held in cash that will form Bucket 1 below. That first bucket is an insulator from my dividend and growth equities.
Your mileage may vary.
Further Reading: Consider a Cash Wedge to manage short-term market volatility
How could you fight a recession?
I have a few ideas…given the drivers seem to be similar to the past playbook per se:
- Sudden economic shocks
- Excessive debt
- Asset bubbles
- Too much inflation or too much deflation.
This means as a student of personal finance and investing I’m doing (and you can consider) the following:
- Build your savings to work against economic shocks. This way, with cash-on-hand or fixed-income assets, you have a larger emergency fund to cover periods of income disruption and any sudden income shocks to your household. (See above)
- Avoid consumer debt and kill off your highest debts. If you have a mortgage still, that’s probably enough. Pay it off. Consumer debt will be more costly in a recession when budgets are tighter. Where possible, as always, avoid lingering consumer debt.
- Practice diversification to avoid major asset calamity. All-in on a few stocks or stocks in just a few sectors (i.e., like tech as a growth sector) could be risky to your financial situation. Consider diversifying your stock assets to avoid owning too much of what could be one bad thing.
- Stay the prudent course. Mind your spending. Keep a budget. Be mindful of fees you pay to others. Recessions come and go, eventually, so don’t let your emotions get the best of you near-term when your financial plan is designed for the long-term.
Like you reading this post, I believe if your long-term financial goal is to build and enjoy a happy and healthy form of retirement or semi-retirement that I want to pursue, you don’t want to miss any chances for great returns. Those returns can come out of a recession.
The C.D. Howe Institute’s Business Cycle Council created a classification system for recessions, grouping them together by category. According to the council: “Category 1 recessions have only a short, mild drop in GDP and no decline in quarterly employment. At the other extreme, Category 5 recessions involve extremely rapid contractions of the economy over an extended period of time.”
|Monthly Peak||Monthly Trough||Category 1 to 5|
|October 2008||May 2009||4|
|March 1990||April 1992||4|
|June 1981||October 1982||4|
|January 1980||June 1980||1|
|December 1974||March 1975||2|
|March 1960||March 1961||3|
|March 1957||January 1958||3|
|July 1953||July 1954||4|
|April 1951||December 1951||3|
|August 1947||March 1948||2|
|November 1937||June 1938||5|
|April 1929||February 1933||5|
Source: C.D. Howe Institute Business Cycle Council.
Canada has experienced five recessions since 1970. These recessions usually last between three to nine months. This means you should at least prepare for that.
Recessions are (sadly) a time just to pause and get things back in balance. It will be interesting to see how deep and how long this balancing act might be…
Are we nearing the start of a deep, prolonged recession? Is the “old playbook” described by BlackRock dead?
More Weekend Reading…
Speaking/writing about Ben Carlson’s site, what could happen if housing prices fall as a result of higher inflation? Could they go down by as much as 20% in the U.S. and here in Canada? What would be the impact?
Canadian real estate permabear David Rosenberg highlighted a recession is coming, hard, to Canada in 2023. He believes this time next year, our Bank of Canada will be forced to cut rates again to combat the recession and ensuing deflation. From the article:
“Consumer debt is so out of control that even with a 3.75 per cent policy rate, the amount that Canadians spend on total debt service drains more than 14 per cent out of after-tax income. And that was before the central bank hiked rates by 50 basis points again on Wednesday.”
The only debt we have is a small mortgage that could be paid off, instantly, if needed. It will be gone in about 18 months anyhow.
Taking on more debt? Thinking about taking advantage of the buy now, pay later opportunities that may retailers are pushing? Make sure you understand the rules of this game before you are taken advantage of.
I always enjoy trying to make sense of the markets. Here is a recent roundup from MoneySense and Dale Roberts.
RBC recently released some top energy investing picks, and they dropped Algonquin Power (AQN, a stock I continue to hold for now) from their list. From the RBC analyst, Nelson Ng – warning Algonquin will need to cut back on capital spending due to “poorly managed exposure to floating interest rates.”
“We believe the company will also need to cut its dividend (payout ratio will exceed 100 per cent in 2022 and 2023), and the credit rating could be at risk for a downgrade if the company doesn’t take steps to strengthen its balance sheet,” he wrote.
As such, I expect an AQN dividend cut in early 2023 and I will see what happens in the coming quarters after that.
I enjoyed this article from Jon Chevreau’s site about the 5 most important factors to decide upon for retirement. I hope to take Fritz’s quiz myself and post on these subjects in the near future!
Tawcan borrowed an idea from my site and wrote about the 5 stocks he bought in 2022. I also bought AQN early in 2022 but alas, I cannot see the future perfectly either!
Loved reading my friend’s trip/post (GenYMoney’s) about her trip to the Maldives. I liked her suggestion of the half-board meal option to save money but also be reasonable about how much food you really need to eat during the day – although we would upgrade to the all-inclusive beverage option!
Great stuff from Farnam Street on Mindsets. An outstanding read or re-read.
Save, Invest, Prosper!
As always, check out my Deals page for major investing subscription discounts and/or free trials from the likes of my partnerships with:
- Dividend Stocks Rock
- 5i Research
- and more!
Have a great weekend!
Hi Mark: All these guys on Bay Street are not all kosher. I mention this because I recognized John Hodgsons picture on your Deals Page. Nothing about John, but a financier from bay street who I saw multiple times on BNN came to Peterborough and one of his first tasks was the way he did business. One of my neighbors dealt there and was called in for an interview. He came to see me and said that from now on he would charge $4500.00 to look after his account. I told him that I wouldn’t do that and that he could do better by buying his stocks online by himself. A friend of my dad’s was in a nursing home, ( Extendicare), and his son said to him what will I do when you go, put it in mutual funds. The father said if you can’t look after your own money than you don’t deserve it. I thought that was great advice. At the moment Brookfield doesn’t pay much of a dividend, but they have 761 Billion of AUM and growing. They have a 50% interest in a German wind farm and a 50% interest in the Nielsen Company. In the letter to shareholders he mentions that we had our largest fundraising to date with inflows of $33 Billion so I think the trajectory is up. This is one thing I like about Brookfield and that is they are always doing something. I remember in the 2000’s Steve Snyder at Trans Alta said that they had done enough fore a while and where going to take a break. This seemed absurd to me as all the companies in his sector were going ahead with new projects.
I’m a big fan of 5i Ronald, they have great research and I offer a FREE trial for any investors but yes, I have to agree, anyone charging $4,500 to look after a plan doesn’t get my vote. A lot has changed with 5i in terms of their model.
Brookfield is a very impressive company for sure.
Hi Mark: I received my quarterly report from BAM.A. In Bruce Flatts letter to shareholders he confirms that a recession is on the horizon for 2023. These investors are way smarter than me and have made me a lot of money so if they say a recession is coming then I believe them. Its no time to panic though as there will be bargains to be had. Your portfolio may fall but you only lose if you sell, so best to hold and wait for the eventual rebound.
I will hold on, Ronald, and if anything I will continue to add to my portfolio in 2023.
I recently purchased bond ETF XSB in my RRSP. First time I have purchased fixed income in years. Currently my entire portfolio (reg and non-reg) is almost entirely invested in equities. I am 68 and will have to convert my RRSP to a RRIF the year I turn 71 and start withdrawals the year I turn 72. I will be purchasing bond ETF’s and HISA ETF’s with the dividends in my RRSP accounts from now on so that I have fixed income and cash available to start making my minimum required withdrawal rates for my RRIF in 4 years time. This is another reason to consider bonds in your portfolio.
I think XSB is a good fund, overall, I used to own it after it came out but rightly or wrongly I came to the conclusion with some very low-interest rates, bonds might not be ideal from 2010 to present and I could get higher portfolio returns going with 100% stocks. That approach is not without risk or downside potential!
I will likely own some GICs eventually, once I retire full-time in the coming decades beyond my “cash wedge” of just cash. See my bucket approach with income stocks and growth ETFs as well.
I think bonds make sense for a few reasons but in my asset accumulation years I don’t see it yet. Maybe I’m being too risky?
Had a question about your dividend amount. Is that the combined total from all of your accounts (RSPs, TFSAs, Non-Reg)?
I only report non-regs (x2) + TFSAs (x2) and not RRSPs or other accounts. I do this for a few reasons covered here.
I’m no expert in finance but I used to hold Vab bond etf few years ago and in 2020 when market crashed so did the “Safe bond” etf 🙂 and it’s been going down since and the yield still the same at 2.88 this is why i sold it and went 100% in dividend growers in the TULRF industries , don’t need the money now and even if I’m retired my cpp/oas will be my bond . anyways this is my thoughts and reading Tom connolly reports made it a solid conviction for me so I’ll never own bonds.
5-year VAB ETF, is down about 11% over that time. A bad investment.
I’ve always mentioned that on my site as well, Gus, I see my CPP and OAS as bond-proxies in the future so I don’t need bonds in my asset accumulation years. Doesn’t make much sense to me.
We all owe a lot of thanks to Tom Connolly 🙂
Hi Mark: That mutual fund question I had last week John Heinzl may have come up with a solution. The shares keep on rising so the ACB must be adjusted as they are called phantom shares in the industry so they are taxed as capital gains. If the ACB is not adjusted then when you eventually sell you would pay double tax. Not good. On another topic I like to follow the history of companies. I told my nephew the history of Telus and he was interested. A few years ago I was curious about old oil and gas companies that were on the TSX and were they were today. I found it very interesting. one I expected to find but didn’t was Renaissance Oil and Gas. They were on the TSX but now are on the Venture Exchange. They had a huge find in Mexico and have a 50/50 partnership with LUK Oil. If you Google LUK Oil and see how it came to be than nothing happening in Russia will surprise you. I did this just for fun and as mentioned before I find the stock market educational.
Good stuff, Ronald. I will look at that.
I also find the stock market fascinating!
Hi Mark: Recessions are golden. This may be cold hearted, but if you have cash then it is a great opportunity to buy stocks as they are on sale. Bonds not so much. With bonds you get interest income which is taxed the same as earned income so the only place for bonds is inside a registered account. Analysts don’t know everything. I remember reading were TD had made a humungous profit but because their personal loan business was slightly lower than a year ago they were going to lower its rating. I have no mortgage and lots of dry powder. The depression was the worse recession but my dad said he worked all through it and it didn’t bother them that much. He had one group that he hunted and fished with and they, like bowling tournaments today, had shooting tournaments then and dad being good with a rifle would bring home a bag of flour or a goose. These trophies helped feed the family. In 2008 I said that all the stocks are down and isn’t it great. My nephew gave me a strange look and so I said everything is on sale. Every thing that goes up eventually comes down and visa versa so for a long term investor there is nothing to sweat or another way of saying is this to will pass.
Having never owned an actual “bond” as a GenX growth investor, now I may be interested. However I have observed Bond ETF’s and they don’t function like the safety of a bond. I want to actually own a 5 Year Bond from say a provincial entity and just collect the coupon, knowing that the lump sum money will come back to me at the end of the five years.
Can individual investors buy individual bonds and is their a tutorial that describes this bond buying process? Or do us retail investors just use GIC’s?
I personally like GICs now, although I don’t own any yet…
There are two ways to buy bonds in Canada:
1. you can purchase a bond fund/ETF through your brokerage account, or
2. you can purchase bonds directly from the issuing government or corporation by way of a broker.
I like #1. Very liquid.
For #2, contact your financial institution to discuss. Just an example, not promotion nor affiliation:
I think this is one area where some of the discount brokers aren’t necessarily set up for direct bond purchases. I don’t think?? WealthSimple or Questrade allows you to purchase individual bonds. Only the purchase Bond ETFs.
I would agree with that, although I haven’t done my research on what brokerages all offer what. You would really need to search them out and talk to them. Bond ETFs are liquid and easy, so for the small MER, I would likely go that route but I don’t own any bond ETFs anymore and likely won’t for a few years. GICs, in the future, maybe, as part of a GIC ladder once I reach full-time retirement. Whenever that is!
As long as I’ve been investing I’ve never been impressed by economic or market predictions from analysts.
2022 was another bust from the predictors.
Just look up the recent article from Reuters “When market forecasters should earn their spurs”.
Great stuff 🙂
Experts continue to get it wrong, all the time, for sure. They need to put food on the table too! LOL.
You should do an article about inflation Mark. Too often people refer to CPI when they talk about investment products meeting or not meeting it. Some folks should really be considering their personal inflation versus the national CPI. There are numerous variances that come into play. Region is a large one, along with personal consumption practices. Case in point, we’re 100% covered for prescription meds through our pensions so any increases are not relevant to our inflation rate. Throw in things like hotels (we don’t use them), children’s clothing, furniture, etc etc and one can see that *the* CPI “basket of goods” is not reflective of *my* basket of goods.
Food for thought.
I did write this one…
I could go deeper on that subject of course, since CPI is a decent but not accurate metric for the reasons you state.
Thoughts? Is/are there better ways to invest and hedge inflation?
I think my thought was that people might consider what inflation amount they might be dealing with versus just always using the national CPI as published.
On a personal level I also look at the total dollar amounts in question. Our indexing is on total pension yet inflation is only on our spending. This could just be a way to delude myself though. 😉
I agree with your statement Lloyd. There are so many pundits writing and talking about generalities. If you know where your money goes each year and some things are covered or you don’t use, It should not be that hard to calculate your own inflation rate. I review our expenses at the end of each year to see where the money went. Never had a budget. Just know knowing what you spend helps you make good decisions. In our experience for 2022 we noticed already our grocery spend was significantly less that last year, then realized our son was at collage for a whole semester more than the year before. But our vacation spend was way up. Great comment Lloyd, made me think about some things in a new way.
Ha, no. I don’t think so. I think inflation impacts us a bit differently than what CPI says it does!