F

O

R

E

S

I

G

H

T

Home > Foresight Newsletter

Foresight Newsletter

Join our Mailing List for Foresight Lite, the e-mail version!

FORESIGHT is a complimentary quarterly newsletter which is written in lay language to help clients understand the investment world.

Our library of past Foresight articles has been moved to our new Investor U website. It contains comprehensive investor information on a variety of topics of interest to TRIVEST customers, as well as links to other sources of information.

Current Issue: Winter 2011

Editorial

Interest rates meaningfully impact all of our lives, whether we are debtors with mortgages, investors, entrepreneurs or pensioners. The present low-interest rate environment has debtors and business people happy, with a low cost of borrowing. But pensioners and investors are reading the GIC posters with disdain. If you have money to invest, and choose to keep it “safe” in fixed income, your reward presently runs from 2% to 3% over 5 and 10 years. Inflation and taxes (if your money isn’t sheltered in a pension or TFA account) add injury to the insult. Then we add the current debt crises of the sovereign debt of various countries, where perhaps even the principal isn’t safe against the backdrop of a 2-3% income return. And so, investors are casting about seeking higher yield, preferably with no incremental risk attached. Not! It is useful to dust off the wisdoms that we are supposed to retain across time. For starters, if you already have built a mature and well constructed laddered bond portfolio, then the recently matured bond might need to be invested with equanimity along the maturity schedule earning that 2-3%. Seek comfort, though, in the overall yield-to-maturity of your total bond portfolio. In the alternative, you might listen to the call of asset allocation rebalancing, which might be telling you to deploy the funds from the matured bond out into the equity markets. Why is it that “buy low” only seems to be the mantra we grasp when the market is high?

And where are interest rates headed? Princeton’s professor Paul Krugman’s U.S. prediction goes as follows:

“…And bear in mind that I’m not using some doomsayer’s forecast; I’m using the staid folks at the Congressional Budget Office…my sense is that a lot of people just can’t bring themselves to face the reality that we’re likely to be in a zero-interest world for a long time. They just keep assuming that the Fed is going to raise rates soon, even though there is absolutely nothing about the macro situation that would justify such a rate increase.”

The Bank of Canada has kept interest rates unchanged as of late, and the Bank indicated that the continued ‘deleveraging’ by banks and households, along with declining consumer confidence, will keep growth restrained for the “advanced” economies. Core inflation (an inflation calculation that excludes food and energy prices) is expected to be around 1% come mid-2012. Average yields on money market funds and bank “high interest savings accounts” are now also approximately 1%. The Bank of Canada does not expect our economy to resume “full capacity” until the end of 2013, at which time inflation is expected to return to around 2%. Given this scenario, it is unlikely that Canadians will experience any interest rate increases in the meantime.