Comments on IIROC’s proposed guidance on Order Execution Only Services

Regulation in Canada often suggests that investors should take responsibility for their investment decisions and to educate themselves (perhaps much more so than other markets and jurisdictions), and have placed their primary focus over the years on disclosure to force such (CRM, POS etc). 

The retail model in Canada is also often portrayed as one where the “advisors” are merely helping the investor to make his decisions, more of a tool almost that helps links the investor with the necessary products:

If you’re an experienced investor, you may want an adviser who offers a wide range of products and lets you choose. If you’re newer to investing, you may be more comfortable with fewer choices and more guidance from your adviser.

The role of your adviser is to give you helpful, informed advice as you build and carry out your investment plan.

The more experienced investor appears to be assigned an even more precarious position of heightened responsibility for their decisions, even within the supposed safety of the “the regulated recommendation”! 

Yet, a one dimensional IIROC consultation on Order Execution Only Services appears to take the opposite tack and paints a picture of a world where responsibility and education are risks even to those investors who have expressed a clear preference to invest on their own account.  

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My take on Best Interests: The CSA’s Roundtable on Consultation Paper 33-404, 6 December 2016

What was my main takeaway from the roundtable with respect to best interest standards?

Not only was there a lack of overt consensus over exactly what the proposed best interest standard is, but the elephant in the room, the distribution model, around which the standard is to be wrapped, was left unmentioned.  Or was it?

In Maureen Jensen’s introduction she made the following statement: “But any changes that we’re going to make must be appropriate for Canadian investors and the Canadian marketplace.” 

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Double charging/dipping on fee based transaction accounts in Canadian Retail Financial Services

Double dipping is where “advisors” and/or their firms charge investors, with fee based transaction accounts, a fee on their accounts at the same time as taking commissions and other transaction returns on the underlying investments.  Since these accounts are meant to swap payment of transaction remuneration on securities held within the accounts for a simple annual fee that favours those with high levels of transactions, knowingly taking commissions and other transaction returns on investments held within these accounts would be a fraudulent act.

Double dipping appears to be a systemic issue in Canada with TD, CIBC, HSBC and Scotia all having been found wanting in this respect.   Canada’s regulators have, for some reason, decided to treat these breaches of firms’ and registrant obligations and regulations as uncontested settlements with no admission or denial of the charges, and have to date seemingly relied on self reporting of issues.

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Will the real Best Interest Standard Please Stand……..UP!


In 2012 we were led to believe that the CSA was looking to introduce a fiduciary type best interest standard into the Canadian retail financial services market. The CSA referred to a “statutory fiduciary duty” which “would likely support a private law cause of action for damages by a beneficiary against a fiduciary…The principal question is whether advisers and dealers should have an obligation to act in the best interests of their clients when providing advice to them. “

The current CSA Consultation states that its best interest standard is not a fiduciary duty and would not interfere with existing client/registrant relationships. The standard would be a standard of care and operate as a principle. The CSA document did not explain the reasoning behind the framing of the rule but it may have left some clues.

My attention was drawn to the fact that the “best interest standard” was to be inserted into the existing obligation to “deal fairly, honestly and in good faith”.

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Best Interest Standards And Legislative Intent: a global view

In conclusion, Europe, Australasia and the US have all exhibited legislative intent with respect to implementing best interest/fiduciary standards for part or all of the investment advisory market place; Europe to date is set to implement best interest standards for the wider market place and much more restrictive and higher standards for those who wish to be seen to be delivering independent financial advice.

Canada is the odd one out! It neither has legislative interest in best interest standards nor does it have unified regulatory interest in best interest or fiduciary standards. Indeed, its best interest standard, as should become clear, is not a best interest standard per se but a best product standard, which places Canada’s regulation, in say UK regulatory time, somewhere in the mid 1980s.



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The Tone From the Top: The CSA’s Best Interests Standard Consultation

A few submissions picked up the nuance in the proposed best interest standard, but not all.  As with much change in the regulation of the retail side, it started out as intended and got beaten down.  Like many things in Canada’s financial services industry you really have to know what you are doing.  Otherwise you have no other choice but to trust in the expertise and professionalism of those you rely on for advice or protection from bad advice.  

The OSC (Ontario Securities Commission) and the FCNB (New Brunswick Commission) are in favour of watered down change that is being paraded as the real deal, but in truth is not.  I do not blame them for trying to salvage something from the grand project.  The BCSC (British Columbia’s Securities Commission) is not and does not even want to hear Canada’s voice on the issue.  The rest have “reservations”. 

I think the fact that most Canadian regulators (our regulators are provincial) appear not to believe it is important for advisors to act in investors’ best interests is poignant.  Pure and simple it means regulators are not willing to act in investors’  best interests.  This is amongst other issues a tone from the top!    

If you cannot trust your advisors and you cannot trust your regulators, then who can you trust, and for what?  There are a few canaries in the coal mine, the OBSI being the most important, but these look like they can keep on singing, for no one who counts appears to want to hear them.  

In other countries the tone has been set by the legislature, that is the democratically elected government.  Governments around the world have pushed for higher standards. 

The lack of tone in Canada goes all the way to the top! And so here is the introduction to my submission:


The Consultation discusses a “best interest standard” for the Canadian Retail Financial Services Market place. The standard is stated as a standard of care and is effective in regulation as a principle (as per statements made in the benefits of a best interest standard) and not a rule. The proposed best interest standard is an about turn from the 2012 statement of intent which was framed as a fiduciary standard and a marked change in direction from the 2004 Fair Dealing Model which acknowledged that the relationship in the industry had transitioned from that of providing transactions and incidental advice to that of advice and incidental transaction.

The proposed standard is not a best interest standard. The CSA or rather the OSC and the FCNB have distanced it from a fiduciary duty and thus removed its regulatory intent and have clearly stated that it will not interfere with current registration categories. This is material. One of the reasons for introducing a best interest standard was to acknowledge that the advisory relationship no longer remained that of an arm’s length commercial relationship where common law would only grant a fiduciary relationship under extreme circumstances, but one where the representation of service had moved to that of the provision of advice and the duties thus elevated. The consultation provides clear instructions to the courts that the relationship is transactional, of the product, where advice is episodic and incidental.

Instead, the consultation, as part of the Proposed Targeted Reforms, has recommended that services that provide advice under a discretionary authority be accorded a clear statutory fiduciary duty. Investors receiving advice under non discretionary mandates, which rely on the same processes, should not be accorded less protection and lower standards of care. The fiduciary liability with respect to advice is represented by the gap between service representation and the integrity of a firm’s service processes to deliver the represented standard of service. These are processes over which the advisor and firm have complete discretion. We know that service representation does not promote the advisor as just a product seller, but this is the relationship which the CSA are regulating and failing to disclose.

To have a fiduciary duty for the provision of investment advice means that you are responsible for making sure that the representations of service are matched by the processes that construct, plan and manage. The Consultation has therefore framed the advisory service as one focused primarily on the point of the transaction. The act of according fiduciary status to the discretionary form of the advice has thus isolated the non discretionary service as one without discretionary process worthy of reposing trust, and placed investors advised under these services to a far lower standard of investor protection and regulatory care. The CSA has effectively prioritised the interests of the industry over those of the client. In this instance, and given the presumption that transaction remuneration is set to continue (note the extensive work on conflicts of interest in the consultation) it is difficult to see how instructions to registrants to prioritise investors’ best interests possess any rigour or tone from the top.

Instead of noting the fiduciary liability that exists via industry representations of service, the consultation chooses to focus on consumers’ misplaced trust and behavioural issues as two of the core reasons behind impaired service outcomes; that and a need to make regulatory expectations with respect to suitability clearer and enforcement of rules more effective. The consultation appears to ignore its own research, with the exception of the Brondesbury report laden with bias over investor responsibility (support for which was not found in any of the research referenced in the report), and the burgeoning literature in this area.

Canada stands alone in the world with its intent to distance itself from imposing fiduciary standards and higher professional standards for the provision of investment advice, and I detail the arguments for this in the submission. In Australia, UK and the US there is clear legislative intent to establish fiduciary standards and while the term fiduciary does not appear in UK and Australian rules for reasons of definition, it does appear in legislative intent. In the US there is both legislative intent and common law precedent for fiduciary duties for non discretionary investment advice. Canada is the only jurisdiction where there is a complete absence of legislative involvement, where the blame for impaired outcomes fails to mention the role of advisors and industry. What would a reasonable person think? A reasonable person would think that regulators are not concerned about advice, but about maintaining the market for products as is.

The proposed best interest standard is nevertheless a progress of sorts. But it is not a best interest standard, rather it is a best product standard and should be inserted as such, either as principle or as a rule into current regulation. It should not be termed a best interest standard as it will further the misunderstanding and misrepresentation of service, exacerbating the existing and unattended fiduciary liabilities within the system. Likewise the Proposed Targeted Reforms, irrespective of how unwieldy and complex they are going to be to regulate and comply with, represent some progress with respect to the standard of care in the suitability assessment.

But the progress is minor and the fractures in the system are clear. We cannot continue to stretch the transactional model. Investment is process driven, if the industry is to evolve regulators needs to encourage the development of process for the construction planning and management of assets, not regulations for transaction compliance. The Proposed Target Reforms talk of pushing transaction ideas through a suitability assessment, but the reality is transactions should come out of such a process. This is all back to front. In order to solve issues such as the advice gap, a problem not occasioned by regulatory change, but a persistent and long standing problem of the masses, we need to develop process. The reason why the advice gap has taken centre stage is because process has taken centre stage and the imperative of process is where the future of the industry lies.

The CSA may have good intent but its ignorance over investment process and construct is obscuring its understanding of the problem. It wishes to keep the horse and cart and forsake the car, to regulate the car as if it were the horse and cart, to blame the outcome and to effectively enforce consumers to comply with an archaic understanding of the financial services industry.

A quick comment on disclosure…..what is its objective and market function?

There has been much work into the impact of disclosure on investor decision making: it does not work on the whole.  

One of the key issues with most disclosure is that regulators have deemed that disclosure is a communication to all investors, so that they can understand the risks, the details and functions of a given asset/security. 

Perhaps we have got the purpose of disclosure all wrong.  What if disclosure has a higher level market vetting purpose, in the sense that all the relevant information about a security or product has to be market vetted by “experts”?  In this context the very existence of a disclosure document, in the sense that it has passed a market expert validation test, is an endorsement or validation of the durability and integrity of the product/asset for the individual investor.

Dumbing down disclosure makes it useless for all, for the individual investor and for the impartial, independent market expert.  Disclosure needs to be fully transparent to pass muster and regulation must assess the integrity of both the disclosure document and the validation process that passes as fit for purpose the disclosure itself.  Not only the standard of disclosure needs to rise (i.e. the integrity of information) but also the complexity and detail of that information needs to rise to all for more effective market validation.

A recent FAIR Canada post, “Why is Deficient Issuer Disclosure Allowed to Persist?” raises the issue of expert/regulatory validation of disclosure communication.  The purpose of disclosure should not be to leave the ordinary investor in a buyer beware situation, but this is precisely what appears to be happening.  While the FAIR Canada post relates to more complex corporate issuer disclosure I feel that the relevance of the point has ramifications for the client relationship and product point of sale disclosure that applies to the retail financial services market place.

Other references

US retail sales…Is the Sun really shining again?

Retail sales takeaways:

  • In rebound mode, but nothing as yet to suggest trend of slowing growth cycles has been broken.
  • Motor Vehicle and Parts sales, a key driver of sales growth heretofore, looks to have slipped to a much lower gear: less consumer credit growth fuelling demand?
  • Retail sales adjusted for CPI ex shelter and adjusted for population growth only just bubbling up around pre crisis levels.
  • Seasonality: some questions over the extent to which seasonality is impacting the data.
  • Inventory to retail sales growth at historically high levels: economy exposed to heightened short term risks to spending.
  • CPI ex shelter, flatlining post 2012.
  • Boundaries to retail sales growth: consumer credit to disposable income ratios, long term income growth declines, peak personal consumption expenditures and continuation of weak profile post late 1990s: longer term dynamics at play.

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Debt and wealth in a monetary system, part 2: discounted valuation issues in a declining frame with inequalities.

We are presently building up conflicts within the asset price frame:

  • Conflicts between asset values and GDP flows and their growth rates;
  • Between asset prices and return expectations;
  • Between human capital values and the distribution of those values and their impact on the overall wealth equation with respect to future consumption risks as well as asset pricing via increased asset focus of flows due to distribution dynamics;
  • Within portfolio structure and relative to the liquidity and capital security dynamics of liability streams. 

All of this tied to the relationship between frame transitions, emergent properties and structural imbalances and unconventional monetary policy focused overly on asset price support.

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Are debt and wealth really two separate forces in a monetary system? Part 1

I write with reference to a discussion in a recent Bloomberg View article, We’re Still Not Sure What Causes Big Recessions.

Debt/broad money supply is a key foundation of asset and human capital values and their supporting GDP flows.  Because of this, wealth and debt effects (new loans create deposits) on GDP/income flows should not be considered as separate forces. 

Debt in its money supply origination (bank deposits) is a foundation of both GDP flows and asset values and it is when debt, and specifically in the form defined, increases relative to GDP/national income flows that we should pay attention.  And we need to pay attention to all flows, not just income flows on risky assets, for example corporate profits which can squeeze out returns on both fixed interest and human capital during periods of enforced low interest rate policy.

Money leverages many activities, and asset values are always to a certain extent in a form of a bubble, but excess leverage, especially during periods where we have structural imbalances and frame transitions creates instability and risks to the financial system. 

Frame transitions that we need to watch out for with respect to excess asset focused money supply growth are where drivers of GDP growth are in decline (labour and population demographics, productivity and global transitions impacting the same) requiring lower levels of capital or growth rates of capital accumulation resulting in increasing levels of capital depreciation.  In this context monetary frame dynamics should also be contracting or slowing.  Frame transitions can be accentuated by increasing income and wealth inequality, something that may also be an emergent property of economic systems during frame transitions.   This can also leverage asset prices to prospective GDP flows.

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Perspectives on US New Manufacturing Order data:

Key takeaways:

  • The frame should dominate analysis of new order fundamentals: long term weakness dominates.
  • The new order bounce back in March/April was led by the transportation sector (MVPs in particular), but the bounce back should be set against the depth of the declines.
  • Outside transportation the trend is very weak.
  • Consumer durable goods orders on a smoothed 6 monthly basis have weakened noticeably since the start of the year.

Commentators are increasingly concerned about the risk of a recession in the US Economy.  Recessions are typically short term step backs/retracements within expanding frames whereas we are in a rather complicated contracting one the one hand (developed economies) and transitioning frame (developing economies moving from investment dependence to consumption/service sector dependence) on the other characterised by excessive debt levels, unconventional monetary policy and increasing income inequality to name but a few fundamental issues. 

So let us look at US manufacturing new order data, at first in terms of the frame, which bounced back on a monthly basis in April:

The frame

We can see from the following chart that annualised real growth rates over rolling 10 year time frames (using new order data adjusted for PPI and smoothed) have been heading downwards since the start of the decade.  The real annualised rate of growth over rolling 10 year time frames shows that the current cycle is much weaker than the pre 2008 cycle.


We can see the step down in growth more easily if we just view the high water mark dynamics (which ignores the current index level if it remains below the HWM).


In reality given the declines in flows since 2014, new orders for manufacturing adjusted for the PPI stand below levels reached at the end of the 1990s, and yet, here we are all worried about the risk of recession when the risk of something far greater has already occurred.  Tied into the frame is the key dynamic of global rebalancing: cheap labour in emerging/developing economies had offshored a significant amount of manufacturing output from the late 1990s onwards (the weak order data partly reflects this) and the expected maturing of developing economies consumers and rising wage costs was anticipated by many to create a rebalancing of global economies.  This is presently at risk a) due to the time frame of transition being longer than many expect and b) given that technology is driving out labour in key industries.

And in the next chart we see nominal annualised rates for new orders over rolling 10 year time frames: clearly the structure and balance and dynamics of the US economy and the attendant global economic dynamics are unable to support the type of growth the economy had experienced in post WWII years.  The primary issue we are facing today is not one of a prospective recession but of a weakening frame:


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US incomes…peaked or just about to surge?

If we look at real disposable personal income growth from the latest BEA data update we see what might appear to be, on the surface, a robust recovery:


Quarterly data shows similar traction:


But real data has benefited from falling energy prices and nominal flows are not as strong, in fact if we focus on nominal flows we are in the midst of a clear downward movement:

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US ISM Manufacturing PMI…supplier deliveries, a true or false signal?

The US ISM Manufacturing PMI ticked up marginally today indicating slightly stronger manufacturing activity.  The change was small from 50.8 to 51.3.   While output and new order indicators fell, employment remained the same and inventories declined slightly, supplier deliveries slowed at the fastest pace for some time.  The month on month change in supplier deliveries was 10.2%, only bettered on 5 occasions over the last 35 years.  

But supplier deliveries tend to lag new orders and we also know that new manufacturing orders fell significantly in late 2015 and have since bounced back (data in the chart below is to March 2016). 


The bounce in supplier deliveries look to be related to the bounce back in PMI new order indicator starting in late 2015 and we can see this lag here:


The bounce in new order data was also the strongest since the recession ended and is usually associated with cyclical turning points. 


But, with the continued slowdown in global manufacturing PMIs and weakness in the ISM’s other PMI components as well as weakness in readings from Markit’s own indicator I would not be too upbeat about any possible signal.  We appear to be stuck in a slowing growth trend market by downs and gradually weakening ups!

And from Markit’s own PMI release:

“The survey data indicate that factory output fell in May at its fastest rate since 2009, suggesting that manufacturing is acting as a severe drag on the Page 2 of 3 © Markit economy in the second quarter. Payroll numbers are under pressure as factories worry about slower order book growth, in part linked to falling export demand but also as a result of growing uncertainty surrounding the presidential election

CPB World Trade Monitor and Flash PMIs

We are clearly in a period of weak global growth as shown by the 6 monthly rates of change in export volumes.  What makes the current weakness of note is that it is the second such decline in the last year and the most pronounced outside of 2001 and 2008/2009:



And a closer look:


If we look at smoothed data which adjusts for monthly extremes we find further confirmation of weakness both at the annual and the six monthly:


And a closer look at the annual rate:


We can also look at the data from a high water mark perspective:


Again at both the monthly and six monthly data we see significant weakness from early 2015 followed by a late year recovery, followed by further weakness.

But the CPB World Trade Monitor is always a couple of months behind which is why current flash PMI data from the various Markit Surveys suggests that weakness has continued across global markets:

Markit Flash US Manufacturing PMI :crept closer to stagnation in May….overall business conditions…weakest since the current upturn started in October 2009….renewed fall in production…softer new order growth…further cuts to stocks of inputs….U.S. manufacturers signalled the first reduction in output since September 2009 in May….uncertainty…caused clients to delay spending decisions…reduced foreign client demand had underpinned slower growth in overall new orders…outstanding work at U.S. manufacturers falling for the fourth successive month in May….

Markit Flash Eurozone PMI – rate manufacturing output growth…second-weakest since February 2015. Growth of new orders received by factories also eased. Producers reported that domestic market conditions remained tough and softer international trade flows led to the smallest rise in new export business for 16 months.

Nikkei Flash Japan Manufacturing PMI™ – “Manufacturing conditions deteriorated at a faster rate mid-way through the second quarter of 2016…Both production and new orders declined sharply and at the quickest rates in 25 and 41 months respectively….a marked contraction in foreign demand, which saw the sharpest fall in over three years….

Thoughts on revisions to US manufacturing new order data

US durable goods order data out yesterday suggested a strong rebound in new orders in April led principally by transportation orders.  But I am not going to talk about the new data (at least until I get the full manufacturing new order data set due shortly), I want to talk about the difference between the new and the old order data:


Data to March 2016 had been revised down by some 2% for manufacturing orders and the rate of revision was similar for both durable and non durable goods.

However the wider picture shows that transportation, in particular motor vehicles and parts orders showed significant upward revisions:


On the other side of the variance we see non defence capital goods excluding aircraft, computers and electronic goods and primary metals heavily negatively revised:


The picture confirms the relative strength we have seen in auto led consumer credit growth on the one hand and weakness in exports and capital expenditure on the other.

A few thoughts on “Rise of the Robots”, risks to global rebalancing and much more

Foxconn replaces ’60,000 factory workers with robots’” was a recent headline in a BBC news report, and of course many other stories.

The global rebalancing story goes as follows: developed economies offshore production of goods in cheap labour emerging markets with strong growth prospects, benefiting from cheaper labour and also entrance into consumer markets with vast potential.  Developed economies experience declines in wage growth as manufacturing declines and service sector expands in relative terms, interest rates are lowered and consumer credit growth stimulated.   Lower cost goods and low interest rates cushion the impact of lower wage growth but the economy moves out of balance, towards consumption and debt (increasingly asset focussed) and away from production and investment.  

Ultimately this story depended on developing markets maturing their own consumer stories and wage growth/currencies rising to erase or at least obfuscate wage price differentials.  This rebalancing of developing economies to consumption and away from manufacturing/investment would have created demand for goods, services and expertise of developed economies, rebalancing GDP away from consumption and towards production and investment, raising wages and reducing dependence on credit for consumption with interest rates slowly re-ascending.

The story about Foxxconn factory workers being replaced with robots takes away important marginal flows from the rebalancing equation and reemphasises emergent income distribution inequalities: less income to labour, more to capital; reduced consumer expenditure growth to rebalance growth in developing/developed areas; greater stress on high debt levels accumulated in both areas, debt levels used to finance consumption in one and infrastructure and manufacturing in the other.  And of course, all the attendant asset price issues that have arisen as a result of low interest, financial shocks, asset price support and other unconventional monetary policy actions.

Technology is a good thing and we should always be striving to produce more efficiently and effectively and part of the move to robots in these developing markets is the reallocation of labour capital across the broader economy and the need to produce ever more goods for growing demand in many of these vast economies. 

But the separation of income flows, or at least higher growth higher value income flows to labour, is a disconcerting one and especially so given the ongoing deceleration of global economic growth and asset price divergence.  This not only accentuates the trend towards increasing income inequality and therefore damages the eco system’s ability to regenerate demand (and support asset prices), increasing reliance on loan growth (and hence debt support), but it also risks prevent a more rigorous and necessary rebalancing of growth between developing and developed that would have re-established the balance of power between labour capital and financial capital that would be necessary to keep the eco system’s flows at regenerative levels. 

Within the capitalist system there are numerous subtleties.   Human beings need a reason for being and the economic dreams of home ownership, durable goods consumption and various other lifestyle goals are gradually being hammered away and left to an increasingly small percentage of the population.   The objective of a capitalist system should be productive efficiency on the one hand and the regeneration of the model’s ability to support its asset, human and of course natural frame.   Technology has not historically been a blight on humanity, but that has been because of various forces that have coincidentally expanded the frontier of consumption and production capabilities.   

Productive efficiency is only one side of the equation and it requires balancing forces on the other to maintain a healthy “equilibrium” of sorts between all factors of production.   Talk of helicopter money, the drive for increasingly perverse unconventional monetary policy all strongly suggest that the equation that drives the eco system is out of balance.

Some obscure perspectives on Canadian Household expenditure

An economy is an asset that produces flows of consumption and investment expenditure.  In a growing economy you would expect these flows to grow.  Household consumption expenditure, while growing larger every year, has ceased to increase at a faster rate year on year for some time:


If we exclude imputed rent paid by households (money not actually spent) and money spent on games of chance (excluded here for the benefit of the analysis to follow), annual year on year (Q on Q basis) shows data as of Q4 2015 below growth in flows reached in the late 1980s:


Why have I deducted games of chance from expenditure?  Well the main reason is I believe that increased expenditure on games of chance is more a sign of consumer stress than consumer health:


Imputed rent, also a proxy for housing affordability, as a % of household expenditure has increased to close to 16% while expenditure on recreation and culture ex games of chance has fallen steadily since its peak in 1999.

The divergence can be better seen in the following chart showing annual Q on Q increases in these expenditures:


Canada: some niggles in savings rate data..

As of Q4 2015 the household savings rate was some 4%, down from 15% as of the early 1990s:


But the data hides a starker reality: disposable income less household expenditure in Q4 2015 left a savings rate of 0.5%.  The 4% savings rate is actually made up for the most part of a pension adjustment, a factor which has held relatively stable.  Not much room here for increasing expenditure.


Indeed we see a big drop in savings ex pension adjustment from 1993 onwards, matched by a large increase in consumer credit and a further deeper plunge from 2002 to 2008, matched again by consumer credit.   I cannot find stat data from Stats Canada or the Bank of Canada on HELOCs which would provide further information on influences on household expenditure (secured home equity lines of credit being far cheaper than unsecured consumer credit) but the consumer credit data seems to coincide quite well with the drop in savings rates:


Household and NPO debt relative to GDP continues to rise:


Canadian Retail Sales: slowing and heavily dependent on Autos

Retail sales fell 1% in cash terms in March on February and by 1.3% in volume terms.  Over the year volume (real) retail sales grew 1.77% and by cash (nominal) 3.17%.

In real terms real volume based retail sales look to be in a declining growth trend (note the smoothed data line) of lower highs and lower lows:


Across Canada we see weakness in Alberta and relative strength in Ontario over the year in nominal terms:


But monthly rates of change are slowing considerably from a peak in mid 2015:


If we just focus on annual data for Canada we see a very strong out of trend upward move


But this is primarily from motor vehicles and parts sales:


If we take away motor vehicles and parts and we see a flat retail sales picture (index January 2014 100):


The disparity between retail sales and retail sales ex motor vehicle and parts sales has not been this big for years:


But the trend is bigger if we just compare MVP sales to retail sales ex MVP:image

We can see this disparity below: the largest since the early 1990s, itself a rebound from the recently ended recession, so the current strength is significant.image

We can see that motor vehicle and parts sales has contributed close to 60% of retail sales over the last three ears:


So how does motor vehicle and part sales compare with wage growth?  If we look at cumulative data, in this case annualised rates of change over rolling 5 year periods, we see that motor vehicle and parts sales have well exceeded increases in hourly wage growth:


US Employment data, key points and filler!

Unlike retail sales, industrial production, new orders or a number of other economic data, the employment report comes with a lot of extra filler.  You need to dig down into the ingredients to figure what is and what is not good.  On the surface we have seen a recent deceleration, but nothing which looks out of the ordinary post 2009.


But what do we see when we dig? 

  • Productivity growth at post war lows!  Employment data is producing less and less and becoming in GDP, asset price support and income growth terms, increasingly diluted.
  • Health care and social assistance has been key to recent employment growth but the growth rate is falling off.  Looking after an aging society may not produce the growth needed to sustain the liabilities attached to the economic frame.  Indeed, many of these liabilities may not be adequately accounted for within asset valuations.
  • If we exclude health care and social assistance from employment date, employment levels only returned to growth on an annual basis in October 2014, making the current employment growth cycle a short one to date.
  • Add food service and drinking places employment (to health care and social assistance) and we have the sum total of jobs created since the recession started.  But even food services and drinking places employment growth has shown a recent declining trend.   Again, the income/productivity dynamics of this type of employment is unsupportive of the current asset/liability frame.
  • Retail trade employment growth was especially strong during the latter part of 2015 (dominated by motor vehicles and parts dealers), although we have seen weakening of late.  Watch out for MVP employment (which means an eye on consumer credit) and buildings and materials (which means an eye on construction).  There has been weakness on the retail side that is obscured by recent April data
  • The weakness in the goods producing industries, construction excepted, and trade and transport is noteworthy in the light of weakness in output, new orders and exports.  These are all key industries in terms of the economy’s ability to provide generate long term GDP, income and productivity growth.   Manufacturing and trade are important cogs in the economic machine.
  • The one relatively strong point in the data remains the professional and technical sub sector of professional services.  Relative to service sector (and hence all employment) it has continued to rise in importance, but the growth rate of this dynamic has slowed in the current cycle.  This may not be a positive for income flows if it represents a movement towards rationalisation of processes (reduced employment at the front end and a small increase at the operational core), reflective of cost reduction and other operational rationalisation.
  • Long term dynamics  – employment growth rates/part time versus full time/self employment versus employed – are all weakening or stuck in a post recession rut.  A lot of recent employment gains look like they are due to a rise in part time employment (which may be a positive if it signals increasing willingness to hire) so growth fundamentals are still very weak and possibly weakening. 

What makes employment growth and the make up of employment growth so important is that it impacts productivity and earnings growth, two key factors that require vigour if we are to accommodate high debt levels and high asset prices.  Other relevant relationships include capital investment (historically weak), income inequality and a slowdown in population growth as well as a shift in its demographics.   Finally, with weak global trade dynamics we have considerable pressure on areas of the economy that have traditionally been important to productivity and earnings growth.  

There is nothing wrong in a declining population and declining growth rates of employment as long as the relationship between asset values (debt/equity) and consumption/investment dynamics are in keeping.   I very much doubt whether it is and this is why employment growth today is a much more important indicator of financial health than it is fundamental economic health.  There are so many straws in the wind!

And the graphics:

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US retail sales….not so pretty a picture

Some concerns with the April data:

  • April is seasonally a weak month and any transfer of consumption capacity to it would skew the monthly data in favour of a higher seasonally adjusted change.
  • It is not the rebound in the data that is important but the strength of the trend.  The pattern over the last 3 years is for a weakening in the strength of the rebound and retail sales growth.
  • Inventories are high relative to sales but they have likely never been higher once we factor in the growth rate of inventories relative to sales.

And the supporting graphics:


Seasonally adjusted retail sales grew at the fastest rate for some time.  Eye popping almost! But April is typically a weak month and we have had relative weakness during Q1 2016.  

The following chart shows the actual, unadjusted, expenditure on a monthly basis for the above seasonally adjusted chart.  If consumption capacity had been transferred to April from prior months its adjusted impact would have been skewed.


More importantly is whether the rebound in adjusted consumption represents a continuation of a weakening trend or not?  This is the real question!


Also, retail inventories relative to sales remain at relatively high levels:


The highest level since 2004/2005.  However, once we realise that 2004/2005 inventory levels accompanied higher retail sales growth relative to inventory growth we can see that the inventory/sales dynamic is weaker still.


Presentation to the Expert Committee To Consider Financial Advisory And Financial Planning Policy Alternatives on Behalf of SIPA

Please note the following small presentation I provided with respect to the above on behalf of the Small Investor Protection Association on 3 May in Toronto.


The Small Investor Protection Association fully supports recognising the importance of professionalism in financial planning. 

Financial planning is an important component of a wealth management universe focused on the processes and frameworks that underpin the efficient planning, construction and management of personal financial assets and their liabilities over time.  

Wealth management is a complex area and those firms and individuals providing advice within it have considerable discretion over the processes that plan, structure, manage, educate and communicate.  We believe that this discretion, the complexity of the processes and the asymmetry of knowledge and experience place the professional advisor and the firm in a position of great responsibility.  SIPA believes that this places fiduciary duties, accountabilities and responsibilities on advisors for the processes that plan, structure, manage and communicate outcomes irrespective of whether the service’s nomenclature is discretionary or advisory and irrespective of title.   

Existing regulation, at the advisory level, needs to widen its remit to those services’ processes that underpin wealth management outcomes and away from a predisposition with the transaction.

It fully supports raising the standards and the integrity of service processes involved in the planning the construction and management of financial needs service processes while deemphasising the role of the transaction in process, regulation and remuneration.

The problems we see in the delivery, quality and accountability of service outcomes lie with a system that rewards the transaction and that overly focuses on the transaction in its service processes.  The focus on the transaction de-emphasises the importance of construction, planning and management in advice based service processes and constrains the development of services that put the client’s best interests first and foremost in the process.  The current system does not operate wholly in the best interests of the investor, whether this is at the advisor, firm or regulatory level.  

As the CFA institute and the Canadian Advocacy Council for Canadian CFA Institute Societies both point out, “the current regulatory scheme is incomplete”. 

SIPA is concerned over the division amongst Canadian regulators as to the merits of introducing best interest standards and the removal of commissions.  It is also concerned that even the proposed statutory best interest standard may itself be diminished by industry interests and calls on Canada’s democratically elected legislatures to become directly involved in the modernisation of Canada’s regulatory system. It believes that advisors’ responsibilities and duties with respect to advice, processes and communications are indeed fiduciary ones. 

And from SIPA’s own submission on the subject:

“This illusion fed to the general public is unfair. It results in many personal tragedies when hard working people lose their lifetime savings quite often late in life when they do not have the time to recover. It creates desperate life-altering events that result in health issues, loss of hope and faith, disruption of families and sometimes victims taking their own life.”

We live in a trusting society. Canadians believe they can trust professionals that are regulated like doctors, lawyers and other professionals. Yes, they trust their “Financial Advisors” because they believe they are regulated professionals. They are not aware they are simply sales persons without responsibility to look after clients’ best interests; they do not feel a need to study medicine or a need to study finance and investments. They are busy with careers and family.

A small investor exclaims and asks “why are regulators not collecting fines for serious violations of securities regulations?”!

This is a brief post on a very important and highly complex issue that cannot be done justice in the space provided.  There are many issues today, in Canada’s financial services industry, where funding for independent research of issues impacting consumers would be of tremendous value to the continuing debate over standards and regulation

Canada’s Small Investor Protection Association (a small non profit organisation that serves as a voice and resource for Canadian investors who have been subjected to financial abuse and/or bad advice by the financial services industry) recently released a report by one of its members on unpaid fines levied by regulators on industry participants but which have not yet been collected.  The report has been discussed in numerous articles, the most detailed of which is found in a piece written by Yvonne Colbert of CBC news.

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US Q1 GDP..big picture concerns conflate with shorter term weakness!

The big picture is the risk that growth may well have peaked in the current cycle:


And personal consumption expenditure flows (population adjusted) have arced in a worrying sign of secular decline for some time:


GDP growth less private employment growth has been negative since Q4 2010, one of the very few such periods in the post war period and the weakest to date and symptomatic of weak productivity and wage growth:



Preliminary US GDP grew by a real $22bn in the first quarter.  Given that we are unlikely to see the weather related bounce back in growth that we saw last year, we are left wondering where growth is going to come from in the second and third quarters, especially if global trade fundamentals remain weak.

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