Grant Williams: Get Out of Equities Before Boomers Are Forced To Sell Them

Authored by Stephen McBride via MauldinEconomics.com,

Last year, the first baby boomers turned 70 and that spells trouble for investors.

Speaking at the Mauldin Economics Strategic Investment Conference, Grant Williams, Co-Founder of RealVision TV, warned investors about the wave of forced selling by millions of retirees and the impact it will have on their portfolios.

Equities Make Up 70% of Boomers’ Portfolios

“Boomers are the largest generation in history to retire, and they’re doing so right now.”

In fact, according to Pew Research, 1.5 million Americans turned 70 last year and will do so every year for the next 15 years.

“When Boomers are retiring in their millions, they have 70% of their portfolios in equities… at a point in time when we are due a recession,” pointed out Grant Williams.

“And in recession, bad things happen… the average stock market drawdown in recession since 1980 is 37%.”

Just $136,000 Saved for Retirement

While boomers have their biggest allocation to equities they’ve ever had, Williams says the numbers don’t look good for them: “The reality is they don’t have enough money to retire.”

“According to BlackRock, the average Boomer has only $136,000 saved for retirement. Even with return assumptions fixed at 7%, when they’re more like 2%, you are talking an income of $9,000 a year… that’s $36,000 shy of the ideal retirement income,” adds Williams.

As such, boomers will be forced to look for income elsewhere. In the not-so-distant past, that has come from bonds.

As the below chart shows, once you hit the age of 65, you go through the most profound asset class shift since your 30s. You trim your equity positions and raise your bond exposure to lower the risk.

Source: Haver Analytics, Gluskin Sheff

However, with today’s yields, bonds won’t provide the needed income.

Even if boomers decide to stick to equities for higher yields, there’s another reason they will be forced to divest their equity holdings—one they have little choice in.

Forced to Sell 5% of Their Portfolios Every Year

Due to IRS mandatory minimum drawdown laws for retirement plans like IRAs and 401(k)s, when you turn 70 ½, you are forced to withdraw at least 5% of the value of the plan each year.

Williams thinks it will have profound implications: “Boomers started turning 70 ½ in April, this is a real problem and people don’t understand the ramifications of it.”

This forced selling will flood the market with billions worth of equities, which will push down prices.

Given that 15 million retirees will be forced to divest their equity holdings over the next decade, Grant has some thoughts on what investors like you and me should be doing today:

“Get out of equities. You might think you’re a wealthy guy… but if you have 70% of your portfolio in equities and you take a 40% haircut, you’re not a wealthy guy anymore.”

What Does This Mean for the US Economy?

For Grant’s thoughts on what the retirement crisis means for the US economy, big demographic trends, and more—watch the full interview below.

David Rosenberg: "This Is A Bubble Of Historic Proportions"

Shortly after we remarked most recently on the unprecedented Canadian housing bubble that has migrated from Vancouver to Toronto, Gluskin Sheff"s Chief Economist David Rosenberg joined the growing chorus of calls for government intervention into the Toronto housing market. In an interview on BNN, Rosenberg, who correctly called the U.S. housing bubble in 2005 when still at Merrill Lynch, said the massive deviation from historical norms has him drawing comparisons between the two situations.

“This bubble is on par with what we had in the States back in ’05, ’06, ’07,” he said. “We have to actually take a look at the situation. The housing market here is in a classic price bubble. If you don’t acknowledge that, you have your head in the sand.”

Rosenberg warned unchecked increases in home prices are becoming a social issue. “It’s not an equity, it’s not a bond -- it’s where people live,” he said. “Where home prices are in Toronto, they absorb 13 years of average family income. That is completely abnormal. We’ve never seen this before.”

“We’re out of equilibrium, and when we’re out of equilibrium, or there’s some sort of market failure, are there grounds there for government intervention? I think even the most ardent libertarian would say ‘yes"." Rosenberg said there are a trio of levers the government can pull to cool down the market. Authorities can address supply, which he said has already been “kiboshed.” Interest rates can be raised, but Rosenberg doesn’t believe the Bank of Canada will do that.  Or new policy can be drafted to address the prevalence of speculation.

“These are not prices driven by the local fundamentals -- this is the foreign buyer coming in,” Rosenberg said. “Toronto has really emerged as a first-class city, not just politically, not just culturally and economically, but also in terms of being a major financial centre. But if you’re going to ask me at this stage, ‘do we need to approach taxation of this capital coming in differently to curb the demand?’ [That’s] absolutely right.”

And just to make his position clear, Rosenberg also an op-ed in Canada"s Financial Post on the topic, titled simply enough:

"Make no mistake, the Toronto real estate market is in a bubble of historic proportions"

by David Rosenberg

The concerns about froth in Toronto’s housing market are not likely to subside given the sticker-shock from the latest report from the Toronto Real Estate Board.

As per the March report, the average single-detached house in the Greater Toronto Area (GTA) sold for $1,214,422 last month up from $910,375 in March of last year — that is a 33 per cent YoY surge, and follows a 16 per cent run-up over the prior 12 months.

Whatever the term is for an acceleration in an already parabolic curve, well, that is what we have on our hands today.

And it isn’t just detached homes seeing this degree of rapid price appreciation — the benchmark single-family home selling price was up 29 per cent YoY, the benchmark townhouse price was up 28 per cent and the condo/apartment composite was up 24 per cent.

This is a bubble of historic proportions.

Not only to have home prices in the GTA now absorb an unprecedented 13 years of median family income, but to have 30 per-cent-ish run-ups against a backdrop of a 2 per cent inflation rate, wages that are barely going up 2 per cent as well, and nominal GDP growth of around 4 per cent. This should put 30 per cent into some sort of perspective when we conclude that what we have on our hands is a near three standard deviation event.

That alone qualifies as a bubble — if you don’t like that term, then call it a giant sud. In the past, Toronto home prices went up at an annual rate of 4 per cent in real terms, in the past year they have surged by nearly 30 per cent.

Some context, however, is needed here.

First, this aggressive increase in home prices in Canada’s most populous city has come (at least in part) due to strong competition among potential buyers for comparatively scant homes for sale.

Active listings of homes available for sale in Toronto plunged 35.2 per cent YoY in March, which means that the months’ supply of houses on the market is a miniscule 0.65, down from 1.18 last March — for reference, a “balanced market” sees a months’ supply figure around 6.0. The average home that was put up for sale remained on the market for just 10 days, down from 16 days a year ago.

These measures of “tightness” in the market are without precedent — not even the red-hot late-1980s bubble experience could ever compete with today’s backdrop.

As well, the sales-to-new listings ratio sits well into “sellers’ market” territory at 70.8 per cent, which compares to 69.4 per cent a year ago — a ratio between 40 per cent and 60 per cent is considered indicative of a “balanced market.”

No wonder nobody wants to list their home! It’s become such a valuable asset.

But you see, this is where the danger comes in: when people start to view their house as some investment as opposed to a home — a place to raise the kids and play with them in the backyard.

A house is an asset indeed, but should never be compared to a stock or a bond or even other investable properties. It is a place to live.

Unlike a stock, which you can sell anytime and tuck away the winnings, if you sell your house, well, you still need a roof over your head. A stock with a dividend gives you an income stream, as does a fixed-income instrument. Unless you are a landlord, your house is burning cash (utilities, property taxes, maintenance), not bringing in cash.   

So there are indeed some supply and demand fundamentals that are underpinning prices. Insofar as the demand is rising because people think they are investing in something hot just because of the accelerating momentum, well, these people are going to end up being pretty big losers. For if the government catches a whiff that it is now speculative fever that is dominating the uber-hot housing market, well that could very well elicit a response (as in capital gains taxes for those who sell within a year or two).

At some point, a correction would be very healthy because on the other side, owners of homes will then realize that no, they did not win some lottery, and will finally be willing to start listing their property, especially those who deep down want to sell (it could well be that the move-up buyers would like to sell but can’t afford that mansion of their dreams).

Not to mention first-time buyers who do not have the income for a down payment that any lender would consider appropriate. After all, we have hit the bizarre stage where a typical home now (and we are talking about a bungalow in Pape Village, not exactly an estate on Warren Road) would absorb 13 years of median household income.

Not even in the late 1980s, did housing get this expensive on this basis, and we know all too well how the Bank of Canada ultimately reacted and what happened next. Stephen Poloz is definitely no John Crow — though things can always change.     

One caveat should be noted because what is different this time around (oh, how I hate using that phrase) is that Toronto has emerged as a world-class city and the foreign buyer is clearly having an impact.

So while Toronto residential real estate is indeed expensive for the locals, it is far less so for foreign investors, especially for Americans who can buy Canadian assets at a 25 per cent discount from a currency perspective.

In the mid to late 1980s, Toronto did not have the Rogers Center. It did not have the Raptors. It had no decent hotel outside of the Four Seasons and the Windsor Arms. Truly great restaurants were not to be found (unless you want to count Winston’s!). There was no Drake. And Toronto FC was not in existence. Not to mention there was very little in the way of a theater district.

While the separatist threat in Quebec gave Toronto the mantle of being Canada’s financial center back in 1976, the city was never seriously viewed as a global player in this respect until very recently. With more than 250,000 employed in the financial services sector, Toronto has very quietly emerged as the second largest financial hub in North America (after New York). Of the 84 cities surveyed in the 2015 Global Financial Centres Index, Toronto ranked 8th!

So while prices may seem a little nutty, it is important to note that Toronto is a major financial, economic and cultural centre, and when compared to its peers globally, prices appear far less crazy, too.

This doesn’t make the current price action justified based on local income fundamentals, but based on the foreign incomes of those wanting to establish a toehold in a stable Toronto amidst a sea of global instability, the prices are not that much out of whack.

As per data compiled by Global Property Guide, Toronto home prices on a U.S. dollar per square metre basis rank just 14th in the world, well behind the likes of London, New York, Paris and Tokyo.

And at the same time, if you are a family in say, Brooklyn Heights looking to buy property in Toronto it would only absorb six years of income; and if you reside in Santa Monica and feel like dipping your toes in the Toronto real estate market, it would only take up four years of your annual median take-home pay. The same (four years) holds true for those wealthy enough to be living in Knightsbridge.

You see, when Toronto home prices are measured against incomes in other places of the world, it is not nearly as onerous (especially in Canadian dollar terms).

In other words, many well-heeled foreigners can far better afford what the locals can’t afford here, and housing in recent years has truly become in internationally-traded asset class (though I wouldn’t recommend ripping out the foundation and exporting the structure anywhere).

So it goes without saying that if the name of the game is to tame the flame then have the foreign investor share the blame. A tax on foreign transactions, as was already done in Vancouver, seems like a pretty good idea. And the government can at the very least use the revenues to either provide greater tax incentives to build and/or provide tax relief for the low/mid income entry-level buyer who is struggling to cobble together the funds for a down payment.

So yes, in this sense, I would be advocating a Robin Hood style of economic policy.

Indeed, what may be needed is a very progressive tax on foreign buying of local residential real estate in the bid to cool demand and reverse the exponential surge in home prices — a surge that is creating tremendous social problems by crowding out young families (or individuals) from chasing the homeownership dream (a typical response is for these folks is to go out and buy a condo instead, but the reality is that average prices here have also skyrocketed 24 per cent in the past year and are in a bubble of their own).

Everyone says that the Bank of Canada cannot raise interest rates to curb the excess demand because of the deleterious effect this would have on the economy writ large (for example, taking the Canadian dollar back up to or above 80 cents which would thwart our export competitiveness which has become a longstanding role of the central bank).

Be that as it may, the home price surge in the GTA over the past year has impaired homeowner affordability to such an extent that it is basically the equivalent of the Bank of Canada having raised rates 150 basis points — actually a 200 basis point increase if you were to look at what home prices have done to affordability ratios over the past two years (so you can’t have it both ways; the price action is basically equivalent to having five-year mortgage rates closer to 5.75 per cent than the actual posted rate of 3.75 per cent).

Barring a bold move by the government to bring home prices to levels consistent with domestic economic fundamentals as opposed to income levels from well-heeled buyers from the U.S., China, and Europe, maybe it is time for the Bank of Canada to start playing a role and follow the Fed on a gradual rising interest rate path.

The S&P Has Now Gone 36 Days Without A 1% Intraday Move: The Longest Streak In History

Heading into Monday"s session, the S&P had gone for 34 consecutive trading sessions in which it hadn"t experienced an intraday move greater than 1%: according to the WSJ"s Market Data Group, this was the longest such streak going back over two decades, to 1995. And, following the Monday close, the market made history when it ended yet another day by being confined to a 1% trading range. This made it 35 consecutive sessions without an intraday move of 1% or more. With Tuesday"s somnolent market action and virtually unchanged close, the streak extended to 36 consecutive sessions - the longest streak in history.

For those who have followed the market, the boredom - at least on the surface - is palpable, despite what RBC pointed out last week when it said that "it is CRAZY what is going on “under the hood,” when on the index level, it’s so optically calm.” However, with most market watchers looking simplistically at aggregate level data, the S&P gives a sense of calm that is at odds with the recently documented surge in political uncertainty. 

The recent calm is a sharp contrast with what was taking place in the market just a year ago: on this week in 2016, oil was $26/bbl, the HY spread was 900bps, the S&P was 1810, EPS was negative, inflation expectations were 1%, VIX 30. Today, oil is $54/bbl, the HY spread 400bps, and the S&P is just shy of 2300, EPS positive, inflation expectations are 2%, and VIX 11.

Some observations: the average daily range between a session’s intraday high and low over that stretch, dating back to Dec. 14, is just 0.54%, according to FactSet. That compares to the S&P 500?s average daily trading range in 2016, which was 0.96%.

As the WSJ further notes, despite the lack of sharp moves, the stock market has mostly been levitating higher "even though the daily moves have been soporific." Since the streak began in December, the index has climbed just 1% in total, but it’s still managed to set a new all-time highs along the way, most recently this week. Still, uncertainty about the future of Trump administration policies have worked in concert with record high valuations and the wait-and-see approach on the part of the Federal Reserve about when next to raise interest rates to hold stocks in check.

“The market is bobbing and weaving around new highs,” wrote David Rosenberg, chief economist, and strategist at Gluskin Sheff.

That’s a sharp contrast to how the S&P behaved just three months ago, in the immediate aftermath of the surprise victory of President Donald Trump on Nov. 8, when the S&P 500 shot up 6.2% from Election Day to Dec. 13, just over a month later.

Furthermore, the absence of a one-day move in the S&P 500 is consistent with other readings of ultra-low volatility. The historical volatility of the SPY ETF, a measure of how volatile that S&P 500 has been over two months, sits at 6.5, the lowest in at least two years, according to CBOE Livevol. Ninety-day historical volatility is barely higher at 8.1, also the lowest in two years.

Expectations for future prices swings in the S&P 500 over the next 30 days are scarcely higher. The VIX has been depressed to near record lows since the election. The VIX is currently at 11.3, well below its long-term average near 20.

Still, the doldrums may be ending soon. As Jason Goepfert at SentimenTrader, quoted by Art Cashin, notes the market is showing little enthusiasm to the upside despite the record highs in the S&P:

Negative momentum is picking up under the surface. Even as the major stock indexes hit all-time highs, or were close to them on Friday, stocks in the S&P 1500 index weren"t showing as much enthusiasm. Gauged by the Relative Strength Index, an abnormally low number of stocks have seen extreme positive momentum, and a rising number are seeing extreme negative momentum.

Indecision after a buying thrust. Friday"s surge at the open left an unfilled gap, as prices never neared Thursday"s closing price during the day. Then on Monday, traders showed indecision with an inside day, a lower high and higher low than Friday"s session. That has led to subpar returns, even during this bull market.

Ultimately it will be up to traders to force a break out to a new trading range, and since they have been unable to do so for nearly two months to the upside, perhaps it is time to revisit what a market drop actually means.

David Rosenberg: "The Travesty Is We Have 23.5 Million Americans Aged 25-To-54 Outside The Labor Force"

Some observations on recent negative trends in productivity, employment mismatch, and labor training and education from the increasingly more bearish David Rosenberg, who notes that the Trump"s proposed policies may end up helping growth on the margins, but fail to focus on what is really important, making tens of millions of US workers competitive and qualified for today"s jobs market.

From Breakast with Rosie, via Gluskin Sheff

I don"t think we have a productivity problem — in fact, the demise of productivity is vastly overstated and that is because the Bureau of Labor Statistics (BLS) is likely vastly overstating labor input, and I’m talking here about how hours worked are estimated.

But the real travesty, and what I think deserves top priority (but I don’t see it), is that we have, in addition to 7.5 million officially unemployed (a number that is closer to 15 million when all the hidden unemployment is accounted for), 23.5 million Americans aged 25-to-54 who reside outside the confines of the labor force. And at a time when job openings are at record highs.

The problem is that unqualified applicants for these openings also are at a record high. The number of jobs available that are not being filled because the skill set is absent is at an unprecedented level — and this was an overriding theme in the latest edition of the Fed"s Beige Book.

The question is what is in the policy playbook to redress this situation?

What we need is a policy playbook that makes education, apprenticeship and training a major priority — the one plank that I had hoped would be yanked out of Bernie Sanders" platform.

While deregulation and simplifying the tax code obviously are constructive segments of the Trump plan, they are not the most important obstacles in the way of growth. Neither is globalization.

Even the most ardent ""supply-sider" would admit that labor input is key to the outlook and this should really be at the top of the agenda — closing the widening and unprecedented gap between job openings and new hiring. There simply is no replacement for excellent education achievement with respect to maximizing labor productivity.

I see scant attention being paid to this file — surely this is more important than U.S. involvement in Brexit or trying to play a role in breaking up the European Union, don"t you think?

David Rosenberg Calls For A Multi-Trillion, "Helicopter Money" Stimulus Package

With the inherent weakness in US GDP and the rising probability of a recession (two weeks ago Bank of America modeled that the next recession would likely start roughly one year from now), Gluskin Sheff"s David Rosenberg thinks that with monetary options exhausted it will take a fiscal boost in the trillions of dollars to kickstart the economy. These issues were discussed in an extended interview with Real Vision TV, where the chief economist and strategist at Gluskin Sheff proposed some radical policies to engineer the growth needed in nominal income. 

His ideas, some of which can be seen here in a clip of the interview, include helicopter money attached to a $2 trillion perpetual bond, massive infrastructure spending and measures to tackle the $1 trillion student debt load that has seriously hamstrung the economy.

Here are some of the interview highlights:

Doing the Same Thing Over Again and Expecting a Different Outcome

Whether the US will in fact experience the technical definition of a recession is a matter of fervent debate, with the odds something like 20%-30%, according to Rosenberg (60% according to Deutsche Bank), but with growth averaging around 1%, there is no doubt the economy is weak.

“There are some people saying a recession is here right now,” Rosenberg says, “I don"t think that we meet those conditions yet. But people say, well, look. Twelve months in a row of negative year on year industrial production, that"s never happened outside recession, check. We"ve had now going into six quarters of profit contraction, year over year. That"s only happened in the context of a recession, check. I mean, all that is true, but so much of this has been related to the oil shock that we had.”

Rosenberg’s problem with monetary policy, now in its 7th year of unorthodox experimentation, is that it has become a weak antidote to structural problems in the economy (even if it is still quite potent at boosting financial asets). Fiscal policy on the other hand, if constructed right, could be the answer due to its very powerful multiplier impact. “I can"t say that I know for sure, but it"s the old Einstein adage about the definition of insanity,” Rosenberg said. “And we"re finding that we"re really-- if we"re not hitting the wall on monetary policy, we"re certainly seeing classic economics 101 of the law of diminishing returns.”

In terms of infrastructure spending, he said that one lesson from recent history and the Great Recession is that you"ve got to have the credibility to convince people that this is going to be permanent and not temporary, in terms of the impact on the economy. “So it can"t be transitory. It"s got to be very big. With interest rates as low as they are, there"s certainly the capacity. I mean, you"ve got a lot of governments around the world issuing 50 or 100-year bonds. So this is a once in a lifetime opportunity to borrow money.”

A Couple of Trillion Dollars of Helicopter Money

While companies have been taking advantage of these conditions to borrow money, the funds have not been invested in the real economy. Share buybacks have become more popular, while personal savings rates have increased amid the economic uncertainty. This all boils down to a big case for government spending, with monetary policy joining forces with fiscal policy in the form of helicopter money.

“What you do with helicopter money is you finance it off the central bank"s balance sheet because we"re talking doing something very dramatic to reflate the economy,” Rosenberg said. “It"s not a few hundred billion dollars. It"s a couple of trillion...I know I"ll get accused of bailing out the sinners, but, my lord, we"ve already done that. I mean, nobody went to jail.”

One of the things holding the economy back is the $1 trillion student debt load, which he said has left 35% of males aged 18 to 34 living with mom and dad, not getting jobs and not becoming first time home buyers. Employment growth for the 65s and over is 7%, meanwhile, as the aging boomers have to work longer because they didn’t save enough for retirement. 

“Helicopter money is QE plus where, say, the treasury issues a perpetual-- call it, like, a century bond, a $2 trillion bond on the Fed"s balance sheet. And so when that bond matures, it"s, like, we"re all dead in the long run at that point. And then the Treasury can use that money to stimulate growth. "

The beauty of this idea, according to Rosenberg is that you don’t have to go through Congress, with such difficulty in achieving corporate or personal tax reform.  “It would lead to a permanent increase in the monetary base. Inflation expectations would go up, which means that real interest rates would go negative. And the theory is that that would provide a bigger thrust towards getting what we all want, which is sustainable and accelerating nominal income growth.“

Real Risk of Fed Mistakes or Trump Trade War

Sustainable and accelerating nominal GDP is certainly what’s required while the risk persists that we could be shocked into recession, or the Fed could make a mistake in raising interest rates too aggressively.

“That"s what happened in December of last year. They raised rates 25 basis points, but the overall financial tightening, in terms of what it meant for the dollar or in credit spreads and the stock market, it was really, like, 75 basis points of tightening. And the next thing you know, the economy slows to stall speed."

Another concern for investors is the prospect of a Trump presidency, bringing with it the potential start of a trade war. That could provide the sort of exogenous shock to cause the economy to go into recession, Rosenberg stated, noting that historically all the recessions in the post war period have been created by the Fed.

“The problem is that when you have the economy running on average 1% growth, or 1% plus, which is not a big cushion. And so, you know, it"s a complicated question to try and handicap a recession on us right now. There"s a lot of people out there that are convinced that a recession is coming.”

To watch the full interview with David Rosenberg, visit Real Vision TV.  You can access this and many more interviews with a free trial. 

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Oh, if Rosenberg"s idea gets traction - and execution -  which it will eventually, as we have said since our first days in 2009, buy lots and lots of gold.