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This and That: Bank of Canada rate decision, Bank earnings and more…

June 5th, 2009 · 13 Comments

Thread of the Week: In this thread on Canadian Money Forum, members discuss which bank they have their main chequing account at and why. Check it out and if you like what you see, register and add to the discussions.

  1. The Bank of Canada decided to keep interest rates at 1/4 percent and reiterated the commitment to hold interest rates until the end of second quarter of 2010 conditional on the inflation outlook. While the bank noted improving financial conditions and commodity prices and recovery in consumer and business confidence as positives, the rapid appreciation of the Canadian dollar was proving to be a huge negative. The prime rate charged by the chartered banks on loans remains at 2.25%.
  2. Now that the big Canadian banks have reported earnings, it is time to turn to Canadian Banks & Insurance to check out what analysts think of the latest results: Bank of Montreal, TD Bank, Bank of Nova Scotia, CIBC and Royal Bank.
  3. Vanity Fair has published a series of columns on Bernie Madoff who ran the biggest Ponzi scheme in history for decades. The subject of this column was Madoff’s victims — some of whom has their entire equity in Madoff’s fund — and in this column, Madoff’s long-time secretary talks about the Bernie she knew.
  4. You may have heard about the 4% withdrawal rule. Rob Carrick writes about the Retirement Rule of 20, which says that a financially secure retirement requires $20 in savings for every dollar of income.
  5. Million Dollar Journey reviewed and is giving away two copies of Squawkfox’s 397 Ways to Save Money.
  6. There is no such thing as a free lunch. Michael James explains why credit card rewards are not such a great deal for consumers after all.
  7. Now that stocks have recovered somewhat, Gail says investors should establish some investment rules to keep emotions in check.
  8. Canadian Dream crunches the numbers on what the revised CPP rules mean for those dreaming of early retirement.
  9. The Wealthy Boomer chats with Zvi Bodie who advocates eschewing stock market risk and investing for retirement in Real Return Bonds.
  10. Larry MacDonald points out that ETF holders should wake up to how lucrative securities lending is and demand their fair share. Tongue in cheek, he suggests that securities lending could become so profitable that vendors will be offering 0% MER ETFs.

Have a great weekend everyone! It looks like we might have a summer after all.

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13 responses so far ↓

  • 1 Dividend Growth Investor // Jun 5, 2009 at 10:01 am

    Hmm actually the Rob Carrick article should change their rule to 25 from 20. I guess they are trying to capitalize on the findings of the guy who invented the 4% rule.. So they simply reversed the formula. Yet they forgot that by increasing the distribution rate to 5% longevity risk of the portfolio is decreased substantially.

  • 2 Phil S // Jun 5, 2009 at 10:12 am

    The problem that the Bank of Canada has for trying to stimulate the economy is that they only control the overnight lending interest rate. Everybody likes to use the analogy that controlling the interest rate is like operating the gas pedal in a car… But using that same analogy, you can’t drive a car using the gas pedal alone! You also need to operate the transmission, the clutch (if it’s a manual) and steer the car in order to drive the thing.

    Continuing on this analogy, I would say that tax policy is like the transmission. It doesn’t matter how hard you stand on the gas pedal, you’re not going anywhere if you’re still in park or in neutral. So, the more (or the higher) taxes we have that are restricting economic growth is like restricting the car to the lower gears.

    I would maybe say that the legal framework is perhaps like the steering wheel. It doesn’t matter if the car is in top gear with the gas pedal to the floor if the car is stuck in the ditch. The legal framework includes such things as standards and regulations, laws and trade agreements. In my opinion, the purpose of government should be to ensure a “level playing field” on which to play and also to act as umpire if we continue on the sporting analogy. As the umpire, the government should not be playing for any particular team… Such as, for example, taking an equity stake and handing tax breaks to a company like GM, which is kind of like a baseball umpire giving all of the good calls to one team. But that’s a total other discussion thread.

    Anyways, my point is that no one entity in government is controlling or coordinating all 3 of these forms of economic control. Back to the driving analogy, it’s kind of like three different people all trying to drive the same car, one working the gas pedal, one working the transmission shifter, one working the steering wheel – and none of them are talking to one another.

  • 3 Michael James // Jun 5, 2009 at 10:20 am

    Thanks for the mention. One part of the Carrick article made me laugh. He mentions “concerns among federal and provincial politicians that too many Canadians are saving insufficiently for retirement and face a big drop in their standard of living.” If every single Canadian saved 20-25 times 70% of pre-retirement income planning to retire between 60 and 65, prices would just rise to the point where most retirees would see a big drop in their standard of living. There simply aren’t enough young people to provide all the services retirees would need to live a middle-class life. This is easy to see if you forget about money for a minute and think of the reality of needing people to supply food, maintain golf courses, build cars, and provide all the other goods and services that we expect to have available for the middle class. There aren’t enough young people to do all this. The minority of boomers who actually do manage to save 20-25 times 70% of their current incomes will live just fine because most boomers will not manage to save enough.

  • 4 Canadian Capitalist // Jun 5, 2009 at 10:25 am

    Actually, I think the fiscal and monetary arms talk to one another but there is a firewall between them. The firewall is there for a good reason: we don’t want the Government of the day influencing monetary policy for narrow political ends. So, in one sense you are right — the Government and the monetary authorities are trying to steer the same vehicle with different controls. They do sometimes co-ordinate with each other but I’d become uncomfortable if they become too closely aligned. There would then be too much power concentrated in one place.

    Instead of a car, I’d liken the economy to a huge oil tanker. Pushing the pedal or applying brakes does not immediately affect the tanker. It takes a while — typically 6 months to as much as a year for the effects to be felt. Meanwhile, conditions might have drastically changed. Monetary authorities have a difficult job. I can’t imagine how difficult Ben Bernanke’s job is, how many ever helicopters he may have!

  • 5 Four Pillars // Jun 5, 2009 at 3:05 pm

    Just read the Vanity Fair article about Madoff’s victims – long, but quite interesting. It’s hard to feel sorry for rich people who lose money but in some cases they literally lost everything.

  • 6 Doug // Jun 6, 2009 at 5:39 am

    Rob Carrick does a good job. However, I’m not certain about the article on the Retirement Rule of 20: it says you can have a 5% withdrawal rate. The number one usually hears is a 4% withdrawal rate. Even that can be a simplication; it depends on an individual’s circumstances. I agree with Michael James point. It’s about supply and demand when it comes to the cost of capital and labor. One way around this is for retirees to emigrate to countries where the cost of labor is lower. You see this already, where American retirees have basically emigrated to Latin American countries.

  • 7 MillionDollarJourney // Jun 6, 2009 at 10:06 am

    Thanks for the mention CC!

  • 8 Geron // Jun 6, 2009 at 6:22 pm

    It’s important to keep in mind that the ageing baby-boomer issue is only really a problem if the number of young workers doesn’t increase. If Canada were isolated, that would be true, however, the demographics of the world are very different from the demographics of Canada. If Canada needs more younger workers, young people living outside of Canada will be attracted to immigrate.

    In the past few decades we have seen freedom of movement of capital increase dramatically. I think the next few decades will see a dramatic increase in the freedom of movement of labour. We are already seeing it in the European Union with great economic benefit.

    Ease immigration and you get closer to solving the baby-boomer standard of living issue.

  • 9 BFM // Jun 7, 2009 at 12:25 am

    Even though the interest rate is kept at 0.25%. In order to control inflation which we may likely face, the Bank of Canada is likely going to increase the rate in the coming quarters.

  • 10 Yuva // Jun 8, 2009 at 3:34 am

    I am not sure if the Canadian government could hold that rates till 2010. With fluctuating interest rates, i dont think it as realistic but anyway they have sent a positive signal for all stake holders.

  • 11 Al R // Jun 8, 2009 at 8:20 am

    If you actually take the time to read the Bank of Canada’s interest rate announcement, they are concerned about *downside* risks to inflation, and the rapid appreciation of the CAD against the USD. The Bank of Canada is increasingly unlikely to engage in quantitative easing as is our neighbour to the south.

    These are DEflationary pressures. You’d have to be obscenely bullish on the Canadian economy to believe that inflation is going to take off in the next 12 months.

  • 12 Al R // Jun 8, 2009 at 8:22 am

    Errr… that should read “as our neighbour to the south is doing”.

    Should also note that a higher CAD/USD exchange rate is generally good news for consumers and anyone else that buys imports.

  • 13 Mad About Madoff // Jun 9, 2009 at 5:08 am

    [...] Canadian Capitalist recently highlighted two terrific Vanity Fair articles about Bernie Madoff.  For those who weren’t watching CNN or reading papers in December 2008, Mr. Madoff operated [...]

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