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Assante Capital
Management Ltd.
1 Eva Road
Suite 303
Toronto, ON M9C 4Z5
T: (416) 620-6662
F: (416) 626-2569
Special Bulletin
September 2011
What In the Financial World Is Going On?
Over the past couple of months the mass media has been informing us about
one financial crisis after another - the sovereign debt crisis in both the U.S. and
Europe, the slowing of the U.S. economy and the volatility in the stock markets.
We have read and studied many of the commentaries and analyses prepared
by the experts and we want to share with you the views that we believe best
describe what is going on. We are indebted to Kenneth Rogoff, Professor of
Economics and Public Policy at Harvard University and Eric Bushell, Chief
Investment Officer at Signature Global Advisors for the analysis presented in
the first part of this Special Bulletin.
1. The 40 - 50 year cycle of consumer and government debt accumulation, and
the use of credit and debt to fund extra growth in the developed economies,
along with richer social safety nets, has now run its course. Less generous
social safety nets and lower growth lie ahead.
2. The aggressive and highly leveraged lending practices of recent years that
fueled this growing debt resulted in a credit crisis. The credit markets seized up
as confidence in the assets underlying the debt eroded and a financial crisis
was upon us. Governments took on a lot of debt to deal with this crisis including
paying more for unemployment insurance and stimulus programs.
3. A financial crisis is different from a recession. In a conventional recession,
the resumption of growth implies a reasonably brisk return to normalcy. The
economy not only regains its lost ground, but, within a year, it typically catches
up to its rising long-term trend. The aftermath of a typical deep financial crisis is
something completely different. It typically takes an economy more than four
years to recover. This contraction applies not only to output and employment,
as in a normal recession, but also to debt and credit, and the deleveraging that
typically takes many years to complete. Therefore this crisis should be called
the Great Contraction rather than the Great Recession
4. Deleveraging is now the order of the day. Both consumers and governments
are looking for ways to reduce their debt loads. Consumers are saving more
and spending less. Governments are reducing their expenditures and cutting
social programs. Austerity budgets have been adopted in Greece, Italy,
Portugal, Spain, France, the U.K., Canada and the U.S.
5. Expect to see a more turbulent social and political period as the effects of
various cutbacks are resisted by various segments of the population. However,
templates for fiscal adjustment are emerging. The key will be to strike the
Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada
delicate balance of reducing government debt in the long run without cutting so
aggressively in the short run that damage is done to economic growth.
6. While slower growth will be evident in the developed economies, it is
expected that emerging economies will still experience strong growth. Many
multinational companies already have extensive operations or sales in these
economies that are very profitable. Most companies are in excellent financial
shape with excellent balance sheets, little or no debt and holding lots of cash.
In fact, it is estimated that U.S. corporations are sitting on two trillion dollars of
Impact On Investors
We expect markets to remain volatile, interest rates to remain low and stock
market returns to be muted compared to historical returns. Under these
conditions, what is someone saving for their retirement, nearing their retirement
or in retirement to do. Right now 5 year GICs and 10-year Canadian
government bonds are paying about 2.5%. Investing solely in these low rate
securities will make it very hard for us to achieve our retirement objectives. We
will need to either save more or retire on less. That is why we include
investments that have historically demonstrated the ability to earn more than
these low rates in order to close the gap.
Our approach to financial planning takes these headwinds into account.
For someone under 50 we recommend investing in a diversified portfolio of
cash, bonds and stocks. For these people low market prices mean you can buy
investments on sale. Buying low is one of the best ways to make money. In
fact, right now U.S. stocks are their cheapest since the 1982 recession.
For those 50 and over we recommend including guaranteed lifetime income
solutions in your retirement plan. They allow you to participate when the
markets go up and guarantee your retirement income for life in negative market
scenarios. These solutions include Manulife Income Plus, CI SunWise
Essentials and Canada Life Lifetime Income Benefit. We also offer competitive
GIC rates as well as high interest savings accounts.
If you wish to discuss and review your retirement plan please contact Bryan at
416.840.3847 –
Rogoff, Kenneth, The Second Great Contraction, August 2, 2011, Project Syndicate
Bushell Eric, Wealth Matters, August 9, 2011, CI Investments
This material is provided for general information and is subject to change without notice. Every
effort has been made to compile this material from reliable sources however no warranty can be
made as to its accuracy or completeness. Before acting on any of the above, please make sure
to see me for individual financial advice based on your personal circumstances. Segregated
funds are subject to any applicable death and maturity guarantees, any amount that is allocated
to a segregated fund is invested at the risk of the contract holder and any increase or decrease
in value. All contracts are subject to legislated minimums and maximums and certain conditions.
A description of the key features of the applicable individual variable annuity contract is
contained in the Information Folder.
Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada