A substantial cash position could reflect a preference to simply wait for better deals.
Business Week asks the important question, "If the economy's growing so well, why isn't my pay cheque?" and finance writer Charles Hugh Smith answers it – the finance industry (and financial assets) took the money.
"[The U.S.] economy is optimized for financialization, not labour/earned income… Financialization funnels the economy's rewards to those with access to opaque financial processes and information flows, cheap central bank credit and private banking leverage."
Domestically, the process of economic financialization is also firmly entrenched. The dominance of the major banks is taken for granted. In recent years, national gross domestic product growth has been driven less by new business formation than low interest rates, mortgage growth and the wealth effect from rising real estate values.
The FIRE sectors – finance, insurance and real estate – have climbed from 17 per cent of Canadian gross domestic product to 20 per cent since 2000. And for the record, the national economy is large, so a three-per-cent increase is a very big, significant, and even structural change.
The finance industry holds an interesting role in the economy. They are all-important and yet peripheral to physical activity on Main Street. Banks, for instance, will lend money to developers to build homes and more money to people to buy the homes, but otherwise do not get their hands dirty in the real world. Stock investors, with notional ownership in the profits in companies without any influence on how they're run, are also part of this trend of abstraction from physical, hands-on economic activity.
The technology industry has supercharged the abstraction trend. The online, virtual world has grown to increasingly dominate the life of many Canadians. Advocacy groups still organize protest marches, but the vast majority of political discussion is done through social media.
Video game stocks have been among the most successful investment themes in recent years. The Economist's Ryan Avent wrote "Escape to another world" earlier this year, highlighting that gaming is a cultural development so powerful that it's affecting the U.S. economy.
"Between 2000 and 2015, the employment rate for men in their 20s without a college education dropped 10 percentage points, from 82 per cent to 72 per cent... As the hours young men spent in work dropped in the 2000s, hours spent in leisure activities rose nearly one-for-one. Of the rise in leisure time, 75 per cent was accounted for by video games."
It's true, on one hand, that gamers dropping out of the work force increases labour scarcity and supports wage growth to some extent. But it's also a fact that by spending what money they have on technology, they are supporting an industry that can expand without creating new jobs.
The rise of Artificial Intelligence, where tens of billions of dollars are being invested annually, will only exacerbate the transference of economic activity from the real to financial and virtual worlds. In this case, jobs once done by people will be accomplished by software.
Before I get to my (hopefully) startling conclusion, it's important to warn against cross-border news creep from the United States. It is not difficult to build an argument that lower income Canadians should get a bigger piece of the wage pie, but the problems of wealth inequality domestically are not even in the same ballpark as our neighbours to the south. Still, financialization is a pervasive phenomenon on both sides of the border.
I believe, to an extent that might be impossible to calculate, that financialization and technology-driven abstraction are starving the real, tangible economy and limiting wage growth in unrelated industries.
There's little motivation, for instance, to go through the hassle and risk of starting a business when alternative mortgage lenders make it easy to profit from flipping houses. Pavlovian emotional responses to social media stimulus (usually in the form of outrage) are enough of a distraction that it's easy to decline an invite to your favourite restaurant.
The compellingly immersive experience of video games can keep young males indoors, content and, since mom's making dinner, not spending for days at a time. Video games will only get more psychologically compelling as virtual reality advancements proliferate.
I understand it's an over-simplification to ask this, but in general terms, why would we expect real world wages to go up significantly when the most important economic trends are moving investment funds from one asset to another, and spending more time staring at our phones and flat screens?
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Hydro One. One of the problems with investing in regulated utilities is that they are, well, regulated. Investors in Hydro One Inc. learned this on Friday morning after a long-awaited decision by the Ontario Energy Board (OEB) effectively cut many of the assumptions underpinning the power utility's hopes for rate hikes this year and next year. While consumers might cheer the decision, investors are left wondering about the impact on Hydro One's revenue, dividend and, ultimately, share price. David Berman explains.
NAPEC Inc. This is a micro-cap stock that two major institutions have large investments in. The stock is covered by four analysts, all of whom have buy recommendations. The share price is up over 30 per cent year-to-date with a further 30-per-cent gain expected. Jennifer Dowty provides some guidance on whether it's a buy.
H&R Real Estate Investment Trust. This real estate investment trust surfaced on the positive breakouts list. The REIT offers investors an attractive 6.3 per cent yield and has an expected one-year total return of 20 per cent. The REIT is trading at an attractive valuation with room for multiple expansion. Jennifer Dowty profiles the stock.
The Rundown
Q&A: Fiera Capital's François Bourdon is bullish on Canada, sees oil soon hitting $65
While some investors are positioning their portfolios for a market downturn, Fiera Capital Corp.'s François Bourdon is readying his for a longer-term rally. The global chief investment officer of Fiera, which has about $125-billion in assets under management, sees a "synchronized global expansion" in the years ahead. He's particularly bullish on Canada and emerging markets and is forecasting oil to hit $65 (U.S.) a barrel in the next 12 months, which is above consensus. The Globe and Mail spoke with Mr. Bourdon recently about his forecast, plus two stocks he wishes his firm had bought more of. Brenda Bouw tells us more.
More than 20 new ETFs launched in September
Exchange-traded funds providers continue to pump out new investment offerings with a plethora of products hitting the shelf in September. More than 20 ETFs have launched over the last few weeks – both in the active management space and passive investing – pushing the total number of ETF offerings in the Canadian market beyond the 600 mark. The assets flowing into the Canadian ETF market have been consistently heading north month over month and now sit at $135-billion in assets under management. Clare O'Hara details the new providers.
Others
Tuesday's Insider Report: Companies insiders are buying and selling
Monday's Insider Report: Companies insiders are buying and selling
At age 30 or 60 – how best to invest your TFSA
The Globe's stars and dogs for last week
How to tap your home's value in retirement
Number Crunchers
These 25 momentum stocks offer strong dividend yields
Ask Globe Investor
Question: I'm one of those people who is house rich but cash poor. What's the best way to tap the equity I have in my home if I need the money in retirement?
Answer: With home prices soaring in recent years, folks who haven't saved adequately to fund their retirement years are looking to the roof over their heads as a potential source of cash. If you've paid off your home or built up a substantial amount of equity, there are various ways to unlock that value.
One obvious solution is to sell the home and downsize to a smaller house, condo or retirement facility. Particularly in hot markets such as Vancouver or Toronto, downsizing or renting is an option to consider, says Derek Moran, a fee-for-service registered financial planner in Kelowna, B.C.
"If those markets correct, which I think is inevitable, my guess is these people are going to regret not selling when things were really high," says Mr. Moran, president of Smarter Financial Planning.
For retirees who want to remain in their current home but are facing a cash squeeze, there are two potential solutions: a reverse mortgage, or a home-equity line of credit. Each has its own pros and cons.
The main advantage of a reverse mortgage is flexibility: Once you get your money – either as a lump sum or advanced in stages – no principal or interest payments are required. HomEquity Bank, which administers the CHIP Reverse Mortgage Plan, will lend up to 55 per cent of the value of the home, depending on factors including your age, as well as the value and location of the property. The loan doesn't come due until you die, move or sell, but you are required to maintain your home and pay your property taxes and insurance so that the lender's security is not impaired.
The main drawback of a reverse mortgage is the high cost. A five-year fixed CHIP reverse mortgage, for instance, currently has an interest rate of 5.99 per cent (excluding closing and administrative costs of $1,795). That's about double the lowest rate available on a conventional five-year fixed mortgage.
Because most people choose not to make interest payments with a reverse mortgage, the loan balance can rise dramatically over time. For example, a $250,000 loan would grow to $451,000 after 10 years, based on an interest rate of 5.99 per cent compounded semi-annually. So you pay a steep price for the freedom from monthly payments that a reverse mortgage provides.
A less expensive option is a home equity line of credit, or HELOC, which typically lets you borrow up to 65 per cent of the value of your home. According to ratehub.ca, the cheapest HELOCs currently charge 3.7 per cent (prime, plus 0.5 percentage points). Another advantage of a HELOC is that you can use it only as needed – you aren't required to draw an initial lump sum or take regular payments.
"Maybe, every once in a while you need to replace a vehicle, so you have the flexibility to do that," says Talbot Stevens, a financial industry consultant and author of The Smart Debt Coach.
One big downside of a HELOC – particularly for retirees who are having trouble making ends meet – is that it requires monthly interest payments for the loan to remain in good standing. So, unlike with a reverse mortgage, you can't just let the interest accrue. What's more, HELOCs charge a variable interest rate, which exposes the homeowner to higher costs if rates rise, as they've been doing recently.
Mr. Stevens points out another drawback of HELOCs: If you wait until you retire to apply, you might not get approved for the loan. That's because lenders take your income into account, which might be too low in retirement to qualify for a credit line. One potential way around that would be to arrange the credit line before you retire.
However, if down the road, you're unable to make the interest payments for any reason – or if the bank decides to call the loan because your credit is deteriorating – it's possible that you could be forced to sell your home. That's why, in addition to financial considerations, the decision to go with a reverse mortgage or HELOC also depends on "how comfortable you are with uncertainty," Mr. Stevens says.
--John Heinzl
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Compiled by Gillian Livingston