Sunday, March 28, 2010

David Dodge’s Dr. Doom predictions


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I listened to David Dodge’s comments yesterday about how Canadians need to save more for retirement if they expect to maintain a decent standard of living during retirement. These predictions of David Dodge's are only as good as the assumptions upon which they are based., none of which were revealed. Furthermore it is of no use whatsoever to tell someone in their sixties that they should have been saving no less than 11% of their earnings for their entire working life in order to have enough money to comfortably retire on.

The biggest assumption upon which David Dodge’s doomsday predictions are based is the rate of return that people can expect to earn on their savings and the rate of return at which their savings will accumulate. This variable is the single most important variable when making such predictions and the effects of investment return are compounded during the period of savings accumulation and have a direct effect on the amount of income that one earns during the period of payout, ie during retirement itself.

David Dodge played a role in killing income trusts when he flip flopped on that issue under pressure from Jim Flaherty at the point in time when Dodge’s reappointment as Governor of the Bank of Canada was under consideration, and something that Dodge openly stated he was interested in.

By killing income trusts, David Dodge participated directly in destroying (for no good reason) the investment vehicle that had emerged in Canada that was most well suited to saving for retirement and providing for retirement income. The arguments used by Dodge and others to kill income trust were flat out lies. Full stop.

Income trusts are the vehicle most well suited to the task of retirement savings and retirement income for two principal reasons. First because of their attributed of paying out excess earnings in the form of a profit sharing investment vehicle, and second because of their historical risk return attributes. Income trusts have the highest return performance vis a vis risk of any investment asset class. Also when compared with the returns of other equity investment vehicles, income trusts have dramatically outperformed the returns of traditional corporate equities as follows (Source: BMO)

Annualized returns over the last 10 years:

S&P/TSX Income Trusts: 16.13%
BMO NB Small Cap: 9.07%
S&P/TSX: 5.61%
S&P/TSX 60: 5.56%

The above differences in rates of return are stark. They are also very revealing when one considers that income trusts had almost THREE times the return than was experienced by investing in the top 60 companies that comprise the TSX index. And who was it who was behind the killing of income trusts if not the CEOs of Canada’s largest companies?

The way to deal with Canada’s pension crisis is not to make people more reliant on the government for cradle to grave coverage of their needs, nor to fear monger in the way that Dr Doom David Dodge is doing, but rather to expand the investment options that are available to Canadians and allow the Canadian capital markets to function in an unfettered manner and continue on down the nature path of evolution that it was heading down in the years prior to Flaherty’s intervention of October 31, 2006 which was in the process of restructuring itself to align with the needs of the CAPITAL PROVIDERS (ie investors) and not the whims of the self interested CEOs of the capital users, in order that the capital markets could be the solution to this pressing need for retirement income, by flowing all the excess earnings of corporate Canada through the hands of the business OWNERS rather than the business MANAGERS, and have the OWNERS be the ones to deploy that capital back into the Canadian economy in the manner that was optimal for them, knowing that every dollar paid out under the income trust structure would finds itself reinvested in the Canadian economy in one form or another.

David Dodge and his doomsday predictions are only as good as the assumptions upon which they are based, in the same fashion that the income trust policy is only as good as the assumptions upon which it was based, all of whose assumptions have proven to be false. David Dodge’s doomsday predictions about what amount of money it takes to retire comfortably and what percent of a person’s savings are only as good as the assumptions on which he has based those predictions. Is David Dodge assuming that Canadians will remain forever captive to owning simply the TSX 60 with a return of a mere 5.56%, or is he prepared to acknowledge the errors of his and the Government’s killing of income trusts, whose historical returns are almost three times higher?

Which is it Dr. Doom? I prefer to let the facts speak for themselves, rather than making false reliance upon you, given your past flip flop on income trust to curry favour with the powers that be.

8 comments:

Anonymous said...

Exactly! If a commentator blathers words without numbers, the commentator is saying nothing meaningful.

For example, it has been suggested that Canadians should be allowed to top-up their CPP contributions. Bad idea; if the employer portion is taken into account, the rate of return on CPP is under 4%. Brutal, eh?

If the employee doubles his CPP contribution, his or her pension will increase by 50%. Pay double, get half -- Heck of a deal, eh?

With David Dodge as an adviser, how could we go wrong?

Louis Mix

Anonymous said...

When the Liberals were in office we saw massive cutting of transfers to the provinces for Health, Education and Social Services, the raiding of the pensions of the Public Service, the RCMP and the Military, the illegal appropriation of some $54 Billion Dollars paid by workers and their employers into EI, myriad scandals involving graft and corruption by the Liberal Party, the most notable being ADSCAM, and one of the most infamous quotes coming from Justice Gomery saying of the Liberal Party, 'they are criminally organized”.

The Liberal Party is toast, there is no way back.

And now they suggest a national carbon tax?

And when will they pay back that missing $40 Million from ADSCAM?

What about the $162 Million Taxpayer Dollars Paul Martin's CSL received while he was Finance Minister?

Anonymous said...

Excellent article.

Oscar Belaiche
Vice President &
Portfolio Manager
Goodman & Co.
Investment Counsel
Dynamic Funds

Dr Mike said...

I am sick & tired of brain-dead politicians & bureaucrats who cannot think for themselves & especially who should not be thinking for others.

What kind of an idiot relies on blacked-out pages as proof.

These pages were blacked-out for national security reasons & as such they would have been unavailable to 98% of those who voted for this turkey.

Good freaking move , voting sight unseen.

Sure makes a lot of sense to me alright.

If I had run my practice like that , I would have been in jail or at least tarred & feathered & run out of town on a rail.

Hmmmm , not a bad idea come to think of it.

Dr Mike Popovich

Anonymous said...

Well - this is just TOO amusing, isn't it?

Go to http://pensionpulse.blogspot.com/ and leave your comments there as well.

David Dodge along with Flaherty, Carney, Harper, TBTF insurance companies effectively destroyed $35 BILLION dollars of Canadians SAVINGS FOR RETIREMENT income through the egregious destruction of Income Trusts as a financial asset class.

So, Mr. Dodge, before you instruct Canadians to SAVE MORE, along with threatening our health care model and making it ripe for insurance company interests, why don't you and your minions STOP STEALING our hard earned and saved money and get rid of that poisonous tax legislation of Flaherty's by having the Income Trust model re-instated as an asset class?

(This asset class is available to Americans in the form of MLPs.)

Anonymous said...

Send DD your thoughts. I did but he didn't anwer. LOL.

dodged@bennettjones.com

Carswell

Anonymous said...

Bring back Income Trusts. Bring in the Marshall Plan. Hurry before it is too late for all of us seniors who have no other way out of this mess we've been put in.

Tony said...

Equity release schemes have proved very popular in recent years. As living costs rise, equity release schemes, which typically let you borrow money against the value of your home with the debt being repaid from its sale only after your death, seem an attractive solution to many cash-poor, asset-rich retirees.