The Globe and Mail - 27.03.2020

B8 O THEGLOBEANDMAIL| FRIDAY, MARCH 27, 2020

GLOBEINVESTOR

| REPORTONBUSINESS

A

t first, I was of the view that
the hole being driven into
the U.S. economy by the
spreading virus and the national
lockdown was going to be far too
big for policy makers to fill. All
the more so in an environment
where corporate balance sheets
were stretched to the max and an
unprecedented volume of busi-
ness sector debt needed to be re-
financed through the remainder
of the year.
But the fiscal proposals being
rolled out day after day since last
week have been absolutely over
the top. The legislation working
its way through Congress floods
the economy with an extraordin-
ary amount of cash – it would di-
rect US$1,200 to most adults and

US$500 for most children – at a

time when the U.S. Federal Re-

serve’s balance sheet has become

totally open-ended.

The contentious issue with the

Democrats is the proposed

US$500-billion funding program

for loans and loan guarantees

(opposition because the Treasu-

ry Department would have broad

discretion over who receives the

money). The bill also provides for

US$150-billion to states and ci-

ties, US$130-billion for hospitals

and there would be an additional

US$350-billion in loan guaran-

tees for small businesses to help

them avoid layoffs, and many of

those loans could be forgiven if

firms meet certain metrics. The

government is basically saying to

the business sector that so long

as you pay your rent and wages

and maintain your staff, you will

be made good. Not every busi-

ness gets saved here, but most

will.

And then there is the Fed act-

ing not just as a liquidity provid-

er on a major scale, but as the

lender of first and last resort. The

Fed has done more in the past

month than it did in most of the

first year of the financial crisis.

There actually is a chance, just

based on the numbers alone, that

all of this infusion of money into

the economy helps stem the re-

cession in its tracks in the second

quarter and, believe it or not,

blaze the trail for a sharp recov-

ery.

There is no precedent for a fis-

cal stimulus program this big

that feeds into GDP right away.

We are talking about at least

US$2-trillion, and it is immedi-

ate, not spread out over 10 years

as other big stimulus plans have

been constructed.

Assuming we see real GDP

come in at negative 1 per cent for

the first quarter at an annual

rate, and say, negative 20 per cent

for the second quarter, we will

have driven a US$1.3-trillion hole

in the U.S. economy. That is a

massive shock. If real GDP col-

lapses 30 per cent in the second

quarter as some now suggest,

that would be a US$1.5-trillion

hit.

But the fiscal stimulus more

than offsets that big downside hit

and enters the economy with

little or no lags.

This goes beyond income re-

placement – it provides a bonus

to the economy, together with

loan guarantees that should re-

move a lot of the bond default

risk. So, if anything, the economy

may well come out of this with a

net gain of between US$500-bil-

lion and US$1-trillion. Then slap

on the fact that we are going to be

left with a super-accommodative

Fed policy for an extended period

of time, with zero rates and

open-ended quantitative easing

as far as the eye can see.

So, could it be the case that

once this bill passes, we end up

with a fiscal stimulus that actual-

ly swamps the shock? The keys

will be: 1) when do we go back to

work; and 2) how much caution

will there still be from the linger-

ing virus. The answer to 1) is

when there is a flattening in the

“case curve,” and evidence that

we have a surplus, instead of a

deficit, of hospital beds so the

very sick can actually be treated.

And the answer to 2) will be evi-

dent in what the savings rate

does – will consumers revert to

their preshock behaviour or will

they withdraw at the margin be-

cause of lingering concern of

contracting the virus?

As things stand, one would

have to think that the Fed back-

stops alone should be construc-

tive for investment grade corpo-

rate bonds and surely for state

and localgovernment debt. Now

that we are on the verge of hav-

ing Uncle Sam conduct a major

income-replacement program

that ensures that rents and other

bills get paid, then I would have

to think that utilities and real es-

tate investment trusts, which

have cheapened up a lot, will be

great cash-flow stream invest-

ments where the dividend is

quite safe.

Yes, the unemployment rate

will jump sharply, but there is a

chance this is a short-term dislo-

cation, especially if companies

are allowed the chance to hold

on so that displaced workers

have a job to go back to. Even if

nothing quite comes back to nor-

mal, there will eventually be a re-

newal in spending that the con-

sumer sacrificed in the past

month in the services space,

from restaurants (especially fast

food), to medical care, to hair/

beauty salons, to movie houses,

to the theatre, to sporting events,

and even travel. Remember, it

doesn’t take a whole lot to re-

bound from zero.

When it comes to markets,

they operate on change, not lev-

els, in any event. Bottom line:

I’ve previously said that we are

likely entering a depression-like

era. But remember, the Great De-

pression went from 1929 to the

end of the following decade, and

the bottom in the market was in

1932. Put that in your back pocket
      as an investor. Things don’t have
      to become “good” as much as
      “less bad.” And we cannot forget
      that this monetary and fiscal
      stimulus is bigger than anything
      we have ever seen before, and
      will be intact long after the worst
      of the “corona crisis” is over.

Whyadepressionmaynowbeaverted

U.S.Fed’smassive

monetaryandfiscal

stimulusprogram

mayhelpprevent

aseriouseconomic

downturn

DAVID
ROSENBERG

OPINION

INSIDETHEMARKET

Founder of independent research
firm Rosenberg Research and
AssociatesInc.

There is no precedent

for a fiscal stimulus

program this big that

feeds intoGDPright

away.We are talking

about at least

US$2-trillion and it is

immediate, not spread

out over 10 years as

other big stimulus plans

have been constructed.

T

he time to buy a segregated

fund might – might – have

been one month ago.

Now? Forget it. Why buy a prod-

uct that protects you from losing

money in the stock market after

stocks have crashed?

Seg funds are an insurance-

industry spin on mutual funds

that guarantee you will at least get

75 per cent or 100 per cent of your

principal back after 10 years. This

is an appealing feature right now,

as you can see in this e-mail from a

reader: “Are segregated funds a

wiser alternative when closer to

retirement, and during market

crisis, such as the one we are living

today?”

The best way to lower the risk

posed by stock-market declines in

a portfolio for someone ap-

proaching retirement is to lower

the allocation to stocks and in-

crease exposure to bonds, guaran-

teed investment certificates and

cash. Seg funds do have some im-

portant attributes – you can name

a beneficiary for your seg fund

and have the assets go to that per-

son after you die without probate

fees. As a type of insurance policy,

seg funds also offer a degree of

protection from creditors.

But as a conservative invest-

ment, seg funds don’t make the

cut. First off, their guarantee to re-

turn 75 per cent or 100 per cent of

your invested capital after 10 years

is close to meaningless. Stock

markets could easily have a five-

year stretch of negative returns,

but 10 years is highly unlikely. Sec-

ond, seg funds charge higher fees

than traditional mutual funds. In

buying a seg fund, you’re essen-

tially agreeing to give up returns

as a result of these higher fees to

protect yourself from a highly im-

probable event – 10 years of nega-

tive stock-market returns.

Highly improbable, but not im-

possible. In hindsight, the all-

time highs reached by the stock

markets earlier this year might

have been a time to buy seg funds.

The recession caused by the coro-

navirus could be nasty – maybe

even enough to keep stocks below

their 2020 peak for 10 years. It

seems unlikely, but who knows?

Now, with stocks down some-

thing like 30 per cent from peak

levels, the likelihood of a 10-year

loss in stocks is greatly reduced. In

that context, seg funds should be

considered on their estate-plan-

ning attributes and creditor pro-

tection alone.

Aresegregated

fundswortha

lookinmarket

turbulence?

ROB

CARRICK

OPINION

INSIDETHEMARKET

M

y grandmother was a remarka-
ble woman. She had a great
sense of humour. When I asked
her what it was like getting
older, she would tell me that, “Age is of no
importance, unless you’re a piece of
cheese.” I would talk to her often. In fact, I
used to have Grandma on speed dial,
which today I guess you would call “Insta-
gram.”
In the year 2000, Grandma had to start
taking money from her registered retire-
ment income fund (RRIF). Most people
convert their registered retirement savings
plans (RRSPs) to RRIFs, and they do this
before the end of the year in which they
reach the age of 71 (you can’t have an RRSP
beyond that year). Withdrawals from your
RRIF need to start the following year – the
year you reach the age of 72.

THECHALLENGE

My Grandma faced a challenge when she
started making withdrawals from her
RRIF: The equity markets faced meaning-
ful declines at the time. The S&P/TSX was
down 13.9 per cent and 14 per cent in 2001
and 2002, respectively, and the S&P 500
was down 10.1 per cent, 13 per cent, and 23.4
per cent over the years 2000 through 2002,
respectively. Grandma also lived through
the market decline of 2008, which also

affected her financially.

The problem for Grandma? Making

withdrawals from a portfolio at the same

time the investments are declining in val-

ue is a recipe for running out of money

before running out of retirement. This is

known as “sequence of returns risk.” Over

a number of years, you might achieve a cer-

tain average annual return, but if there’s a

string of negative years in the mix (even

one or two bad years), your money may

last for a much shorter time than you

expect.

Consider my grandmother’s portfolio.

She started with $500,000 on Jan. 1, 2000.

She had a portfolio that was 60 per cent

fixed income, and 40 per cent equities. She

wasn’t expecting to shoot the lights out in

terms of returns. She had assumed she

would earn 4.5 per cent annually. If this

had actually taken place, her RRIF at the

end of three years (by the end of 2003),

would have been worth $477,980 after her

minimum required RRIF withdrawals.

In actual fact, she didn’t earn 4.5 per cent

in the first three years of having her RRIF.

Markets were down while she was also

making those minimum withdrawals, and

her portfolio actually amounted to

$399,910 by the end of 2003. Needless to

say, her lifestyle changed significantly.

THEHELP

Seniors who have RRIFs today have good

reason to be concerned with declining

markets. Like my grandmother, they are

being forced to make withdrawals at a time

when markets are volatile, and we could

see losses for an extended period. The

federal government stepped up to help se-

niors last week by announcing that the

minimum RRIF withdrawal requirement

for 2020 is now reduced by 25 per cent.

The problem? This simply isn’t good

enough. This change will allow seniors to

avoid the full withdrawal they’d otherwise

have to make, but it still requires seniors to

withdraw more than they should – if they

have the ability to leave the RRIF untou-

ched for some time.

Here’s what I propose: Thegovernment

should eliminate the requirement for se-

niors to make withdrawals from their

RRIFs in 2020. Then, as we near the end of

this year, reduce the minimum required

withdrawal for 2021 by 50 per cent if mar-

kets continue to decline.

What difference would this make? For

seniors who could take advantage of leav-

ing those RRIF assets untouched, it can

make a big difference. Let’s consider my

grandmother’s portfolio again for a min-

ute. Her $500,000 RRIF turned into

$399,910 by the end of the third year be-

cause she withdrew the minimum re-

quired amount from her RRIF while mar-

kets were falling.If the government had

done what I’m suggesting and allowed ze-

ro withdrawals in the year 2000, and 50 per

cent of the normal required withdrawal in

2001, her RRIF would have been worth

$431,860 – an 8-per-cent improvement – at

the end of 2003.

Now, what we do know is that the next

20 years won’t look precisely like the past

20 years in terms of investment returns.

But the principle that market downturns

lead to problems for the financial security

of seniors will never change. And the gov-

ernment can help by going further to help

seniors than a measly 25-per-cent reduc-

tion to the minimum withdrawal this year.

Most of the financial support announced

to-date in response to the COVID-19 pan-

demic has been for workers and businesses

• which is important – but let’s not forget
  about seniors, who are significantly affect-
  ed by the current market volatility.

GETTYIMAGES

TheCOVID-19responseisn’tdoingenoughforseniors

TIM
CESTNICK

OPINION

TAXMATTERS

FCPA,FCA,CPA(IL),CFP,TEP, is an author, and
co-founder andCEOofOurFamilyOfficeInc.