Is it Really as Bad as it Looks?

A common refrain since 2008 persists. It goes something like this:

“Current global economic and financial circumstances are not as bad as they seem and smart people (Bank of Canada, US Federal Reserve, Eurozone leaders, ECB, IMF, OECD, BOE, BOJ) will ALL work this out.”

None of this changes a simple, inconvenient truth:

Since 2002, the world has piled on over $100 TRILLION in additional debt. Worldwide debt has gone from $80T to $195T in 2011. That represents debt growth every year in excess of 12% over the last 9 years. Worldwide GDP growth over the same period has averaged 4% per year.

(Source: Bloomberg, Ned Davis Research, Federal Reserve)

The bill is now due and there is no means to pay it. Very few of us have lived through these types of times. This is why so much of our time and resources at Fraser Vandermeer Asset Management are spent in serious research and analysis of our circumstances.

In the last decade, every added dollar of new debt in the world economy has added only $0.08 of real GDP. This never has and never will, end well. The road to insolvency is clear as debt growth has outpaced GDP growth and at an accelerating rate. No matter how cheap debt becomes (and ‘stimulus’, ‘twist’, ‘swap’, ‘print’, ALL mean more debt!) the real question is: how can so much debt be repaid?

At this point it is our view that it cannot, other than via default, restructuring and inflationary money-printing which robs real wealth.

The gap between what we want to believe is going to happen and what will happen, is enormous. It characterizes where we stand today and this psychology is very important to understand. There is no new (free) money to fix this intractable, un-repayable, too much debt problem (add to this the boomer demographic); but politicians and bankers would like us to believe there is or that there somehow magically, can be.

Our # 1 job as your fiduciary remains as follows:

  • We remain focused on the return OF your capital ahead of the return ON your capital, over the long term

In addition:

  • We remain much more conservative than we have ever thought we had to be
  • We concentrate on productive, ‘hard’ assets (eg. oil, real estate, agriculture, physical land and other tangible assets)
  • Gold and silver in physical form (NOT paper futures contracts/promises)

At present, our medium risk model portfolio stands at a year to date return of +0.5%. While, individual account results will vary due to composition and timing, we are encouraged and committed to delivering exceptional portfolio safety and performance.

Very serious challenges lie ahead. While we too would like to avoid this painful reality and/or pretend that difficult choices are not in our future, we don’t get paid to be optimists. You pay us to be realists. The coming 3-5 years require unprecedented vigilance, education AND the development of your own opinions on this situation; as well as stringent money management vigilance.

DID YOU KNOW?

The RRSP Contribution Deadline for 2011 Tax Year is:

February 29, 2012

The maximum RRSP contribution limit for 2011 is $22,450. If you did not use all of your RRSP contribution limit for the years 1991-2009, you can carry forward the unused amount to 2011. Therefore, your RRSP contribution limit for 2011 may be more than $22,450. The maximum RRSP deduction limit for 2012 is $22,970.

How much should you contribute?

This is an individual question based on your circumstances. We can help you determine this through a conversation regarding your tax brackets, or you can use a calculator or talk to our accounting staff who can run more detailed analysis and scenarios.  In general, we think you should contribute only up to the amount that provides a decent tax benefit today, but please consider saving outside RRSP’s as well to avoid excessive taxation down the road.

How can you contribute?

You can go online to your bank’s website and set-up DWM Securities Inc. as a bill payee using the DundeeWealth account number that you want to deposit to or you can always mail or drop-off a cheque payable to DundeeWealth.

If you have questions on either of these methods, please give us a call or send us an email.

ARE YOU A US PERSON?

The U.S. imposes tax on taxpayers’ worldwide income, regardless of where they live. As a result, U.S. Persons have annual U.S. income tax filing and reporting requirements regardless of their country of residence or how little time they spend in the U.S., even if they have no U.S. tax liability to pay.

You should consult a professional U.S. tax specialist to determine if you may be considered to be a U.S. Person for U.S. tax purposes. If you do not have your own U.S. tax advisor, your Advisor can introduce you to an independent U.S. tax professional upon request.