Is Basic Income the answer to a new AI world?

I am so glad that I am a retired senior. I don’t have to worry about a robot taking my job. Since I have lots of time on my hands to think, I wonder what a new AI world would look like. For example; will my 2 year old granddaughter even need to get a driver’s licence? Will the Uber or cab that she orders even come with a driver?

Now I have always been a big fan of science fiction movies. There is a scene in the movie “Logan” where Wolverine has to dodge driver-less trucks to cross the highway to help some people. Installing AI in 16 wheeler trucks could replace the need for a lot of truckers.

Fast food restaurants have been the training ground for teenagers and young adults.  I used to tell my kids that they better get a good education or you will end up using the phrase “would you like fries with that” while working at MacDonald’s. However, even MacDonald’s are installing new self-serve kiosks. Now you can even order your Starbucks coffee using your phone. Where will young people get work experience?

Everywhere I look, jobs are slowing disappearing, the new AI technology seems to have very few limits.

“For example, Australian company Fastbrick Robotics has developed a robot, the Hadrian X, that can lay 1,000 standard bricks in one hour – a task that would take two human bricklayers the better part of a day or longer to complete.”

Japan has the highest percentage of people over the age of 60 and their population is shrinking. As a nation, there is a shortage of workers and they have embraced the use of robots in the work place. This trend could be coming to North America sooner than you think.

As a baby boomer, I worry about the future cost of health care. The world population is aging and health care costs are raising. I hope that science fiction turns into reality and my caregiver looks something like this.

   or this 

Why universal basic income may be necessary

A 2013 study by Oxford University’s Carl Frey and Michael Osborne estimates that 47 percent of U.S. jobs will potentially be replaced by robots and automated technology in the next 10 to 20 years. Those individuals working in transportation, logistics, office management and production are likely to be the first to lose their jobs to robots, according to the report.

For many, basic income sounds like a free ride or welfare. Economist believe that masses of people will not just sit at home but will make a contribution by continuing to work. The basic income would allow recipients to explore other options not available to them if they are struggling just to survive,  such as retraining or to find new job opportunities.

In theory, new opportunities would spring up to replace jobs done by machines. However, there are some practical problems, like where will government get the money if less people are working to pay for a basic income program? The North American education system would require a major overhaul to put more job training skills into the curriculum.

Some additional information to consider

The government of Ontario just announced a three year basic income pilot project to help low income earners in three cities. A single person can apply to receive $16,889 a year and couples will receive $24,027. Recipients who are employed will keep what they made from their jobs but their basic income would be reduced by half their earnings. For example, a single person earning $10,000 per year from a part-time job would receive $11,989 in basic income ($16,989 less 50 per cent of their earned income), for a total income of $21,989.

Is basic income just a pipe dream or a future reality?

 

 

 

 

 

Tips on rebalancing your retirement portfolio

rebalance-moneyunder30

Many investors are in for a rude awakening when they open their year-end retirement plan statements. The bond portion will probably show negative returns. It could even wipeout a good portion of their positive returns from owning equities.

Now, the most common method used in rebalancing your established asset allocation mix would be to reduce the holdings that are up in value (sell stocks) and buy assets that have fallen in price (buy bonds). This practice may have worked very well in the past but interest rates are going up forcing bond prices down.

The chart below compares the S&P 500 with the IShares 20 plus year Treasury bond ETF

tlt

“The decades-long bull market in U.S. Treasuries has finally drawn to a close following Donald Trump’s surprise presidential election victory, according to mutual-fund manager Bill Miller.”

“Miller isn’t the first to call time on the bond bull market. Economist Henry Kaufman, the original “Dr. Doom” who is credited with calling the last bond bear market in the 1970s, told the Financial Times this week that the current bull run is at an end.”

In the past, when the Federal Reserve decided it was time to unwind its easy monetary policies, it would raise the federal funds rate fairly quickly. The Fed believes a neutral stance on monetary policy is reached somewhere above the 4% level. The current Federal Reserve is moving slower than normal. Based on an average of three rate hikes per year, it will take the Fed a little over 4 years to normalize interest rates.

Tip # 1

Short-term, reduce or eliminate investing in target date mutual funds since they automatically rebalance from equities to bonds. Plus they increase your bond exposure the closer you are to retirement.

Tip # 2

During a period of rising interest rates, the prudent strategy is to reduce the duration of your bond portfolio. That could mean using a short-term bond ETF or a ladder of GICs both of which would allow you to benefit from an increase in rates.

Tip # 3

If you’re comfortable with a little credit risk, use short-term investment-grade corporate bonds to get a little more yield.

Tip # 4

Cash is by far the safest asset class. Move some of your equity allocation and some of your fixed income allocation to cash. I have my doubts that President Elect Trump can get congress to pass all his stimulus agenda and even economists are unsure if these policies will actual increase economic growth.

Corrections in the bond market are not as uncommon as you think. Most have been short in duration. See the chart below:

lt-treas-losses

Keep in mind that in the past, rate hikes were implemented  at a much faster pace than what the current Fed has purposed. Losses in the bond market could continue for longer than expected.

Hidden fees can destroy your retirement dreams

When asked about contributing to a company’s pension plan, my standard answer was always put in enough to receive the company’s matching percentage. Never turn down free money, it’s like receiving a yearly bonus of 2% or 3% of your annual salary.

However be aware of fees that are hidden in the fine print. Make no mistake, these fees do matter. They may seem tiny, barely noticeable but they can eat away your future. A one percent reduction in fees can add an additional 10 years to your retirement income. If two people have the same 7 percent return over time but one pays 1 percent in fees while the other pays 2 percent, the latter will run out of money 10 years earlier.

For nearly 30 years, the pension plan industry wasn’t legally required to explain exactly how much it was charging investors. Sadly, a recent industry survey showed that 67 percent of Americans believe they pay no fees in their 401(k) plan. In a recent survey in Canada, 36% of Canadians claimed that they paid no fees and 11% were unsure.

In a muddy but legal arrangement, a high percentage of plan providers accept payments from the mutual funds they offer in your 401(k) plan. This is called revenue sharing or, more aptly, paying to play. Naturally, the list you have to choose from includes the funds that pay the provider the highest amounts, rarely the best performing and certainly not the lowest in cost.

Additionally, many providers restrict low-cost funds to plans that exceed a certain amount of assets, meaning that employees of smaller companies are forced to invest in funds with higher fees. Since the providers don’t make much of a profit on the lower-cost funds they do offer, they will usually charge a significant markup. For example; you could be paying a 1 percent annual fee for an S&P 500 Index fund when the actual cost is .05 percent. That translates into a 2,000 percent markup.

“Last year the Obama administration announced that hidden fees and backdoor payments were costing Americans $17 billion per year. And that’s not counting the excessive “out-in-the-open” fees that are draining our retirement accounts. The Department of Labor is also sounding the alarm. “The corrosive power of fine print and buried fees can eat away like a chronic illness at a person’s savings,” said Labor Secretary Thomas E. Perez.

A company pension plan is a wonderful savings vehicle when it’s efficient. The problem is that many of these plans are plagued with a variety of additional hidden layers of fees. These added layers have seemingly arbitrary labels, such as “asset-management charges” or “contract asset charges.” They often add up to 1 percent or more and are buried in the fine print of plan disclosures.

New regulations for advisors

Beginning in April 2017, a financial professional who makes investment recommendations to you about your 401(k) or IRA will be legally required to provide advice that is best for your situation, not the funds that provide the most compensation to the advisor. “The advisor will now be required to disclose their conflicts of interest.” This new fiduciary standard will only apply to retirement accounts, and advice provided about other types of taxable investment accounts will not be held to the same standard.

Employers need to wake up and take their role as pension plan sponsors more seriously. It’s in their power to dramatically impact the future quality of life for their employees.

My advice;  put in enough to receive the company’s matching percentage and read the fine print before making any additional contributions to your company’s pension plan.

Beware of Negative Growth in Corporate Profits

 

 

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My previous blog posts have been leaning towards being more bearish regarding the stock market. The revised forecast for negative growth in corporate profits for the first quarter of 2015 makes me wonder if forecasters will reduce their expectations for the second quarter as well. I find the magnitude of the decline in expectations are somewhat alarming. Previous estimates for the first quarter were for a gain of 8.57 percent, with the second quarter projected at 7.33 percent and the full year at 9.78 percent.

Some Wall Street forecasters are putting a positive spin, by discounting the negative earnings from the oil & gas sector,  claiming that the rest of the S&P earnings will be positive. Energy profits are forecast to tumble 62.51 percent in Q1 and about the same in Q2, with the full-year sector drop pegged at 57.08 percent.

While others point to the strong U.S. dollar as a headwind to weak earnings for the next two quarters.

“Since the end of World War II in 1945, each of the 10 economic recessions has been accompanied by a decline in earnings growth. Only three times during that period did negative earnings not see a recession follow”, according to Sam Stovall, chief equity strategist at S&P Capital IQ.

“While not an official profit recession, as no contraction in EPS growth is currently projected, the full-year growth estimate is getting uncomfortably close to that threshold,” Stovall said in a note to clients this week.

Capital IQ expects the first quarter to show a loss of 2.92 percent for the S&P 500. Expectations for the second quarter, IQ sees a loss of 1.84 percent”.

These conflicting views makes it difficult for me to put money to work in the stock market. I am old school, in the past, the transportation sector has been a good indicator of economic activity. The one year chart below of the transportation ETF (IYT) shows signs of weakness. It is currently trading below its 50 & 100 day moving average and is close to breaking below the 200 day.

iyt

 

I will be focusing on changes in revenue (top line growth) over earnings which can easily be skewed. I expect the railroads will show some weak revenue growth because they depend on transporting commodities like oil and coal. Norfolk Southern released an earnings warning on Monday, first quarter earnings per share are expected to be $1.00 per share. That is 15% below the same quarter in 2014 and is primarily due to lower expected revenues.

Take a good look at revenue growth from parcel delivery companies, air freight and trucking companies to confirm that economic activity is getting stronger. Here are a just few names that I am watching.

 

C.H. Robinson CHRW 27-Apr
Ryder Systems R 22-Apr
J.B. Hunt JBHT 14-Apr
United Parcel Service UPS 28-Apr
FedEx FDX 11-Jun
Forward Air Frieght FWRD 21-Apr

The first quarter GDP of 2014 came in at -2.1% but rebounded to 4.6% in the second quarter. Could we have a repeat performance this year? Consumer spending was positive for March after three negative months in a row. The low price of gasoline will add $800 to $1,200 extra dollars this year into consumer pockets. I expect that those dollars will be spent during the second half of 2015!

 As I was writing this post, J.B. Hunt released their earnings report:

J. B. Hunt Transport Services, Inc., (NASDAQ:JBHT) announced first quarter 2015 net earnings of $91.9 million, or diluted earnings per share of 78 cents vs. first quarter 2014 net earnings of $68.7 million, or 58 cents per diluted share.

Total operating revenue for the current quarter was $1.44 billion, compared with $1.41 billion for the first quarter 2014. Current quarter total operating revenue, excluding fuel surcharges, increased 10% vs. first quarter 2014. Intermodal (JBI) load growth was 6% over first quarter 2014 levels.

 

 

 

Tug of War in the Oil Market

tug  tug1

The tug of war continues between the oil bulls and the bears. Volatility continues in the price of oil which was up 6% on Tuesday and was down more than 4% on Wednesday after the Energy Information Agency (EIA) reported an inventory build of 19.95 million barrels (14 year high). This far exceeded the Thomson Reuters estimate of 3.43 million barrels.

The takeover of BG Group by Royal Dutch Shell poses the question whether the oil market has hit a bottom? The oil bulls believe that the halving in the price of crude is similar to the early 2000s when many super-mergers took place. Back then, BP acquired rival Amoco and Arco, Exxon bought Mobil and Chevron merged with Texaco.

The BG acquisition will provide Shell with enhanced positions in competitive new oil and gas projects, in Australia LNG and Brazil deep water. The other interesting point about this deal is the nearly total absence of North American assets. Shell has multiple reasons for buying BG, but more access to North America, is clearly not among them.

What I find fascinating is that 78% of BG Group’s reserves are in natural gas. Another curious fact, Shell has estimated the cost of its proposed LNG export terminal in Kitimat to be up to $40 billion (Canadian). It owns 50% of LNG Canada through its subsidiary Shell Canada Energy.

Paying a 50% premium for BG raises three more questions:

  1. Is the BG takeover based on the current low price of natural gas or oil?
  2. Is it cheaper to buy existing LNG plants than to build new ones?
  3. Is it cheaper to buy existing deep water wells than to drill new ones?

Wild cards in the oil market:

  1. When will Iran’s 30 million barrels stored in oil tankers hit the world market?
  2. When will oil storage in the U.S. reach capacity?
  3. How much of China’s cruel oil imports are going into storage?
  4. When will low oil prices force U.S. share production to actually decline?
  5. When will the Saudis cut production?

The price of oil has been stuck in a trading range but the current tug of war is slanting towards the bull side. According to oil experts, being interview in the business media, the hot money is flowing into oil stocks. The year to date price chart of the U.S. oil ETF (XLE) has moved above its 50 and 100 day moving average.

xle

I am not an expert when it comes to analysing chart patterns. I do know that the daily trading volumes are on the weak side. I have seen many money managers on business networks indicate that they dipping their toes into oil stocks. They are reluctant to call a bottom but they are buying some large integrated oil stocks and refineries.

The XLE has 28% of its value composed of Exxon and Chevron shares. Both of these companies report their earnings on April 30th along with Royal Dutch Shell. BP earnings come out two days earlier on April 28th and I have mention in a previous post that I own some bearish BP puts in my play money account. By the way,  the BP puts are currently under water but it is money that I can afford to lose.

Remember, trading in the oil market is being dominated by hedge funds with very deep pockets.