OUTLOOK 2014 David P. Baskin, President David Baskin, LLB - PDF document

OUTLOOK 2014 David P. Baskin, President

David Baskin, LLB President David studied economics at the University of Colorado and law at the University of Toronto. Following his early career as a lawyer and banker, David founded Baskin Financial in 1992. The company has grown from assets under management of $25 million in 2000 to about $540 million today. Baskin Financial has clients in six provinces, from coast to coast. David appears frequently on national television and radio as a commentator on the markets and is quoted widely in the press. An enthusiastic sailor, David and his wife Joan have two adult children. All are actively involved in community and charitable activities. Barry Schwartz, MBA, CFA Vice President, Portfolio Manager Barry joined Baskin in 2000 and has been an equity partner since 2005. He holds the Chartered Financial Analyst and Certifjed Investment Manager designations, as well as a BBA and MBA from the Schulich School of Business, yet he contnues to be a perpetual student of the markets and value investing. He is a frequent commentator on the markets on national television, radio and in the press, and he provides regular editorials on the Baskin blog. Barry contributes to numerous charities and is involved in many community organizations, including the investment committee of his sons’ school. In his spare time, you can fjnd Barry at the gym or the curling club. Scott J. Mazi, CFA, CA Portfolio Manager Scott joined Baskin Financial in 2006 and became an equity partner is 2009. He brings with him experience and insight from over 20 years in the fjnancial services industry including senior positions at KPMG, UBS (Cayman Islands) Inc. and TD Asset Management Inc. He holds both the Chartered Accountant and Chartered Professional Accountant designations as well as the Chartered Financial Analyst designation and he has a BSc in business from Miami University (Ohio). Scott and his young family live in Oakville, where he is involved with coaching soccer and hockey and is also involved in community and charitable activities. In his free time, Scott enjoys playing golf and hockey. Jeff Pollock, BBA, JD Associate Portfolio Manager Jeff joined Baskin Financial in 2011. He actively researches new investment ideas and contributes regularly to the Baskin Financial blog. Jeff supports numerous charities, including St. Michaels Hospital, the Heart & Stroke Foundation and the Canadian Blood Services. He is also politically involved in his community, including volunteering his time during municipal election campaigns. Jeff graduated on the Dean’s List from the Schulich School of Business (BBA) and the Faculty of Law from the University of Windsor (Juris Doctor). He is also a Level Three CFA candidate.

STEADY, BUT STILL SLOW. THE RECOVERY CONTINUES. 1

Section 1 The Slow Motion North American Recovery Continues Section 2 Europe Turns a Corner Section 3 Capital Markets Outlook and Strategies for 2014 2

Section 1: The Slow Motion North American Recovery Continues Fears that the US would slip back into recession have proven to be unfounded. The bad news is that GDP has been growing at an annual rate of less than 2% for three of the last four quarters, maintaining the slow pace of the past three years. Normal growth should be at least 3% per year, and faster after a recession. The difference since the end of the recession is about $500 billion of missing growth. The biggest drag on growth has been the sharply reduced spending by the Federal Government. Premature and abrupt withdrawal of the recession period stimulus, caused by the sequestration and a dead-locked Congress, has probably reduced GDP by at least 1% per year in the past two years. Fiscal drag has largely off-set the effect of monetary stimulus undertaken by the Federal Reserve Bank’s bond buying program. 3

The slow economic growth is refmected in the rate of employment growth. While the US economy has been adding jobs each month since the end of the recession, the rate of growth is not enough to bring unemployment down signifjcantly. The US economy needs to create about 150,000 jobs per month simply to offset population growth and keep unemployment at the same level. As a result, three years into the recovery, unemployment is over 7.5%, compared to 4.5% fjve years ago. The difference between 7.5% and 4.5% unemployment is about 6 million jobs. To bring unemployment back down to 4.5%, about 400,000 new jobs would need to be created each month for more than a year. Peak job creation in the post-recession period has not even reached 300,000 jobs per month. 4

The 2008/09 recession was unique not only in the percentage of jobs lost (over 6%) but in the very slow rate at which those jobs have been restored. Most previous recessions saw a return to prior employment levels within 24 months after the start of the recession. In this case, fjve years after 2008, jobs are still 2% less than at the peak. Of all the jobs lost, about 2 million were highly paid manufacturing positions, often referred to as “gateway jobs” leading to the middle class. The recession steepened the already rapid loss of employment in this sector. Fewer Americans are working in manufacturing today than at any time in the past 60 years, even though population has more than tripled during that period. 5

The combination of an aging population and persistently low job growth has led to a sharp decline in the number of Americans actively working or looking for work, the labour participation rate. From a peak in 2002 of over 67%, the participation rate has fallen to about 63% - a difference of about 12 million. The percentage of the total population employed has fallen from a peak of almost 65% to a recent 58% - a difference of about 20 million. This is the total of unemployed, newly retired, and discouraged workers. Changes in the job market as a result of technology, competition from low-wage countries and investment by companies in robotics and advanced machinery have had a particularly detrimental impact on less educated and lower skilled workers. Those with less than a high school education have seen a disproportionate number of jobs disappear, and these have been very slow to return. 6

A source of strength in the U.S. economy has been housing. After falling more than 75% from the peak level in 2006, housing starts have recovered to about 900,000 units per year – still less than normal, but a huge increase from the bottom in 2009. Another source of strength has been renewed bank lending. After falling sharply during and after the recession, outstanding business loans have increased by 42% in three years to a new high. Low interest rates have encouraged businesses to borrow in order to expand. 7

While the recession in Canada was not nearly as severe as it was in the United States, GDP growth at home has been even weaker and less consistent than in the US, with an annualized rate of less than 2% per year over the last eight quarters. This is in contrast to the stronger growth that was seen in 2010 in the immediate aftermath of the recession. In terms of infmation-adjusted (constant) dollars, Canada’s GDP per capita is still marginally lower than it was prior to the recession. Over the past nine years, GDP per capita is up only about 7% in total. 8

Canada’s Unemployment Rate Unemployment in Canada during and following the recession was less severe than in the US. Our unemployment rate is lower, but job growth has stalled and there has been almost no change in net jobs growth over the past eighteen months. One reason for stalled employment growth may be the aging of the baby boom generation. As can be seen in the comparison of the population makeup between 1971 and 2010, the number of Canadians over 50 is a much higher percentage of the population compared to 40 years ago. Persons over 50 who became unemployed during the recession have likely found it much harder to fjnd new jobs. At the same time, as Canadians live longer, the top of the pyramid is bulging outwards. 9

Percentage growth in age cohorts in Canada, 1971 to 2010 Over the past four decades, there was almost no population growth in the prime earning years between 30 and 55, compared to huge and unprecedented growth in those over 70 years old. This demographic shift, which affected Europe earlier than North America due to a lower immigration rate in Europe, will have profound impacts on social spending, affecting areas such as schools, hospitals and retirement and nursing homes. Canadian population under 14 and over 65 years of age In 2016, for the fjrst time ever, there will be more Canadians over 65 than there are under 14. This compares to 1971 when there were four children under 14 for each senior citizen. Even though many older people continue to work, the participation rate in the labour force for adults will continue to drop independent of the economic situation. 10