CommunityLend blog

CGA Canada produced their 2010 report Canadians debts. Most of us quietly assess ourselves against others and against the average as one way to judge success in achieving our financial goals.  This report provides a window into the financial lives of Canadians and it is freely available.

Credit (excluding mortgages) all through the last three years has been increasing and at much higher rates than the US.

Drilling deeper we see that 77% of this debt is in loan products with floating (Line of Credit) or high rates (credit cards) and therefore essentially no amortization.  We know that if the minimum payment is regularly made on those products they will take over 30 years to repay in full, no matter the amount outstanding.  This is hardly a recipe for reducing debt.

The CGA worry about three future risks for Canadians.

1. Decline in income

2. Asset price shock

3. interest rate shock

At CommunityLend we want to help in any way we can with transparent prices and products designed to reduce debt while also providing some protection from the risks mentioned in this report.

Technorati Tags: Canada,consumers,debt,consumer loans,fixed rate,pay down,reduce debt,financial plan,personal loan,loan,asset price shock,interest rate shock,interest rate hike

A timely and informative article on family budgetting.  It makes several excellent points, with the central theme that the entire family is in it together, so a common plan is useful and more likely to succeed when everyone has at least some idea of the general family finances.  It makes the point that not every detail on say credit cards needs to be shared, but some general direction on that is very useful to let everyone appreciate  the family situation.

Don’t have a family budget? Yikes! | Globe and Mail

“It’s beneficial to consider the family as a financial team,” Mr. Heath says. “All team members should be in on making decisions or being aware of the current status of the financial situation.” Making it a team effort will help cut down on the stress of constantly nagging the kids to turn off the lights or spend less time in the shower.

Umair Haque maintains a fascinating blog where he follows the direction of business and his perspective on the changes in the economy are interesting to us at CommunityLend. When you are breaking new ground, it is useful to be able to relate to grander changes going on in the world.

A User’s Guide to 21st Century Economics

Tomorrow will not be like yesterday. This is no mere recession tectonic global shift in savings, consumption, and investment. Today’s macropocalypse is a rupture in the global economic fabric – and the next half-decade will be spent reweaving it. It is not a temporary departure from business as usual, an illness – it is a structural transformation, a lasting change

These are powerful statements. He goes on to summarise a few of the posts from 2008 where he used certain market leaders as examples to point out the difference between old and new.

Tomorrow’s market leaders have new DNA. We’ve spent the last year identifying next-generation leaders – from the Obama campaign, to Threadless, to Zara – and learning from them. They look and feel radically different because they were built for 21st century economics, not 20th century economics.

The points being made here are fundamental and it is hard to disagree with them. The role of marketing is exposed as fulfilling what he describes as consumer addiction by using Madison Avenue tactics to push products. Whereas the role of marketing in 2009 is about producing value with that value being defined as the value felt by the customer. There are no more consumers – there are real people seeking value.

The role of corporations in this new world is one of innovation – innovation where companies will offer “higher level innovation” which provides that real value. What is the role of innovation in a world where greater investment will flow to reinventing moribund industries?

In the 20th century, innovation was about processes, products, and services: that’s why most boardrooms are still investing in lower-order innovation. At the Lab, we’ve found that higher-order innovation – business model, strategic, and management innovation – is associated with significantly more powerful and durable value creation. Think Apple (reinforcing simple product innovations, like the iPod and iPhone, with disruptive new value chain designs, via iTunes and the Apps Market).

The article might be a bit philosophical, but we are experiencing new times that have not been experienced during the lifetimes of most of us. It is becoming clear this is not a minor correction but rather, a dramatic shift in business and the old axiom of “it is not business as usual” has never been more relevant than now. CommunityLend intends to be part of that shift.

The Canadian government continues to pressure banks  to ensure they keep consumer lending going.  The negative headlines from the US relative to credit certainly flow over into Canada and levels of Canadian consumer confidence.

Canadians voice concerns over access to credit, Flaherty says | Globe and Mail

TORONTO — Finance Minister Jim Flaherty says consumers across the country are worried about access to credit.

“We are hearing across Canada concerns about access to credit,” Mr. Flaherty said Tuesday. “It is a major issue going into 2009.”

The finance minister said in Toronto he will be talking to the country’s major banks and working to ensure there is affordable and accessible lending.

In a coordinated move the Governor of the Bank of Canada (Carney) and the Federal Finance Minister (Flaherty) have come out using identical wording “It is not clear to me that they need additional capital buffers,” and insist that the banks turn lending back on, particularly for businesses who are having difficult finding access to lending from the Banks.

Flahery warns Banks on lending | Globe and Mail

“It is not clear to me that they need additional capital buffers,” he said of the banks during a meeting with the editorial board of The Globe and Mail. “What is clear to me is that there is unfilled demand for credit for worthy investments, and I’m sure that our banks will see these opportunities in the fullness of time.”

The federal government is buying $75-billion of mortgage securities from banks to help them expand their balance sheets and pledged to backstop their sales of wholesale debt. The central bank is offering billions more through short-term loans to financial institutions hurt by the credit crisis.

Mr. Flaherty made clear he doesn’t think the banks are showing enough gratitude.

and yesterday:

Carney to banks: Lend, don’t hoard | Globe and Mail

TORONTO — Mark Carney is pointing a finger at the country’s big banks for hoarding capital against a rainy day instead of doling out more loans, a choice the Governor of the Bank of Canada says is damaging the economy.

…

Worries about companies’ struggles to get loans emerged as one of the biggest risks to the economy at a meeting between Finance Minister Jim Flaherty and his provincial counterparts yesterday in Saskatoon.

This introduces a dilemna for the Governent that was well stated by the famous economist J.M. Keynes nearly 90 years ago.

The Paradox of Thrift | Economics Professor

Paradox of thrift was revised by English economist John Maynard Keynes (1883-1946) in the 1930s, who asserted that thrift is virtuous only up to a point. If an individual increases the proportion of income he saves, his reduced expenditure on goods will lower total demand in the economy.

Simply put, when peoples confidence is unsettled their natural reaction is to batten down the hatches,  save, pay off debts and prepare for the future.  In turn this reduces the size of the economy and reduces value for everyone.  It becomes a vicious spiral.   It is interesting that the communication effort to Banks is focussed on helping businesses, presumably because business confidence is a necessary precursor to consumer confidence returning.

GDP is made up of spending by 1. Business, 2. Consumer, and 3. Government plus 4. net exports.  The thinnking of the government is that with confidence for 2. being in the ditch, they must do all they can to avert 1. (business) confidence dropping so much.

All this coming at the time when banks consider they need to re-capitalise in order to save for future loan losses including the likes of the Maddoff affair coming out of the woodwork, and they are betting there has to be more to come.

Some notes from the first two keynotes are Startupempire in Toronto.

Don Dodge – nice reality check – down turn does not mean lack of opportunity – just means adjustment

- great time to start up a new company

- vitamin vs pain killer

- vitamins are nice to have

- pain killers are things that are needed

- "me too" start ups will not get funded

- ad based companies won’t get funded any more;  VC’s will do the math

- what does it take to generate $1M per month in advertising revenue

- its a large number

- angels vs VC

- angels are easier to convince if they know you, or know people who know you, or have been in the business themselves

- if they don’t know you, they are more difficult

- If Angels don’t know you VC’s are better because they are willing to take a risk

- do homework – where have they invested before

Austin Hill – successful entrepreneur – great talk.  Some great tools referenced here.

- Advertising is not a business model

- getting customers is a business model

- the VC model is broken

- if you add up all the value in Skype/ youtube etc, it still does not equate to enough market cap to justify the IRR required by the VC model

- Canadian market is different

- Canadian VC are well sized – they can be profitable with one good deal

- Walmart – big and broad or Apple strategy – niched and focus

- understand metrics

- pirate metrics on slideshare http://www.slideshare.net/dmc500hats/startup-metrics-for-pirates-long-version

- productplanner.com – mapping user flows

- http://www.balsamiq.com/ – wireframing tool

- don’t try to build demand – develop partnerships with others who are being troubled by the current environment

- partnering strategies are one way to take advantage of the downturn – help them with their downturn problems

- topgrade:  no time to compromise on inefficient people

- make real world meaning – there are enough tools already built for sharing video, tagging etc – focus on real meaning for customers and business value

- point to big shifts and here is how my company can use that opportunity (eg cloud computing, demographic shifts)

- hearts – minds – wallets | core to pitching

- do not talk about features

Good wake up piece here indicating the relative appetite for credit and in particular credit card and unsecured lines of credit in Canada vs the US.  Not sure the numbers sound completely right, but the indication is that Canadians have relatively much more unsecured debt that Americans, and that might come as a surprise to most Canadians. 

The article goes on to draw out the distinctions between passive saving while the stock market was rising, versus the current situation, whereby saving must come from monthly income – old fashioned saving as the CIBC economist calls it.

Plastic Nation: Canadians Drowning in Credit Card Debt | Epoch Times

“People have put themselves in this situation where they’ve got cars on lease or on loan, they have a huge mortgage on their homes and they may have $30,000 to $40,000 on lines of credit and unsecured debts such as credit cards and that’s just not sustainable.”

…

CIBC senior economist Benjamin Tal says savings rates went down because net rates went up. In recent years people were making a lot of money in the stock market and in the housing market, he explains, and this was their way of “passively saving.”

“But beyond that, now with the housing market levelling off we will see a situation in which people will go back to old fashioned saving, especially in an economic slowdown,” Tal predicts.

The Canadian banks choose to rebel against the Government of Canada direction to reduce interest rates.  The Central Bank dropped rates by a half percentage point indicating concern about the economy and in an attempt to ease credit.  However the Canadian Banks are choosing to keep 50% of the drop for themselves.  Story at the Globe and Mail.

Banks trim prime but lag BoC cut | Globe and Mail

OTTAWA — Major Canadian banks said they would lower their prime rates by just a quarter of a percentage point, refusing to pass along all of the Bank of Canada’s half-point decline.

The rebellious move is a departure from the past, when the big banks have fully matched central bank rate cuts, despite complaints they couldn’t really afford it.

While there is a general assessment that the US and European banking crisis will rub off on Canada, and provoke a recession, possible later in 2008, or early 2009, UBS acknowledge that Canada is in relatively good economic condition which will mollify the impact on the country.

Recession? You don’t say | Globe and Mail

“An important point of distinction for the Canadian economy is that, for the first time most can surely remember, the underpinnings are sound going into a downturn,” UBS said in a note to clients. “Specifically, consumer debt service ratios are historically only average, the budget is in balance with debt ratios less than half US/European levels. Accordingly, the economic risk in Canada is far lower, and there is more ammunition available to undertake countercyclical initiatives, if so desired.”

The mainstream press do a good job of presenting quick quotes, and implying all kinds of dread and panic.  Its worth looking beyond the headline and some facts at the differences between the US situation and Canada.

Future of Canada’s economy comes into question as TSX ends week of panic | Canadian Press

The theme of the article is broadly the spillover effect of a slowing US economy, reduction in credit availability, and reduction in consumer spending.

It is certainly not our place to make predictions or make economic commentary, but some facts might be useful.  Then we can each decide the reason or cause for any panic reflected in the TSX.

Some basic facts in the diagram below, compiled courtesy of Google Finance.  In order to highlight the relative effects of banking in each country’s stock market.  We have US on the left, Canada on the right. 

The US Dow is down 26% and roughly the same in Canada at 27%. 

However when we look at financial services, a component of the Dow index, the American index is down 52%.  This suggests that the Dow banking sector is worried.   The sentiment of the market is that the US is in a flat out banking crisis.

In Canada it appears to be the opposite – what exactly are we panicking about in Canada?  Clearly not banking, because relatively speaking the Canadian banks are holding the Canadian stock market higher, with the TSX is apparently being dragged down by other factors.  We may well have cause for panic, but it doesn’t appear to be reflected in market sentiment for Canadian financial services.