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Adrift and Starving on the Risk Appetite

July 6, 2012

Our banks and insurance companies are adrift in a sea of money created of our own money – we’ve probably given them far too much of it, apparently, and it has no place to go but into the thrall of  “Risk Appetite” and “Volatility” which sound good and look convincing in the Annual Reports, but, as we know, they are just another word for “The Risk/Reward Equation” and fecklessness.

For example, the five largest Canadian banks currently have assets of over $3.2 trillion which is a lot of money and nearly twice the current market capitalization of all the companies in the S&P TSX (about $1.8 trillion) and comparable to that of the Dow Jones Industrial Companies ($3.8 trillion, today).

But the money is not really theirs to do with as they please because they also have obligations and only a net worth of $170 billion (about 5% of their assets or liabilities) and “securities for sale or trade” of more than $520 billion, or three times their net worth. In effect, it’s not their money that they’re holding or trading in stocks on the shelf, but ours, which used to be called “bank deposits” and earned a respectable rate of interest from time to time.

And it is a similar problem for the insurance companies who are required to guarantee the capital of their segregated funds but have found that they can’t get even zero% per year on average and need to go to the capital markets to bolster their own regulatory capital and ensure the safety of their commitments.

One would think that with a more accountable and proactive policy of risk management – the traditional businesses of the banks and insurance companies –  they could offer us more of the products that we could really use, such as higher interest rates on our savings at inflation or better, lower interest rates and service costs on our loans and credit cards, and capital safety and no fees on our mutual funds and segregated funds that don’t lead to bankruptcy.

It’s also evident that what looked to be “easy money” in the sales and service of the investment market is not easy at all, and that consumers and savers are paying the price of it in terms of expensive services and poor returns or benefits.

But we can do something about it. Take the money back – more than $15,000 for every Canadian person – and invest it in capital safe and inflation protected investments such as TIPS and RRBs and do it ourselves or wait until the banks and insurance companies begin to realize that “Alpha-smart and 100% Capital Safety with 100% Liquidity” guaranteed with no fees and no loads, are the products that we want and expect, and the only products that we’ll buy.

Failing that, we’ll need to tighten our belts and continue to help them out, won’t we.

The Risk/Reward Equation

Notwithstanding our good luck or happenstance,
– if we accept the “risk/reward equation” – no risk, no reward – we will lose our money;
– if “caveat emptor” is good enough for us, we will lose our money;
– if “past performance is no guarantee of future performance” is good enough for us, we will lose our money;
– if we like Jeremy Siegel’s book, “Stocks For The Long Run”, McGraw-Hill, NY, 1994, now in its fourth edition, we will lose our money;
– if we give it to our clients, we will lose their money.


Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”.

Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability.

We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now.

The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”,  ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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