Statistics Canada’s former chief economist, Philip Cross.
Philip Cross worked at Statistics Canada for 36 years, rising to become the agency's chief economic analyst before departing in early 2012. Mr. Cross is now working on policy issues for several universities, think tanks and government organizations. He also frequently appears in the media as a commentator on the economy, and writes for various journals, magazines and newspapers across the country. We recently spoke to him about his investment approach.
How would you describe your investment approach?
I am inexperienced at evaluating individual stocks. When I was at Statistics Canada, I avoided investing in individual companies because the agency collected data from businesses and I didn't want to create the appearance of benefiting from inside information.
Instead, I have adopted a strategy that relies mostly on investment funds to align my asset allocation with the business cycle and macroeconomic trends. Not only does investing at the macro level help avoid conflict-of-interest issues but it is less onerous and error-prone than picking individual stocks.
Companies have so many more variables – mostly company-specific in nature such as management changes, operational efficiency and access to financing. It's laborious to analyze them all, and then there is the risk of overlooking some aspect that later goes awry.
Business cycles and macroeconomic trends are driven by much fewer variables, a big one being central-bank policy. And just as history shows stocks earn superior returns over the long run, it shows there are up and down patterns in the economy whose turning points tend to be foreshadowed by events such as a build-up in inventory levels or ramping up in inflation.
How have you been shifting your asset allocation?
I was mostly in 'plain vanilla' exchange-traded funds and mutual funds that track stocks but have now shifted more toward Nassim Taleb's 'barbell strategy' of having a large weight in cash and a large weight in investments that profit from a crisis or crash. [Mr. Taleb is a professor and investment professional who has authored several financial books.] So, my portfolio is currently one-third in cash, one-third in 'plain vanilla' funds and one-third in 'end-of-the-world' holdings.
I made this move because low interest rates have misled investors into believing risk is lower than it really is. As a result, stocks and other financial assets have been bid up to rich valuations.
Can you elaborate on your 'plain vanilla' holdings?
Within the 'plain vanilla' group, I have moved away from Canadian equity funds toward U.S. equity funds. Canada is now at a worse juncture of the debt cycle than the U.S. is. Back in the mid-2000s, it was the other way around with the U.S. housing market imploding and unleashing a severe financial crisis. Now Canada is on a debt binge and its housing sector is overextended. The stronger Canadian financial system may avoid the kind of meltdown U.S. financials had, but the consequences for the Canadian economy and stock market could still be quite painful.
The U.S. also has a government that is pro-business like never before. Canada and several provinces have gone in the opposite direction, adopting anti-business policies that diminish incentives to create wealth. The recent hike in Ontario minimum wages is a prime example. Many studies have found that raising minimum wages produces a number of adverse unintended consequences – a notable one being higher unemployment when firms in competitive, low-profit industries shrink staffing to finance the wage hike.
What about your 'end-of-the-world' holdings?
Within the 'end-of-the-world' group, an example of a holding is shares in Prem Watsa's Fairfax Financial Holdings, which is known for tilting the investment of its insurance reserves toward crisis scenarios. Put options on stock-market indexes or exchange-traded funds are another example. And some investment funds are set up to do well during downturns.
The barbell strategy requires patience and discipline because the timing of a crisis is hard to predict.
This interview has been edited and condensed.
Larry MacDonald is an economist, author and financial writer.
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