Gold About To Crack?

May 11, 2006

Gold has now been up (priced in U$) nearly nine weeks in a row:

   ----     -----
  Mar 10   541.30
  Mar 17   555.10
  Mar 24   560.50
  Mar 31   581.80
  Apr  7   588.40
  Apr 13   596.50
  Apr 21   632.20
  Apr 28   654.50
  May  5   684.30
  May 11   721.50

Look at these opposing price swings today (May 11, 2006):

  Price of gold:
    U$ 721.50, up U$ 15.80, up 2.24 %

  XGD (Barclays iShares gold trust, TSX):
    C$ 87.72,  down C$ 2.06,  down 2.29 %

I’m no believer in the predictive power of technical analysis, and normally would think nothing of such swings. But still. Trees don’t grow to the sky and there is cleary a bubble. No-one can tell, without being lucky, precisely when the bubble will crack, and when it cracks, whether it will continue upward again, or be a final burst.

Predictions of this kind make mortals look like fools. Being both, I’ll have a little fun by stepping in front of the freight train right here. How about:

  • Gold cracks imminently: starting within 1-3 days (i.e., heading down by May 16 at the very latest (and I am thinking probably tomorrow (except that it’s pre-weekend)));
  • The crack will be significant: say U$ 70 to 100 down (counting intra-day) when all is said and done;
  • The crack will be swift: 7-10 days to the bottom from the top;

Even if this happens, my guess is the run is not over, it will likely surpass the previous highs.

Caveats: All of this is just bemused observation, for fun, by a non-professional. I don’t know anything, because there isn’t anything to know. Don’t base any investment decisions on it! What you do is your responsibility alone.

Disclosure: I am neither long nor short any pure gold plays. In fact I’ve never gone short anything, and have held no pure gold stocks or precious metals funds for nearly the last 3 years. I do own a very small amount of Teck Cominco, a mining company with a bit of gold exposure.


Basics of the Gordon Equation

March 29, 2006

When I first encountered the Gordon equation (GE), a simple rule used to estimate/describe financial returns, in popular books I was confused and doubtful about various aspects of it. Eventually I hammered away at it in bits of spare time. It seems a lot clearer now — what it assumes and its range of validity and limitations. Anyone interested in the basic derivations I’ve written up, which are essentially trivial and try to be clear and keep the assumptions explicit, can view/download them with these links:

gordoneq.pdf (131 Kb PDF file)

or (85 Kb PostScript file)

From the introduction:

Outline of topics: Section 2 looks at the GE in the setting it’s commonly introduced in: the so-called dividend discount model, where it’s an exact solution. In Section 3 a more general model, with finite time period and including capital growth, is considered and the return is expanded as a small-dividend perturbation series. Section 4 specializes this further with the introduction of two simple price models. The GE emerges in the leading order parts of the expansion along with corrections due to valuation or dividend yield changes. In Section 5 these corrections to the Gordon return are illustrated with numerical examples. Section 6 briefly collects conclusions.

Comments and corrections are welcome.

Does He Jump, conclusions

February 21, 2006

The weak form of the conjecture has now failed, even with the contrivance of Presidents’ Day invoked to extend the weekend. Down in flames! Of course, all that really could have made it happen was public outrage, and if there wasn’t enough of that in Belindagate there was no real reason to think it would carry here.

In an attempt to make something useful out of this frivolous series of posts, I’ll try to get briefly at one or two nuggets, in the context of floor-crossing and party-leaving generally.

Clearly it’s a spit in the face of the people who elected you. Even if you cross with the best of intentions (i.e., not chasing opportunistic bribes), there will be those in the electorate who disagree with you. They deserve final judgement.

The question is often asked: Do people vote for the person or the party? For any specific voter, the answer is usually not clear, and it could be one or the other. But my gut feeling is that most times it’s the party that wins. After all, if you consider all the political candidates for 300+ national ridings, how many of them are any great shakes, or really well known? Probably around 10%. Even for those, there will be voters who don’t really know much about them. It seems reasonable then that the significant majority of voters really don’t know much about their local candidates, and so, if they vote, they vote for a party. There are only a few parties, their general platform tendencies are well known and their promises well advertised.

From this, it follows that if the MP leaves the party they ran under, it is a refutation of the crucial condition that got them elected. Hence the need for a by-election to test voter approval. Further, if there is to be a reward for floor-crossing, such as a cabinet minister position, etc., this needs to be disclosed before the by-election so that voters can judge the full circumstances. Conversely, if such a reward is not disclosed, it should be prohibited for a reasonable period (1 year?) if the by-election does re-elect the MP. Of course, it probably isn’t possible to rule out all forms of reward, but at least the usual ones should be spelled out in law requiring pre-disclosure.

Finally, an important nugget: In discussions of this topic, I’ve seen otherwise sensible people suggest that a by-election should be required for a true floor-crossing, but not if  the MP leaves his party to sit as an independent. This is ludicrous. For if this were the case, anyone who really wanted to cross the floor (to another party) would just have to pretend to become an independent, while in reality being a de-factor member of, and voting with, the new party. Abstractly, an independent is a new party, even if not in name.

Does He Jump, part II

February 19, 2006

The strong version of the conjecture is now officially burried. The tea leaves have not looked good this week, e.g., the best that Paul Martin could come up with: he was astonished by the defection. Gee, astonished. Still a few hours to go on the weak version, but I’m not holding my breath. All I can hope for is for some serious re-thinking to be going on privately this weekend, with the pressures perceived as magnified beyond reality at the focal point.

Does He Jump?

February 11, 2006

A bit of fluff today, but after all, this is Vasten Void, and the product must be kept flowing.

Regarding Liberal Conservative MP David Emerson’s great Canadian floor-crossing crisis of 2006, I had conjectured in a comment on Andrew Coyne’s blog what the result would likely be. Namely, first a categorical denial on Emerson’s part that he would quit as a result of the public criticism over the situation (in an attempt to put an end to the story). And secondly, his actually quitting within one week of the denial (the possibility of running again in a by-election remaining open).

The first, and highly predictable, part of this conjecture has now come true. Emerson has flat-out denied that he will quit in an interview with CBC news on Friday, Feb 10. The crucial second half of the conjecture can now be refined into one of two possible forms. Strong form: Emerson quits by Friday, Feb 17. Weak form: He quits by Sunday, Feb 19.

The public “furor” over this matter has, certainly, been less than a firestorm. Yet it has persisted and drawn public criticism from over half a dozen of his Conservative co-MP’s. Will it all die out, perhaps being overshadowed by other Tory teething pains or gaffes? Will he quit in wimpy form after more than a week? Or does he Jump? This is what fine vastening is all about.

Go for it, David. JUMP! Not just because it’s the right thing to do, but if only to make my week.

Prudence and the Pilferers

February 5, 2006

This blogicle examines and debunks Canada’s allegedly “prudent” fiscal surplus.

Since 1999-2000 the former Liberal government has run large budget surpluses, typically ranging in the area of 7 to 20 billion dollars. They represent excess revenues (notably from taxation) over current expenditures. Up to 3 billion dollars of these surpluses has been used annually to pay down the national debt (which currently still stands at well over 600 billion). As for the rest, it has generally been allocated to new spending. While there has been some modest tax reduction, nominally aimed at curtailing the surplus, nevertheless the surpluses have continued and grown from a modest amount in 1997-98.

A number of obvious, and brief, points need to be made about this situation at the outset:

  • The excess money represented by the surplus has been collected from taxpayers due to overtaxation. Therefore it belongs to the taxpayers, not to the government.
  • The national debt, of course, also ultimately belongs to everyone in the country (including taxpayers).
  • There are only two legitimate options about what to do with the surplus money: (i) return it to taxpayers, or (ii) use it pay down the debt. In the case of option (ii), it should probably be done on a pre-disclosed basis, in part because it represents a re-distribution of wealth from high to low taxpayers, and partly because people should have a say about the pace at which they will pay off their debt.

It follows that a government’s using up the surplus (or significant parts of it) on new, unannounced non-emergency discretionary spending (that they were not elected for) is not justified. In fact, it is tantamount to theft. And in this case a massive theft of nearly 100 billion that makes the adscam/Gomery scandal look like peanuts. Naturally, the money is used to increase the scope of and entrench the government by allowing them to “provide” politically useful programs. While taxpayers do get some benefit from these programs, that is not the point. Rather, taxpayers did not elect the government to spend their money in this way, and they have the right to allocate it differently or more efficiently themselves.

Of course, the Liberals didn’t call this theft on their part. Instead, their strategy was to first play down the the size of the surplus until its embarrassingly elephantine extent could no longer be denied, and then switch tactics to braying, summon the spin-doctors and apply the adjective “prudent”. The idea being sold here was that it is better to run a modest, prudent surplus than to be constantly in deficit. Few would argue with that choice, but coming to the main issue: have the surpluses been merely prudent, or were they truly excessive? I want to give a logical and simple argument for the latter case, because I haven’t seen it addressed anywhere in this way, and because it’s of crucial importance in assessing a government’s fiscal record (past or future).

Economics is not an exact science. It’s hard enough finding two economists who agree on the details of anything, let alone being able to predict the course of the economy and the spoils of the tax system with sufficient accuracy to balance a nation’s budget regularly.

If the department of finance pursued the noble goal of balancing the budget, then the uncertainties inherent in that economic problem would inevitably result in unbalanced budgets: sometimes a surplus, sometimes a deficit. If their economic predictions were skillful, these errors would tend to be smaller rather than larger. And if there was no systematic bias in their methods, over time the incidence of deficits and surpluses would be about equal, and on average (over time) the budget would just about balance.

Of course, economies tend to run in cycles; a few years of boom, then some of bust. This enhances the probability of, at times (during a recession), having a deficit for two or three years running. Human nature being often focussed on the short term, this might be regarded as worse than it really is. Hence it could be seen as a good idea to put a systematic bias into the economic model and aim to run a modest surplus; that way, if things turned out leaner than expected, the budget may still balance, or very nearly so.

And that really is the key to identifying a prudent fiscal policy: actual surpluses, from year to year, would fall in a range that sometimes, on the low end, led to a nearly balanced budget or even a small deficit. Importantly, this is not what has occurred in Canada over the last many years. Instead, actual surpluses have ranged from about 7 to 20 billion, with the exception of 1.6 billion in 2004-05 when the Liberals were reined in by their precarious status. The surplus, where possible, has therefore been excessive, egregious, and not prudent.

Once this is admitted, then the only remaining escape mechanism from the finger of guilt is pleading incompetence in the economic modelling. But this doesn’t really wash either: incompetent economic predictions would lead to widely ranging outcomes from balance, most likely a sequence of both deficits and surpluses, both large and small from year to year. Even if there was a systematic bias to the incompetence (initially favoring, say, surpluses over deficits), then attempts to correct an evident and unwanted surplus would be as likely as not to overshoot the mark (due to the assumed incompetence) and in some years again lead to deficits.

This too is not the pattern that has been seen. Rather, year in and year out the surpluses have been relatively consistent in their size. This indicates rather clearly, that they have been planned, intentional and self-serving Liberal money grabs, spin-doctored away under the euphemism of prudence.

That particular merry band of thieves is now deposed, although amusingly little damaged by the scandal of their gluttonous surpluses. The Conservatives have promised to clean up in this regard, among many. For them the jury, while still out, should know what to look for.

The Incredible Flow-Through Leak

January 29, 2006

Former Canadian finance minister Ralph Goodale’s department is currently under investigation by the RCMP regarding an alleged leak of information concerning the decision in his (most recent) income trust fiasco. The formal allegations were brought forward by the NDP during the election campaign. They allege that Bay Street insiders privy to the leak benefitted by purchasing income trusts and dividend paying stocks, which stood to rise after the decision became public, which it did on Nov 23, 2005. Further background to this can be found here.

Notable nay-sayers to the likelihood of a leak include the Bay Street community, according to various media reports. Of course they are hardly unbiased, not being eager to point the finger at themselves. However, in this case they are one group with enough (indeed, more than enough) knowledge of and familiarity with the situation to actually draw the right conclusion, as opposed to those who saw the trading frenzy of Nov 23, and in a knee-jerk or partisan reaction cried “Leak!”

Here I want to outline and explain the argument against a leak, which is based on correct market anticipation as grounds for the pre-announcement trading activity. Of course I don’t know if there was a leak or not, but based on the reasoning below I find it highly improbable.

In September 2005, the finance department initiated a public consultation regarding perceived tax problems related to income trusts. The consultation was scheduled to take public input for consideration until Dec 31, with a decision expected to be reached early in the new year. Among the options being explicitly considered was the possibility of introducing a new tax on trusts. It wasn’t long before the uncertainty created by this situation resulted in a significant drop in income trust market values. (To be sure, a coincident drop in oil prices also depressed the values of energy trusts, but this factor was far from alone.)

This trust value scalping made minister Goodale the target of criticism from many sides: trust investors large and small, trust managements, investment bankers, would-be trust convertees. This only aggravated the problems of the tottering Liberal minority government. Moreover, the media was eager to unearth any tidbits they could regarding this on-going situation. Any time the minister gave them even a vague comment relating to hypothetical outcomes, the markets stirred in reaction. It soon got to the point where, for fear of misdirecting trigger-happy traders, the minister publicly refused to provide any further comment on the situation until 2006 when the consultation would be completed. This is a very important thing to realize, which many leak-seekers probably don’t take into account.

Now move ahead to Nov 22. After a long period of silence, and with the Liberals on the brink of non-confidence, Goodale finally has something to say: the trust situation will be resolved imminently, before the fall of the government. This, in essence, was the leak; and it was public! If you actually think about this, the implications are immense and fairly clear. First, an imminent announcement signals a decision either having been made (or about to be finalized). And second, an early end to the consultation.

Concerning the decision to be made, it could be either bad or good. A “bad” decision would have been along the lines trust stakeholders were dreading, something like “we’re putting a new tax on trusts” and perhaps other restrictive or draconian measures. For the minister to close off public input prematurely, before everyone could have their say, and impose a decision like that, particularly in the face of other concurrent anti-Liberal sentiment (Gomery et al), was just not a real possibility.

So, if the decision couldn’t be bad, it had to be “good”. Namely, at the very least: no new measures or taxes affecting income trusts directly. This is what almost everyone wanted, and is really the only possible acceptable reason for ending the consultation early.

And what about dividend stocks? It was widely realized by those somewhat familiar with the tax system that the “problem with income trusts” was largely a problem of duplicate taxation, in particular concerning dividends. This had been widely reported in the media, and had been pointed out in early publicly released submissions to the trust consultation, along with the suggestion to eliminate duplicate taxation of dividends. In his mini-budget, the minister even thanked early contributors for such thoughtful and useful suggestions.

Therefore, it was not a big leap to conjecture that the minister’s decision would involve a tax reduction on dividends. This was a sensible idea, would be well received, and moreover would inject some substance into the decision, rather than just saying “we’re backing out early and doing nothing for now”, implicitly because “we can’t take the heat”. (Incidentally, the actual proposal by which dividend taxes were to be reduced, also adopted by the Tories, appears to be rather pedestrian.)

All of the above reasoning is of a highly probable nature. Bay Streeters doubtlessly thought along these lines during the day from Nov 22 to Nov 23, and those of them eager to place bets before an announcement began buying income trusts and high dividend paying stocks on Nov 23 (if not already nibbling at them on Nov 22). This would not require knowledge that an announcement was to come on the evening of Nov 23. One was coming soon, so best get in early or simply jump on the bandwagon. This could easily have cascaded into the broad frenzy that did take place in those securities that day.

Seeing this strong anticipatory reaction, finance would have had little choice: best to finalize and out the decision at once, before the speculation could run wild any longer. Thus the near haste with which the announcement was revealed after market close on Nov 23 may have been partly in reaction to the building frenzy. Some concluding remarks:

  • A leak can never be ruled out for certain, even if the RCMP dismisses the case for lack of evidence. However, all of the publicly available evidence can be readily and reasonably explained as outlined above, with no need to assume a leak. An unbiased person doesn’t even have to be an financial insider to see this. The markets are very good at reading these kinds of tea leaves, and they usually get it right.
  • Conservative leader Stephen Harper played this incident very well politically. While always hedging his statements, he slanted them strongly in favor of a leak. But his true beliefs were probably revealed by the fact that he left it up to Jack Layton’s NDP to launch a formal complaint on the matter. In that way, when the final RCMP report in all likelihood comes out negative or inconclusive, the egg will be planted squarely on Layton’s face.
  • As for Ralph Goodale, I find it quite implausible that he was involved in this alleged leak, but I don’t feel too sorry for him. Given his repeated, incompetent meddling with the income trust sector, one might call it retributive justice if a baseless scandal broke loose and bit him on the butt.

Making a Minority Government Work

January 24, 2006

Here’s a novel (I hope) idea for how to proceed in cases of minority government. But first, why might we need this?

After 18 months of Liberal-led minority government in Canada, flaws in the current setup have become quite evident. Let’s list some of the worst:

  • A marginal “tail” in parliament (in this case, the NDP) has the power to “wag the dog”, imposing their policies rather undemocratically.
  • The governing party (in the case, the Liberals) was able to delay an official vote of confidence for months, in the process ignoring several votes tantamount to confidence, on technicalities at best. As a consequence, a disfunctional parliament can drag on with wrangling replacing accomplishment, all just to extend a term in power, and perhaps try to time an election advantageously.
  • The governing party can get away with bribery-type schemes to induce opposition members to “cross the aisle” (e.g., Belinda Stronach’s 15 minutes of “non-political” fame and ministry).

So how could such problems be avoided, or significantly minimized?

The basic idea is to take the leading parties and force them to cooperate, if at all possible. Easily said, but how? In detail:

  1. Start with the leading two parties, in terms of seats, and group them together. If they still don’t total a majority of seats, then group in the next leading party, and so on, stopping once a majority of seats is represented by the group. Call this group, say, the “Enforced Governing Coalition”, or “EGC”. This group would be expected to try to cooperate and form the government. In practice the EGC would usually consist of just two parties, and perhaps very rarely three.
  2. Now the key: Give every party in that group a loaded gun. Specifically, each party in the EGC should have the right, at any time of their own discretion, to declare non-confidence (or perhaps better, call it “non-cooperation”), dissolve parliament and force an election. (Call this a “parliamentary veto” if you will.)

For example, in the both the current and last parliaments, the Liberals and Conservatives would have formed the EGC, and either one could have ended parliament to force an election at any time they chose. When the NDP tried to call the Liberal’s shots, the Tories could have put a stop to it in that way.

Logically, this scheme can be viewed as an extension of the usual majority government, in which a single party forms the “EGC” and has the right to call an election. Conversely, a majority government is a special case of this more general scheme. Also note that, due to the arithmetic involved in selecting members of the EGC, such parties would have roughly comparable numbers of seats and thus be roughly equally deserving of their special “veto” power.

Next, consider the main benefits of such a system.

  • It would represent a democratic assignment of power. The most widely elected parties would run the government together as majority.
  • It could prevent a marginal party from wagging the dog. However, it doesn’t totally exclude the useful possibility of two parties, one in the EGC and one not, cooperating together on a issue, provided this is not seen as completely unacceptable by another member of the EGC.
  • The leading party could not hang onto power desperately or maliciously if things were not working, because the other member(s) of the EGC could pull the trigger.
  • The leading party would have a difficult time recruiting aisle-crossers. For, recruiting one would indicate the enforced coalition was not working, and would likely be seen as an act unscrupulous enough to warrant dissolving parliament.

A key question of course is: Would the EGC parties cooperate? I believe the answer is, Yes, they would be forced to cooperate to the greatest extent possible; because if they didn’t cooperate while the public perceived they could, the stalemate would lead to an unnecessary election. It might be amazing how well they’d each behave with the “veto gun pointed at their heads”. There would be some political poker alright, but you couldn’t bluff too often.

Note that it would be very dangerous for any EGC party to call an election frivolously, or even be perceived to have caused one unnecessarily. This would most likely be political suicide and damage their future position badly. Just look at all the hand-wringing that went on recently regarding a dreaded winter election. The public doesn’t want an unnecessary election, and if they felt one had been created, the party that caused it would be punished accordingly.

Another potential objection: Wouldn’t an EGC party just go ahead and call an election opportunisticaly if things developed such that they were pretty sure they would win a majority? Yes they would, but there’s nothing wrong with that. For if they win, it means they have the people’s support, and it is time to get on with a real majority government.

Alternatively, if the EGC really was at loggerheads and found they simply could not cooperate on anything constructive anymore, the onus would be on them to make this clear politically to the people, and then perhaps agree jointly to call an election and let voters have their say again. That would open the door to a potentially different balance of power.

The Conservatives’ Last Mile

January 21, 2006

Two days until the Canadian federal election on January 23. Polls now suggest a Conservative minority government, with their number of seats predicted to range from about 125 to 145, somewhat short of the 155 needed for a majority. Close, but not quite tantalizingly close.

But polls are only polls — what if the unexpected happens? The most likely unexpected outcome would surely be a Conservative majority. But, what could put the Tories over the top? The Liberals’ various forms of self-destruction combined with the Tories’ more calm centrist stance have brought things here, but I think those forces have run about as far as they can. Surely, even the flailing Liberals can’t accelerate themselves “on the march” (to oblivion) within the next two days, and the Conservatives have now more or less expressed their platform (aside from some devilish details, but who’s paying attention anyway?).

So, I think any final Tory push, if it happens, has to come from outside of the various parties; it has to come via decisions within voters themselves. And one thing they might be thinking is: “We’re sick of minority government, and all the unproductive wrangling, posturing and underhanded tricks that come with it. After 18 months of this, wouldn’t it be better to have a majority government?” With the conservatives perched near this, being the only viable possibility to achieve it, it’s realistic to conceive that a useful slice of votes could swing their way for the above reason, to “give them a chance and see what they can do?

A Tory majority may not happen (perhaps most likely not). And if it does, though we’ll never know for sure the final reasons that swayed voters, the above seems quite plausible from here.

Muddled Tory Re-investment Proviso Harbinger of Hell

January 17, 2006

Late last week, Canada’s Conservative party vaguely revealed, in a speech by leader Stephen Harper, a new tax proposal in their election platform. While details are as yet scant, it reportedly would allow deferral of tax on capital gains provided that proceeds of sale are re-invested within six months. Apart from the predictable opposition Liberal party gainsaying, most media reports I’ve seen (e.g., at take a rather benign and uncritial view of this proposal. In the January 14 National Post, J. Chevreau’s article at least mentions the possibility of “the devil being in the details”.

It is a bit risky to criticize something before all the details come out. Nevertheless, it is not hard to extrapolate at least roughly how a policy like this must work, given the stated goal and current rules on related matters of capital gain taxation. Doing this it appears all but certain that a very nasty devil must be hiding in the details.

First, I am entirely in favour of eliminating tax on capital gains. It’s my firm belief that taxing capital gains on equity securities is (in the long run) unjustifiable double taxation, and is entirely inconsistent with the elimination of double taxation of dividends. (More about this well below.)

What bothers me deeply about the proposal is its proviso “subject to re-investment within six months”. Apparently no details have yet been given on how this would work, but a reasonable guess might be something like this:

1 When capital property (stock, bond, fund unit, real estate, etc.) is sold at a gain, the proceeds go into a “notional cash account” and bring with them a cost base equal to that of the property sold. This cost base is averaged in with any pre-existing cost base for money already in the notional account (much like current identical property rules).

2 When new property is purchased (“re-investment”), one has the option of allocating all, or part, of its purchase price with money from the notional account, and pro-rating the cost base of that money into the purchase’s cost base.

3 Six months after any money enters the notional account, that amount of money is reduced by any amounts allocated to re-investment as above, and the remainder is then deleted from the notional account, whose cost base is then re-calculated to reflect the deletion. The capital gain originating from the original sale which created the deleted funds would be taxed as currently.

This is clearly an utter bureaucratic and accounting nightmare. A number of problems are immediately seen, the most significant one of which I list first:

* The cost base of any single property could depend upon ALL of the other properties one had ever sold previously (anytime after the proviso came into effect). I.e., the effects depend globally on one’s investments, and can propagate forward indefinitely!

* Tracking the evolution of the notional cash account and its attendant cost base, as described above, is an onerous task. Most Canadians today have enough trouble calculating capital gains under present rules. Keeping track of the above would daunt almost anyone. Also, no brokerage or fund company could do it, because they don’t know about all your property transactions. So people would either not do it and gain no benefit, do it themselves and make a mess of it and constantly revise their tax returns, or go to accountants, who would be very happy indeed, and whose fees would eliminate any benefits of tax deferral.

* Similarly, can you imagine a CRA tax audit in the far future, where you would have to document and explain your entire capital property activity’s history over prior decades just to justify the capital gain on a single security that was sold without re-investment?!

* If property is sold in November or December, the six month period expires after the corresponding tax return is due on April 30. Thus one might not even know by tax time whether the proceeds have been re-invested, yet one has to decide whether to declare a taxable gain or not.

* If bonds are eligible re-investment options, this leaves open the possibility of short term bonds, money market instruments or money market funds too. But if you can “re-invest” in such short term products then, effectively, the six month period could be extended forward indefinitely.

* If a capital gain is transferred from a stock to a bond via re-investment, and the bond is held to maturity, is the capital gain thus converted into interest? One might expect this would be the default behaviour — a punitive result since interest is taxed at the highest rate.

Given such problems (and there must be many more), it is clear the six month re-investment proviso, or any similar thing, is an absolutely untenable disaster with onerous accounting and legislative special casing consequences. What should be done instead is very simple: phase out capital gains taxes by reducing the inclusion rate from 50% to 0% in a timely and orderly manner.

All of this makes me wonder if, in fact, the Tories really want to just eliminate the capital gains tax entirely (as should properly be done), and that they are using the proviso as a temporary political smokescreen to deflect opposition criticism before the election.

Returning briefly to why taxing capital gains on securities is undesirable: For stocks, capital gains are driven by two factors: corporate net earnings and investor sentiment; but the sentiment factor is bounded and averages out over time, while corporate earnings are already taxed, so taxing the stock gains they produce is duplicate taxation. As for bonds, their prices are determined by interest rates, and do not “grow to the sky” since interest rates tend to remain bounded from below. Hence taxing bond capital gains is, in the long run, also a horribly inefficient and counter-productive exercise for the CRA to engage in.

Unfortunately, some of those most knowledgeable might not be motivated to speak out against the Tories’ misguided re-investment proviso. Not accountants, who stand to benefit. Not pension funds, who are unaffected. Mutual fund companies may not like the tax cut in any form, as it would help investors flee poorly performing managed funds. Investors need to raise a firestorm of criticism before the oncoming train runs over them.