Best Bands of 2006-07

This has been an interesting and successful year; I graduated from university and obtained a great full-time job. Along the way, I’ve managed to discover some great new music. Here are the best artists I’ve found during the past year.

[01] Wishbone Ash, a four-man band from Devon, England, combines elements of progressive rock, pop, and the blues. Led by the talented, if underutilized, bassist and singer Martin Turner, Wishbone Ash is one of the most unjustly forgotten rock bands of the seventies. Ash features dual lead guitars, which allows them to create intricate, interlocking riffs and solos. The band has a diverse range of songs in its repertoire: in addition to a large number of catchy, well-written blues-based rock songs, their catalogue includes long, melodic jams (“Phoenix”, “Handy”), aggressive proto-metal anthems (“Warrior”, “Queen of Torture”) and peaceful, atmospheric ballads (“Lullaby”, “Sometime World”). I haven’t heard any of the band’s post-1970s material, but I’d strongly recommend Wishbone Ash’s classic period (self-titled debut through “There’s the Rub”) to fans of Led Zeppelin and Deep Purple.

[02] Focus, a four-man Dutch progressive rock band, composed some of the genre’s most elaborate and halcyon music. The quartet is best known for the truly unique hit single “Hocus Pocus”, which features a fast, heavy guitar riff and verses packed with incomprehensible whistling, yodeling and gibberish singing. However, the song’s energy and aggressiveness is atypical for Focus; most of their songs are peaceful, mellow and primarily instrumental. Most of the emphasis is on Thijs van Leer’s flute and organs, and Jan Akkeman’s guitar. The band’s compositions range from concise 2-minute songs to 26-minute epics. Mellifluous and sublime, Focus is recommended for fans of Camel and Pink Floyd.

[03] Hailing from Canterbury, England, the Soft Machine was one of the most daring and creative artists of the sixties. The band started as a quirky, psychedelic rock group that enhanced their catchy pop tunes with bizarre lyrics and creative, chaotic jams (“Hope for Happiness”; “Why Are We Sleeping?”). The band’s style changed dramatically with their aptly titled “Third” album, when they composed long, atonal jazz fusion pieces (“All White”; “Slightly All the Time”). This style persisted through the rest of their catalogue. It’s unfortunate that the band gave up writing pop tunes altogether, given how catchy and clever they were. Despite the band’s somewhat schizophrenic nature, they played pop, psychedelic and jazz fusion at a level that most bands could never hope to obtain. Recommended for fans of Pink Floyd (Syd Barrett era) and Miles Davis ("Bitches Brew” era).

[04] Colosseum was a British jazz/fusion band that wrote complex, lengthy instrumental pieces and (usually adequate, occasionally brilliant) pop songs. The band’s five members were all technically proficient (though none possessed elite talent); they used their considerable musical skills to perform dark, jazzy instrumental pieces. Colosseum’s biggest flaw was their inability to write catchy pop songs, which they attempted to play roughly as often as instrumentals. The majority of the band’s output is pleasant and enjoyable, but only a few songs stand out (“The Kettle”, “Walking in the Park”). Given their inconsistency, it’s not surprising that the band only released one classic album (“Valentyne Suite”), though there is more solid material in their catalogue if you’re patient enough to find it. Recommended for fans of Caravan or Cream; start with “Valentyne” and progress from there.

[05] Known for their unique combination of pop, classical, folk and progressive rock, Curved Air was an experimental British band that peaked in the seventies. The group is unique for several reasons. First, Curved Air is arguably the best prog rock band with a female singer (although the competition is not especially tough). Sonja Kristina Linwood has a pleasant voice and is able to change her style to suite the band’s eclectic repertoire. Second, the band is well-known due to Darryl Way’s extensive use of the electric violin. He used the instrument in lead and supporting roles, and demonstrated that the violin could be a significant asset to a progressive rock band. Third, Stewart Copeland, best known as the drummer for The Police, started his career with Curved Air. He appeared on two of their albums in the mid-seventies. Despite the band’s high potential, their career was marred by inconsistency, most likely due to frequent line-up changes and no clear direction or style. The band’s progressive influences are most prominent on songs like the complex “Marie Antoinette”, an epic song about the 18^th-century French ruler, and “Vivaldi”, where Way plays numerous lightning-fast violin riffs and solos. The band’s best pop songs include “Back Street Love”, “Woman on a One Night Stand” and “Day Breaks My Heart”. I’d recommend the album “Midnight Wire” for beginners; it’s one of the band’s least innovative, but features the best songwriting.

Other notable artists that I discovered this year include Khan (a melodic, jazzy Canterbury scene band), Queensryche (an American metal band with solid songwriting and a considerable progressive rock disposition) and Renaissance (an English folk-rock band with beautiful vocals and a strong classical influence).

I already liked jazz & fusion icon Miles Davis and metal band Iron Maiden a lot prior to this year. However, I’ve learned to appreciate their music even more during the past twleve months.

Inflation, Taxes, and Lousy Journalism

The Toronto Star recently featured an article that compared two financial strategies, namely paying off one’s mortgage versus maximizing RRSP contributions. The article provided a fairly generic analysis of the issue; however, towards the end, author Paul Brent presented a highly flawed and misleading quantitative example. The purpose of this short response is to explain the errors in Brent’s article and provide general tips on financial analysis.

The author’s scenario (see note 1) introduces us to a hypothetical 35-year-old Toronto resident who received a $10,000 windfall. He currently has a 5.5% rate mortgage with a $330,000 principal and a twenty-five year amortization period. The resident has a 35% marginal tax rate. The author compares the cash flow implications of a one-time excess mortgage payment to a one-time RRSP contribution (both in the amount of $10,000) (see note 2 & note 3).

Brent estimates that making a one-time mortgage payment will “save $25,000 over the lifetime of the mortgage” and will reduce the amortization period by 1.5 years. Based on the data provided, I estimate that lifetime mortgage payments would be reduced from $617K to $578K; this produces $39K in savings (actually quite a bit higher than Brent’s estimate). More problematically, Brent’s article is missing half the story.

One of the most fundamental principles of investment analysis is that long-term cash flows must be reduced (“discounted”). A dollar in the future is worth less than a dollar today for several reasons. First, due to inflation, the purchasing power of a dollar in the future is less than a dollar today. Second, since humans are generally risk-adverse, they must be compensated for the inherent risks in deferring use of their money. Therefore, due to factors including reduced purchasing power and human psychology, future amounts of money are inherently less valuable than current amounts.

To compare monetary values from different time periods, analysts look at the present value of future cash flows. The present value of a cash flow is the dollar amount from the future, translated into an equivalent amount today. For example, assuming 5% inflation compounded annually, $100 received ten years from now has a present value of approximately $61 ($100 / (1.05^5)).

The fundamental flaw in Brent’s article is that he fails to account for the corrosive power of inflation. While it is literally true that a one-time $10,000 mortgage payment will save a homeowner roughly $39K, most of these savings would occur more than a decade into the future. The benefits of lower mortgage payments in the future would be greatly reduced due to inflation. Assuming a 3% discount rate, the present value of the author’s proposed one-time $10,000 mortgage payment is just $19K. In other words, inflation erodes half of the estimated benefits of making an early mortgage payment. Failing to take inflation into account is sloppy and irresponsible because it greatly overstates the present value of savings.

Brent’s article is equally faulty when discussing the cash flow implications of a $10,000 RRSP contribution. He estimates that, given an 8% growth rate, the contribution would provide the taxpayer with an additional $50,000 of cash flow.

While it is literally true that the investment would grow by approximately that amount ($48K to be precise), Brent once again fails to account for inflation. Discounted at 3% (see note 4), the $48K increase in the investment is only worth $29K today. Inflation thus erodes roughly 40% of the growth.

Brent makes another critical error. He only considers the before-tax rate of return on the investment. The Canadian government taxes various kinds of investment income in different ways; failing to account for taxes could cause individuals to make poor investment decisions. All funds withdrawn from an RRSP are included in the taxpayer’s income (with a few exceptions, which are beyond the scope of this response). Assuming that the hypothetical taxpayer maintains a 35% marginal tax rate, his investment, adjusted to present value, is suddenly worth only $19K after tax.

Finally, the author does not suggest why an 8% RRSP growth rate is appropriate. Many bonds offer around a 4% return while Canada’s main stock market, the TSX, has grown at a compounded annual rate of about 12% over the past five years. The implicit assumption of a 50/50 split between debt and equity investments should have been explained clearly. Alternately, the author could have explained that a stronger preference for equity investments would make an RRSP contribution relatively more attractive than paying off the mortgage.

Brent’s article is faulty because he doesn’t account for two of the most fundamental problems investors deal with: inflation and taxes. By omitting two factors that significantly reduce investors’ true purchasing power, Brent is overstating the value of the benefits that taxpayers receive from following his advice. Promising taxpayers huge sums of savings that will never materialize due to inflation and taxes is misleading and dishonest.

I’d like to stress that I’m not offering any specific conclusions regarding the mortgage versus RRSP debate (because all of the numbers presented here are dependent on numerous case-specific assumptions). Also, non-financial factors should also be considered (i.e., a taxpayer who is debt-averse would be more likely to pay off his mortgage). Still, despite the inherent uncertainty in financial analysis, there are no excuses for the sloppy journalism present in the Toronto Star article.

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Several technical notes:

Note 1: Frank Wiginton, who developed the hypothetical scenario, deserves at least as much criticism as Brent.

Note 2: I'm still not sure how the author calculated a $25K savings. I'm fairly sure my calculation of $39K is correct.

Note 3: All of my calculations were done in Excel spreadsheets; I have not found a way to upload them here. If you wish to examine my spreadsheets or calculations, send me an e-mail.

Note 4: I am using a very conservative 3% discount rate. This reflects the Bank of Canada’s targeted inflation rate of 2% plus an additional 1% risk premium. Had I used a larger risk premium, the present value of Brent’s mortgage savings would have been reduced even further.