Category: Accounting tips

When the wildfires started again, early, in California President Trump blamed the state for not raking enough. ‘The forest is a mess,’ he said. Maybe so. But the region just went through seven years of drought. Meanwhile July was the hottest month, ever, for the Earth. The last five years have been the hottest five in recorded history.

Dorothy and I were chatting about weather on the weekend. It’s snowed in Ontario and been plus 15 in Nova Scotia. Weirdness for November. The discussion moved into our lives, as we’re the same age. When we were born 2.3 billion people lived. Now the population is 7.7 billion. Same planet, 235% more humans.

Since we were married in 1971 (‘Brown Sugar’, ‘Riders on the Storm’, ‘Imagine’) the number of wild animals has declined 60%. After those 48 years there are three billion fewer birds. Nineteen species alone have lost 50 million members. Over the course of history up to 5 species of creatures a year have gone extinct. That’s now has risen to several dozen – a day. Insect mass is falling 2.5% annually. At that rate, in a century, there’ll be none. No natural plant pollination.

The above, as far as I can ascertain, is fact.

Now, has the climate changed because of people, or because of God? Is it actually altered, or just different weather? What, if anything, can be done about it? What happens when there are ten billion people? Or will tech changes allow infinite growth?

The preponderance of science backs the theory people have changed the planet. Predictions are dire. They’ve spawned climate strikes, enviro warriors like little Greta, Trudeau carbon taxes, the EV craze and angst in Alberta. The debate has hardened. Polls show most people believe there’s a climate problem, while a loud minority cry it’s a hoax. Currently the most powerful single man on the planet is in the latter camp. As a result, the global emissions that science blames for climate change largely continue.

People having babies take a leap of faith, of course. The world in thirty or fifty years could be one of dramatically altered weather, rising sea levels, more storms, impacted agriculture and big economic consequences causing wide population shifts and mass migration. Or, on the other hand, nothing will change. Parents need to decide – if they even think about it.

Research suggests climate change will increase the wealth divide. Developing countries with denser populations and more limited resources in areas where temperature may rise the most will be zonked. Rich western nations may do better. It’s a recipe for conflict. The OECD says climate change will reduce the global economy by between 2% and 10% in the next three decades. To put that in context, the 2008-9 economic crash which almost ushered in a deep recession saw a 4.2% drop in America’s GDP.

Well this post is not written to tell you that man-man climate change is real. Or that it’s not just weather. Or suggest you don’t have babies. Nor whether you should believe Greta, the United Nations and most scientists, or Donald Trump and all the people in the comments section below. It merely seems like prudent risk management to consider that the years you have until retirement, or in it, or the lives of your children, could be a lot different. Blackrock, the giant financial outfit, says almost $4 trillion in US bonds could be impacted by a changing climate and the impact on cities like New York.

One of the major hits could involve mortgages. The Fed Bank of SF says long-term (30-year) home loans could simply be unavailable in large regions. Lenders are reassessing the risk in holding real estate as security in areas increasingly at risk for wildfires, floods, violent storms, local economic disruption or drought. In a conference call Friday the bank detailed the risks of an evolving planet. In some places, it said, there will not be a real estate market at all.

“The result: Entire neighborhoods would empty out, leaving cities unable to shore up their crumbling roads and bridges just as severe weather events become more extreme and more frequent. Home values would fall, potentially depleting the budgets of counties and states. For most people, being unable to get a mortgage in a given neighborhood would rule it out as a place to live. But population flight is a best-case scenario when it comes to the financial system.

“If banks don’t recognize the danger of flood risk and keep lending only to have flooded homeowners default on their mortgages, the events could lead to a cascade of negative events akin to the housing collapse in 2008, which set off the worst recession in 70 years.”

Well, as you know, when the US real estate market tanked the global economy faltered. Governments went into the red zone. Interest rates tanked. Debt exploded. Unemployment spiked. Corporations were bailed out to save jobs. That was a temporary event. Could we deal with a permanent one?

Just a thought, as we recall the stunning sacrifices of past generations to save the world.

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By Guest Blogger Ryan Lewenza

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Today I’m going to cover the controversial economic theory know as trickle-down economics. I can hear the yawns already so go top-up your coffees.

For macroeconomic theory there are two main schools of thoughts. First is demand-side economics, which was popularized by US economist John Maynard Keynes. This theory posits that economic growth is driven by stimulating demand for products and services. For example, if an economy is slowing/contracting the government should increase spending (i.e. demand), which can help stimulate the economy.

The second theory is supply-side economics, which argues that increased production drives economic growth (see chart below). To help increase production governments should promote a business friendly environment by cutting taxes and regulations.

How Supply-Side Economics Works

Source: Investopedia

Trickle-down economics is a form of supply-side economics and supporters of this theory believe that targeted tax cuts for corporations and the wealthy will help to stimulate economic growth and ‘trickle down’ to the rest of society. This school of thought was advanced by Ronald Regan in the 80s, economists like Art Laffer, Bush II in the 2000s, and more recently by President Trump and the Republican party when they cut corporate and personal tax rates in 2018.

It’s my personal view that trickle-down economics is not very effective at stimulating long-term economic growth and, in fact, can have negative long-term consequences for an economy. Let me explain.

First, as is common with many economic theories, the theoretical premise of trickle-down economics doesn’t really work in real life, or the actual gains end up being far less than anticipated.

The father of trickle-down economics is economist Art Laffer. He believes that when taxes are high this provides a disincentive to work and make investments. Therefore, the government should lower taxes to stimulate the economy and that the stronger economic growth will result in higher government tax revenue thus the tax cuts ‘paying for themselves’. The problem with this is that it only works when tax rates are prohibitive (i.e. above 50%). Currently the highest marginal tax rate in the US is 37%, so given this, trickle-down economics is less effective than in say the 1930s when it was in the 60% range.

Let’s examine the most recent example of trickle-down economics – Trump’s tax cuts from 2018. President Trump, his economic council, and the Republican congress all said that by cutting the corporate tax rate that: 1) it will stimulate the economy so much that the US economy will grow 3-4%, and 2) the tax cuts will pay for themselves as a result of higher economic growth.

How did this pan out? Let’s review the chart of US GDP below.

The tax cut was implemented in Q1/18 and you can see there were a few decent quarters of growth following the tax cuts but this has since faded (last quarter growth was a lackluster 1.9% Q/Q). I calculated an average of quarterly GDP growth (blue line) to smooth out the trend and clearly growth has been decelerating since early 2018. Yes there are other factors at play that are weighing on the economy (e.g. Trump’s trade war) but, as you can see, the high growth predictions have fallen far short.

And we can do the same exercise looking back at Bush II tax cuts in 2000 and others and see the same effect. The net result is usually a short-term bounce in growth, but the targeted tax cuts often don’t have any long-lasting positive effect.

US Economy Has Slowed Since the Tax Cut in 2018

Source: Bloomberg, Turner Investments

My second concern with trickle-down economics brings in another economic theory called ‘the marginal propensity to consume (MPC)’. Essentially, this theory tries to quantify how much people will spend if they receive higher income. The MPC tends to be higher for lower income levels, meaning that if a person earning $50,000/year receives a $1,000 bonus they are more likely to spend the $1,000 than someone earning say $200,000/year. Taken to the extreme how many yachts can Jeff Bezos buy if his tax rate is lowered? The MPC theory suggests lowering taxes on lower income levels will have a larger impact on the overall economy than cutting taxes on higher income earners.

Third, is the impact on government tax revenues and deficits. This is my big beef with trickle-down economics. Over and over again we hear ‘the tax cuts will pay for themselves’, however, the reality is far different. It’s real simple. Due to the lower tax rates and the lower-than-predicted economic growth rates, government tax revenues decline and deficits often spiral. This is exactly what we’re seeing in the US right now. The US deficit is going to hit US$1 trillion this year, and this is during a period of positive economic growth. Just imagine what it will look like during the next downturn.

US Deficit to Hit $1 Trillion This Year

Source: Bloomberg, Turner Investments

Finally, a strong argument could be made that trickle-down economics has contributed to the rising income inequality that we’ve seen over the last few decades. For example, the top 1% earners currently take home 21% of all income earned in the US versus 10% in the early 1980s. I believe this is contributing to much of the angst and polarization we are seeing in the US and the rise in populism.

So there you have it. I’ve laid out my concerns with trickle-down economics and why I’m not a proponent of this economic theory. Now to be clear, I’m not advocating we fleece the wealthy à la Senator Warren and recommending tax cuts just for lower income individuals. This is basically our PM’s current approach. Instead I believe that tax rates are too high for all Canadians, and that personal tax rates should be lowered across the board. For example, currently the highest marginal tax rate for Ontario residents is 53%, and like Art Laffer, I believe that when tax rates are this high it does provide a disincentive to working and investing. But where I diverge is that cutting tax rates just for the wealthy and corporations that it’s unlikely to ‘trickle down’ and lead to prosperity for everyone as they profess it will.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

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Did the feds lie to us prior to the election?

Hmm. Conspiracy stuff. Conservative click bait. But it’s an interesting question. The job numbers for September were terrific. Ottawa announced the creation of 135,000 new positions in the two months leading up to the October vote.

Then, pffft.

Last month the country actually shed jobs (when economists expected 15,000 more). But that’s just the half of it. Over 40,000 people lost their month in manufacturing and construction. More than 16,000 full-time employees with benefits were replaced by 14,000 part-timers. The biggest areas of job gains – government (20,000) and the real estate/finance biz (18,000).  Great. More civil servants and realtors.

Now, in fairness, the monthly jobs stats are as predictable as this blog. And wage gains were pretty good at more than 4%. But it sure makes an old dog suspicious.

By the way 66% of people voted on October 21st. Of those 33% (5.9 million) picked the Libs and 34.3% went for the Cons (6.1 million). So the T2 gang formed government with the support of 22% of the citizens and won 36 more seats. Can you see why Mr. Trudeau dropped his promise for electoral reform? And why Alberta’s pissed?

Okay, on to something happier: Mr. Bond Market.

In case your spouse asked you during an intimate moment this morning, “Yes, but how big is the bond market, lover” here’s the answer. In the US it’s $10 trillion bigger than stocks. Trading is huge – $700 billion or more a day. And debt just keeps growing, as you know, with governments constantly issuing new bonds. So small changes can have big implications everywhere.

Earlier this week we told you the recession had been called off. Yay. Better-than-expected corporate profits. Good US jobs numbers (unlike ours). A steady-eddy Fed report. Easing of US-China trade tensions. The potential of tariffs being rolled back. A second term for pro-business Trump.

All of that has propelled stocks to new heights. The highs are higher. The lows are higher. Money is flowing from the margins to the centre. Bond prices have tanked as yields surge. Preferreds up. Gold plopped. No need for ‘safe haven’ stuff when the party’s all equities. And while the quixotic president could take the punchbowl away with a single Tweet, the odds are he won’t. Or if he does, he’ll pivot back. The man is obsessed now with 2020.

Remember the inverted yield curve? How could you forget? That’s when the amount of interest paid by short-term debt (of a few months, for example) is higher than the yield on long stuff (a decade or more). It shows Mr. B. Market is expecting future growth to dissipate, inflation to crash and the economy contract. Last summer it was all the talk as the amount of interest paid by 10-year US Treasuries plunged to 1.4%, sending bond prices surging. Money coursed from stocks to bonds. The doomers flooded into the comments section. Guts everywhere.

Now it’s all changed. On Thursday the biggest jump in yields of the Trump presidency took place, and that 10-year note is again near the 2% level. In the bond world, that’s big. The signal now is not for recession, but growth.

The thinking is that the Fed, in raising rates nine times, might have been a little too frisky in its monetary policy. So when the US economy staggered a bit (and as Trump sharpened the trade war) the central bankers backed off. Three rate cuts have ensued, and the expectation is America may be achieving that mythical ‘soft landing.’ That’s when an economy cools and stabilizes after a period of growth, but avoids crashing into a job-killing crater. No smoky hole in the ground. Instead, a safe descent.

So, new records this week. Thus far in 2019 the Dow is ahead 18%. The S&P 500 is up 23%. Bay Street has added 17%. A balanced and diversified portfolio has plumped 10%, and with far less volatility.

Anything could happen to throw the numbers off. But for investors this has been a helluva year. Now that the bottom has been made for interest rates there’s more certainty about what lies ahead. At least in the States.

Four years from now there will still be a President Trump. But a Prime Minister Trudeau?

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So it happened this week.

‘Ok Boomer’ appeared in the comments section. It was a defining moment.

As noted here a day ago, we’re now in the TikTok age. This is beyond Facebook. Past Twitter or Whatsapp. Way after Instagram. Dominated by teenagers and twentysomethings, it hints at where we’re headed. And, apparently, we’re doomed. Watch for 30 minutes and see if you can still walk straight.

Generations have always clashed, but lately there’s a huge political and financial element to the friction between the Boomers and everybody who’s come afterwards. It’s been encapsulated in the ‘Ok Boomer’ phrase, which is meant to be dismissive, disrespectful, patronizing and damning. Because being a Boomer is bad. Is that you? Then be ashamed.

Why?

Simple. Boomers stand accused of screwing up everything. The climate. The economy. The future. People in this cohort made houses too expensive to afford. They created wealth inequality and the 99%-1% divide. They gave the world Donald Trump. They stole all the good jobs and they won’t give them back.  And, above all, they grew up in a time of inflation, expansion and opportunity, while leaving behind deflation, contraction and debris. Whatever’s wrong is likely a Boomer creation.

Now, full disclosure: this pathetic blog has dabbled in its own share of ageism. After all, it’s fun ridiculing moisters with their whiskers, tats, vape pens, wrinkled shirts, house lust, Drake and reliance on mom. But wrinklies are equally ridiculed, especially those crusty people who’ve gone  through six or seven prosperous decades and think the world owes them something. As for the GenX mushy middle, well, God help you.

The ‘Ok Boomer’ thing went viral recently when a Green Party MP in New Zealand hurled it at a heckler during her speech in the legislature. Don’t ask me why. It’s an Internet thing. Anyway, happened. Then some US radio jock tweeted this, and it was war:

“Boomer’ is the n-word of ageism. Being hip and flip does not make bigotry ok, nor is a derisive epithet acceptable because it is now.”

Little Greta Thunberg, the climate change warrior, epitomizes the anti-old movement, since she has pitted herself against the elites – corporations, governments, the United Nations. All of those are not dominated by Mills, but their parents and grandparents. Meanwhile the wealth divide has yawned ever larger and in Canada’s big cities this is epitomized by property. The Boomers are loaded with it. The kids are struggling to afford rent. Resentment has soared along with education and expectations. A BA was an accomplishment for a boomer. Today it’s equivalent to a high school education. Adulthood has been pushed back as years in school augment.

‘Education, not experience,’ is the new demand. And there’s no doubt those with MAs, MBAs or multiple engineering degrees deeply resent managers with a sliver of their formal training but decades of practical learning.

Millennials believe parents lucked into steady jobs, pensions, houses, income security and now retirement. For the newer generation careers have disappeared in a gig economy, debt is a fact of life and real estate elusive, while society itself looks unsustainable. How can so few people possess so much while most go wanting? How can the spectre of climate disaster be ignored? Hasn’t capitalism failed when wealthy nations borrow capriciously against the future?

Good questions. The world’s imperfect. But a big Boomer die-off won’t change that. Millennial values don’t seem that different from those of their folks – they want a house, babies, an income and early retirement. Odds are two decades from now ‘Ok Millennial’ will be the new n-word phrase of ageism.

But one thing is true: the nationalism, populism and fake patriotism that Brexit or MAGA embody is entirely a creation of the Boomer generation. With hard borders, trade barriers, cultural intolerance and a growth-at-all-costs mentality it’s a generational attempt to go backwards in time to a homogenous era when a man could afford a house, wife, family and cottage on one wage. When nobody cared what went on in China or San Salvador, and immigrants were supposed to be poor.

Now, a lot of old people have lost their way, fearing the very globalism, freer borders, technology and flexibility that brings opportunity to well-educated, mobile, motivated kids. Cutting the UK off from the EU, for example, is a crime against the young. Just like opening oil drilling in protected areas or rolling back climate accords.

Well, the war’s just started, methinks. And the more I know about it, the more I like dogs.

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Was it just days ago that deplorables in the steerage section guffawed the suggestion rates might be going up? No respect. The beatings, as they say, will therefore continue until morale improves.

Well, guess what? Everything may be changing. And your hero, Trump the Munificent, is the guy to blame.

Forget the inverted yield curve. Forget the recession. Forget a stock market correction. We’re goin’ to Mars with Elon and Donald. Oh, and that Xi dude. Money is on the move. Out of bonds. Into equities. Risk on.

As you know, that sexy US Commerce Secretary, Wilbur Ross, has indicated ‘phase one’ of a US-China trade deal is nearly ready to ink. Expect a big signing ceremony. Washington is letting tech companies deal with Huawei again. Beijing will be Hoovering up a mess of American agricultural products (including ours). Tariffs slated to become effective next month will be waived. This is the beginning of a pre-2020 electoral charm offensive the American president will use to ensure roaring markets, full employment and steady GDP growth into next year.

Assets are responding. Naturally. This is a big deal for the global economy, ensuring more growth, less protectionism, reduced trading costs, enhanced profitability – and no recession. In reaction the yield curve is flaccid no longer, but stiffening nicely.

Says one Wall Street analyst: “Brexit, impeachment, budget deficit, lack of a budget — none of those things are affecting the market at this point. … How quickly you resumed higher rates and how quickly the curve is steepening out tells me the trend is changing, and we’re moving to a very large trend higher in interest rates.”

Already happening. Bond yields have moved up since the trade announcement. Meanwhile the Fed – although it nipped its key rate another quarter point just days ago – clearly signaled it wants to pause. The cuts so far (three of them) were insurance against a potential slowing of the economy if the trade war continued. Now, if Ross is truthy, the insurance is not required. In fact more economic growth, more inflation, lower employment, wage demands and record equity market levels may lead to a Fed tightening. As stated here a few days ago, this will also make our guys at the Bank of Beavers look like clairvoyants for having resisted the urge to make money cheaper.

It means US 10-year bonds, which plunged in yield to the 1.4% level during the summer (lower than what short-term debt was paying – hence the ‘inverted’ yield) are on their way back to the 2% range. Now add in the solid jobs gains the US announced last week – despite the big GM strike – and it shows the economy is alive and kicking. This even has oil ticking higher, as Mr. Market looks at the America-China deal as a big unwinding of the populism and nationalism that just months ago seemed dire.

Sorry, Trumpers. Your guy just pivoted. But we knew he would.

Anyway, whazzit mean?

Well, CBs never really wanted to reduce rates, but the Trump-Xi war scared them into it. The bankers would love to have the cost of money normalize so debt growth can be contained while giving them real ammo to deal with the next recession. Rates are too close to zero and need to increase simply in the name of risk management. (Dropping them adds stimulus, and is the CBs’ main monetary tool for shortening and shallowing contractions. Like in 2009.)

Rates will rise, not fall, if protectionist sentiment gives way again to trade deals. The forces of globalism will win, since human wealth depends on its success. MAGA, Brexit, Wexit etc. are fun attempts to blow stuff up and see what happens, but they’ll be swept asunder by corporate internationalism. You think you can stand in the way of Jeff Bezos? Good luck with that.

Anyway, if you’re gambling on rate declines by borrowing short or with a variable-rate loan, this might not end well. Five-year fixed-rate mortgages are incredibly cheap at 2.5-3% and provide a lot of security.

But how about a 10-year mortgage? There was an interesting argument in favour of the decade-loan loan published on one of the mortgage-humping sites this week (RateSpy). The difference between a fiver and a ten is so small at the moment (less than half a point) that this is a very viable option for anyone wanting to know what they’ll be having for breakfast in 2028. It’s worth noting, as well, that 10-year mortgages under the Canada Interest Act become open loans after five years. They can be paid off at any time in the second half of their lives with a simple three-month interest penalty.

The downside of a 10-year is you’ll pay a bit of a premium for the first half over a conventional five-year loan. But you’ve purchased protection for the next five. There’s little doubt, when you think about it, that rates will be higher in the future – since we’ve been sitting at historic lows for most of a decade. More global growth is a certainty. Technological advance is guaranteed. And huge sums will be required over the next decade to deal with rapidly-changing demographics, the AI revolution and, yeah, climate change. If you doubt where we’re headed, just spend tonight watching TikTok. Your life will change.

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FOMO. Fear of Missing Out. It’s almost – but not quite – as powerful as fear. Somewhere between sex and a chocolate smoothie. With sprinkles.

So yesterday we talked about financial FOMO. It looks like markets are melting up, with more new highs coming, a big Santa rally on the way putting 2019 in the record books as a mudda of a year for investors. Now that the trade war’s ending, FOMO is sucking in billions. Maybe trillions.

But, whoa, is the same now happening to Canadian real estate? While Americans stuff their 401k retirement plans with equity-heavy ETFs, this nation of beavers is once again falling in love with bricks and mortgages. That’s right – apparently we never learn.

In delusional Vancouver the market is rising above the dross and penury of a socialist, tax-hungry government with October sales up a riveting 45% from last year. This is even 10% ahead of the decade-long average, and notable since a massive 20% tax has all but locked foreign buyers out of the market. (Maybe it was us all along. Imagine that.)

Detached sales zipped higher by 47% to average more than $1.4 million. Condo sales surged 40% and average $652,000. Overall listings fell from year-ago levels by 16%. So, more demand and less supply pressures prices. The MLS composite Frankenumber was down 6.4% to just under a million (an improvement). Detacheds grew 7.5% while condos were 6% less than last October. After fleeing more expensive properties for the last two years, money is flowing back in. The sales-to-active listings ratio for single homes has effectively doubled.

Now, the GTA seems similarly afflicted. Relieved realtors there report a 14% jump in deals last month and, as in Vancouver, a plop in listings. That pushed the average price ahead almost 6%, which was the fastest rate of growth in two years. The average property (houses, condos etc.) is $852,000 – fifty grand more than last autumn.

This means we’re almost back to the mid-2017 price record, which was the result of the FOMO Panic of 2016. Remember that? People made offers on houses they just drove past and never entered. Realtors demanded, and received, certified cheques for $100,000 when offers were presented. Buyers didn’t even look at anything with a condition attached. And bidding wars were the norm.

Well, guess what? They’re back. So is emotional buying. Plus the fear that anyone not jumping in now will never be an owner with the privilege of making monster mortgage and property tax payments.

Why?

First, mortgages are still cheap. Five-year money is available in the 2.5% range, which is insane when inflation’s 2%. Even though the Bank of Canada wisely held off more rate cuts, lenders are aggressively competing for market share. Because Canadians have no self-discipline, of course, and can’t swallow enough debt, this is too tasty to resist.

Second, we just went through a federal election where subsidizing homeowners and buyers was a central theme. The triumphant Libs have goosed the RRSP Home Buyer’s Plan, will bring in green reno subsidies, and are inflating the shared-equity mortgage plan to included houses worth up to $800,000 in the Bubble Cities. The message was sent, loud and clear: the government wants you to be enslaved and immobilized by borrowing instead of dangerously free and unpredictable. Apparently it’s working.

The risk here is obvious. We’re over-extended already. Mortgage borrowing is rising. Half of people have little or nothing left at the end of the month. Never before have so many been retiring with unpaid mortgages. HELOC and reverse mortgage debt sits at record levels. Dependency on the paltry CPP is rising fast. The savings rate is a disgrace, and a fraction of that in the US.

This is what FOMO does. When augmented by government actions the result is houses that are even harder to afford, with loans even bigger. The more people spend on real estate, the less they can invest for their financial futures. And, down the road, we all need cash flow more than a paid-off house.

But what of financial assets? Does FOMO not inflate them, too?

You bet. That’s why smart people always hedge their bets with balanced assets and lower risk using ETFs, for example, rather than buying stocks. This blog has prattled on about that for years. And been correct.

In a perfect world everyone would have a house and stuffed investment accounts. That’s won’t happen, which is why the Rule of 90 makes sense. Buy real estate if you need it. Use cheap money to get it. But still feed your TFSA, retirement or non-reg account. Never be embarrassed or demeaned as a renter. Shun greed. Man up to fear. But chocolate’s okay. And that sex stuff, too.

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Because it’s tiring being pissed off and victimized all day, let’s move on from Wexit. Alberta will not leave Canada, of course. Neither that flat province next door. Nor Quebec. There’s simply no economic scenario in which people don’t get incredibly poorer by carving a country up. And the US will never absorb our sore bits.

Anyway, we have the formula for political turmoil. Liz May just threw in the towel. Young Andy Scheer has the PCers sharpening their knives. T2 is damaged goods. The Bloc dude is looking strong, but regional, and Jag wisely just disappeared. Mexico again, or something. What a bunch.

So let’s drop politics and focus on money. Way less contentious. Unless you’re a wuss.

One professional wuss I know is a financial advisor who has been sitting on his clients’ money for three years, “because things are just so expensive.” He believes the headlines about inverted yield curves, the inevitability of a recession (some day) and reads Debbie Downers like the permanently scared David Rosenberg. He does not invest client money, while still taking a fee to sit on it, and calls it caution. Meanwhile the world moves on. New record highs in 2019. And no clouds in the sky.

There’s a golden rule worth remembering. Don’t bail when records are being made. Especially lots of them. So far this year the S&P 500 is ahead 22%. Europe has gained 15%. Bay Street has added 16.5%. China’s up 9%. The Dow and Nasdaq at record levels. Best performance in six years. And reason to believe there’s more to come.

Why?

As this pathetic but well-endowed blog told you, we are getting a US-China trade deal. Yes, the war will be over. Or at least truced. Trump may be an unpredictable, quixotic, egocentric boor of a guy, but he’s also a political animal. No way he’s going into the 2020 election without a China deal, record low unemployment and record market indices. That’s his plan.

This week Commerce Secretary Wilbur Ross said as much. There will be a ‘phase one’ trade deal with Beijing this month. The signing ceremony will be on US soil. And Washington is about to green-light licenses allowing American companies to sell to the Chinese tech giant and much vilified Huawei.

Stocks went up. Bonds went back down. Yields are on the rise again after the Fed signaled rate cuts are pretty much done. Meanwhile corporate earnings have been much stronger than expected, even if the McD boss was diddling an employee. Saudi Arabia is about to unleash a monster IPO as oil giant Aramco stock hits markets next month. And we’re now into the strongest six-month period of the year (traditionally) for financial markets.

Meanwhile, as mentioned, Mr. Market has decided that despite his many warts, Trump will be president for another four years. The Dems have drifted too far left, are scaring people with talk of wealth taxes, and Trump’s been solidifying, energizing and strengthening his base. In fact the whole impeachment thing likely plays into his us-and-them, drain-de-swamp narrative. Of course a 50-year-low unemployment number doesn’t hurt.

So, a balanced, diversified, liquid, boring, all-ETFs-no-stocks portfolio is up double digits in 2019. Those who sold into the storm at the end of 2018 out of fear were their own worst enemy. Advisors afraid to invest have missed predictable gains. And once again we have evidence that timing markets simply doesn’t work. The best strategy is to invest when you have the money, and stay invested until you need to spend it.

Finally, while we little morally-superior beavers love to dis Trump (it’s not hard) he’s saved people from themselves. Canadians today carry more debt than ever, while saving desperately little. Personal finances are piteous and almost half of families have $200 or less left at the end of the month. A recession now would be an economic disaster, since many families have nothing in reserve. House-rich and asset-poor, living in a condo-and-cannabis economy, the last thing people need is a crumbling job market.

The orange guy, it seems, has pushed back that inevitable downturn (after ten years of expansion). It’s a reprieve. Make the most of it. You still don’t need to like him.

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A few days ago this comment was posted to this pathetic blog. I let it stand.

Wifey and I are moving out of Liberal London. Offers are now in play. Might as well cash out now with this market as hot as it is here. Moving to a more Conservative WASP land. There is too much diversity, Liberalism, cultural clashes and societal fracturing to stay here anymore. We don’t like it here and therefore we are leaving!

Great reading your posts Garth but life is too short to stay around an area that is experimenting with cultural diversity that is clearly failing. When governments flood a city with people that are too different from one another then the natives leave. We are tribal creatures and we want to be around those who are like us who share our culture and values! Governments cannot change that……EVER! Inclusion, multiculturalism, diversity, identity politics………..DO NOT WORK! All this accomplishes is making people leave the areas they were born in!

In response, this was emailed to me on the weekend:

Is this crap adding anything to your blog? In the short two or three years I’ve been reading comments there have been so many good voices that have gone silent. I think it is crap like this that causes folks like them to go away. Pretty soon all you get is folks like that here. Surely that isn’t what you want?

Saturday hundreds of people gathered in Edmonton to promote the separation of Alberta from Canada. They trashed the feds. The Liberals. The East. Quebec. The GTA and Montreal. Strangers. And the nation. At the front of the room organizers hung a Canadian flag upside-down, an international symbol of distress and disrespect.

What do the comments above have to do with Wexit – which in a dozen days has gone from smouldering discontent to the flames of rebellion?

Everything. Fuelled by social media and intense peer-to-peer communications channels that never existed before, the world is splintering. It’s at the heart of the debate here about nationalism vs globalism and populism vs elites, governments, central banks and mega-corps. Wexit, Brexit, Hong Kong, Catalonia, Trump and MAGA – they all flow from the same well.

The poster and ‘wifey’ above want out of a city they blame governments for changing – allowing “diversity, Liberalism, cultural clashes and societal fracturing” to come to their street. The yearning is for a more homogeneous place, populated by people like them. He admits it. “We are tribal creatures.” It’s at the essence of what’s now occurring in regions and entire countries, not just in a single family or in one hood in a lone city. We ignore it at peril.

The populist movement has an ugly side, of course. Brexit was fueled by growing anti-immigrant sentiment, and a feeling Britain was being ‘lost.’ Trump’s very first political speech called Mexicans ‘rapists and murderers,’ and one of his premier acts as president was a travel ban on predominately Muslim countries. Tribalism makes people want to be in the safety and familiarity of their group, to repel outsiders, especially when it’s melded with economic change and a feeling one group has of being screwed over by others.

Globalism, internationalism, economic free trade – it all developed in the name of efficiency, expansion, growth and prosperity. Borders cost money to get across. Markets that aren’t chopped up are easier to serve. One set of regs is better than a dozen. When capital and workers can move more easily, companies and economies evolve so value is added in the most sensible areas. Factories get built in Vietnam to make electronic bits cheaply so consumers in Calgary can buy smart phones at a fair price. Wal-Mart is stuffed with Chinese stuff people can afford.

The downside is that high-value-added places like Detroit or Oshawa lose low-value-added jobs like making hubcaps or TVs. Expensive defined-benefit corporate pensions disappear. Families need two wages where one used to suffice. Jobs drift offshore. And while the young growing up in a global world embrace the education, skills and risk to succeed, the old do not. They yearn for the past. Make my world great again.

So folks feel powerless. They see the wealth divide grow. They get outvoted in a larger pool – like the nation state – and feel it’s being controlled by others who do not share their values, beliefs, interests, goals, or pipelines.

Now they can communicate. Social media has changed everything. It’s why Trump tweets. Wexit or Brexit or MAGA supporters can talk to each other without any media filter, dissenting voices or moderating arguments. Movements grow fast that way, threading together those who would never otherwise connect. Suddenly there are enough of them to fill a hall in Edmonton or a thronged rally in Florida.

Well, Brexit has been a disaster. Alberta will never ‘leave’ Canada. Hong Kong is doomed. But Trump will likely be re-elected. Every instance of tribal thinking, of nationalist sentiment, is different. But they’re all economically destructive, leading to trade wars, harder borders, higher costs, inefficiencies, increased regulation, reduced profits, social conformity and more of a world now in the rear view mirror.

And that, apparently, is the point.

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  By Guest Blogger Doug Rowat

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I attended a presentation on the eSports industry a few weeks ago.

For those not familiar, eSports is professional video gaming. Guys (mostly) who used to play video games alone in their basement, still play video games alone in their basement, but now make some serious coin doing it. Apparently, more people watch (yes, WATCH) eSports than watch Major League Baseball. In a few years, I was told, eSports will eclipse the audience of the National Football League.

As I stared at their PowerPoint presentation showing various columns moving astronomically higher, I was reminded of how often I’ve seen the same presentation. Different metrics, different industries, but always the same charts dazzling the audience with breathtaking growth rates.

I could have been at a presentation on robotics, genomics, e-cigarettes, 3-D printing, solar power, cyber security, healthy lifestyle (avocados!), nanotechnology, blockchain, cannabis, online gambling, electric vehicles, self-driving vehicles, the circular economy, smart homes…and on and on. Years earlier it would have been presentations on the oil sands, rare earth metals, income trusts or China.

Last month, I had a client contact me suggesting that we invest in plant-based food companies (“huge growth”). And then, just a few days ago, I got this email from a start-up seeking, of course, moolah:

The company is raising $2m now and $4 million concurrent to a RTO [reverse takeover]. They’re cash flow positive, will be profitable in November and have great momentum as they continue to sign up school districts to facilitate the buying of tickets to local events such as football, basketball, prom, etc.

That’s right, this company’s business model is, in part, taking a cut of high-school prom ticket sales. Once again, the growth opportunity is spectacular.

So, there are literally waves upon waves of speculative, theme-based investment ideas. The pipeline is endless and all of these companies promise the same thing: mind-boggling growth.

Naturally, some of these niche, theme investments work out spectacularly well (for example, it turns out that the Internet IS a big deal). But many don’t, at least not so far. Here’s the bath (or round-trip) you might have taken in the past couple of years in robotics, 3-D printing or cannabis. Incidentally, I could have shown many more examples. An investment in nanotechnology, for instance, has become just that—nano—with most related ETFs and indices having been liquidated or discontinued in recent years.

Robotics: growth potential doesn’t mean investment returns

Source:Bloomberg; Global X Robotics & Artificial Intelligence ETF (BOTZ) 2-year price chart

3-D printing: growth potential doesn’t yield investment returns

Source: Bloomberg, 3D Printing ETF (PRNT) 2-year price chart

Cannabis: growth potential doesn’t equal investment returns

Source: Bloomberg, Horizons Marijuana Life Sciences Index ETF (HMMJ) 2-year price chart

The point is you can’t pretend to know which of these niche investments will fail or succeed, or certainly not how to correctly time all of them. And, if you were only drawn to the PowerPoint charts going up to the sky, you’d have put your money into all of them. But the amount of research effort required to truly discriminate the good from the bad is enormous and, even if the due diligence could be conducted thoroughly in every case, the timing risk would still remain incredibly high.

It’s much more practical to build a portfolio with diversified, high-quality assets positioned across many geographies and many industries. And, equally important, to hold assets that have long and readily available trading histories. An extensive trading history is one of the best ways to identify the long-term risk and determine inflection points. With a long trading history, volatility becomes more transparent and predictable, and entry points easier to establish.

So, was it kind of fun to sit in that eSports presentation and learn about what will be driving the attention and interest of 18-25 year olds who use terms like ganking, zerging and jungling? You bet.

But would I ever directly invest our clients’ money in eSports? Never. I’ve been burned by too many sexy growth charts. And with zero trading history, it’s a blind gamble.

To paraphrase Dwight Eisenhower: It’s good to be on the train of the future, but if your timing’s wrong, you’ll be lying on the tracks in front of it.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.

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What a contrast. In Calgary a major and storied Canadian energy company just proved money has no alliance. Encana changed its name, packed its bags, and self-identified as a US enterprise. The city’s commercial vacancy rate of 20% got a little worse.

In Washington Trump did a jig as the latest jobs numbers flowed in. Wow. Forecasts for 85,000 new hires were blown out of the water. Despite a strike by tens of thousands of GM workers, America added 128,000 new positions. Unemployment at 3.6% is still considered ‘full’ employment. Wages grew 3%. Upward revisions added 95,000 jobs to previous months. Black unemployment at a record low (5.4%). Economic growth is a respectable 1.9%. Consumer spending is plumping at almost 3%. Stock markets at record highs. The Fed’s on pause. Trump laughs at impeachment while preparing for a second term.

And Encana defects.

This was a message some people were trying to send during the election campaign which ended October 21st. Money has no patriotism. Whether it’s a company struggling in a high-overhead country more concerned with social spending than infrastructure or a doctor facing a 54% tax rate, the incentive to leave augments. When houses in Toronto and Vancouver cost seven figures and rents rage, employers are under constant pressure to goose salaries. The result is dangerous. Household debt climbs. Savings fall. People live on the edge. We end up with a condo-and-cannabis economy.

Now, drama aside, it’s clear our two countries are on divergent paths, and the dudes running Encanaa made a studied, deliberate choice. This is why that ridiculous idea of Wexit has gained traction in the last dozen days, and why the T2-Dipper gang in Ottawa may be in for a rocky path ahead.

The American jobs numbers are significant. They prove the Fed was right. No more rate cuts are required. They show if the US-China spat is solved, or even toned down, that economic growth can romp. Lots of new positions, increasing wages and stable labour force participation suggest that even in Year Ten of an economic recovery, things are juiced. And they point increasingly to a second Trump term. “As markets internalize that,” says analyst Ed Pennock, “they will move higher.”

Indeed, bond yields are falling. Bond prices are rising. Preferreds may be the buy of the decades. And equities are marching upward in a trajectory that promises more highs for the Dow, the S&P and even Bay Street. So far this year stock markets have returned double digits and could touch 20% by year’s end. Balanced, diversified, boring, lower-risk portfolios are up more than ten percent, and that Christmas slaughter of 2018 is a distant memory. Too bad for those wusses who turned paper declines into real ones a year ago or fled to the torpor of cash.

But, but, but. What about Mapleville?

Well, it seems clear we’re entering into a new phase of discord. The hairy, salivating beast of sovereignty has risen again with the rebirth of the Bloc Quebecois as a strong nationalist voice. The anger in oil country and environs has spawned the rise of Wexit and the Bloc Rednecois. The October election showed the fracturing of Canada along regional lines as well as the urban/rural split. It’s sad. But no surprise. Leaders roared around trying to suck off votes by giving people more social programs and government goodies instead of nation-building. None spoke about what binds us. It was all about bribes. And, as a people, we responded that way. Now we reap the result.

There’s little doubt the Libs will have adopt a coalition position to govern. Representation from the West will have to come through an unelected senator, or PMO staff. Maybe crusty Ralph Goodale will be the Trudeau chief of staff. Maybe even that lone NDP MP from Edmonton will find herself in cabinet (wearing a wire for Jag). Also pretty certain is the troubled future of young Andrew Scheer, now that Peter MacKay (and others) are gunning for him. Perhaps in Canada the Harper model of social conservativism is simply kaput. No northern Trump. Instead a return to the middle as the PC brand re-emerges.

Or, then again, we might just fly apart. The hippies and Dippers in BC. Heathens in the middle. Snowflake millennial metrosexuals in the GTA. Separatists and hockey players in Quebec. And, of course, Lunenburg.

Seriously, expect turmoil. And taxes. Canadians have just elected the most left-leaning set of politicians in its history to form government. Americans seem likely to embrace the opposite. And now they get Encana.

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