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July 17, 2015 | Home Country Bias

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

BABY ON BOARD modified

I thought this was an interesting blog comment yesterday:

Garth you sound like The American more and more. I am open to another man’s opinion. But I will not read your blog anymore with all your pro US and anti Canadian hyperbole. If you love them so much then GTFO.

While some anon hater was writing that, our dollar slipped below the 77-cent US market for the first time since the lights went out in 2009. Commodities (especially gold) lost more ground, pulling the TSX to a reasonable loss. The one-year return for Toronto stocks is negative, at -1%. In contrast, the 12-month return for the Dow is 9% and the S&P has increased 10.8%. The Nasdaq is ahead 21% year/year while being up almost 11% so far in 2015. And it’s only July.

Only a fool would not want a globally-diversified portfolio. After all, in Europe the French market has added 23% this year, outpacing the gain in England (6.7%) and even the German market’s advance of 19%. As mentioned a few days ago, the Chinese market – despite recently laying an egg – has returned 95% in the twelve months. Even stocks in poor deflationary Japan have given investors there a 19% goose so far this year.

Sadly, almost three-quarters of all Canadian investors have 100% of their assets in Canada, in Canadian assets, denominated in Canadian dollars. Not only have they taken a beating with a serious devaluation of the dollar (down over 3% in three months), but Canadian equity holdings have clearly lagged the rest of the world. Meanwhile a misguided monetary policy has kept interest rates in the ditch, heavily penalizing those who save their money and stuff it into interest-bearing investments.

It’s not anti-beaver to point these things out. Because we’re a small population rattling within a large country, living beyond our means and therefore dependent on exports and commodity values, if your whole portfolio’s made up of maple assets, risk is accentuated. Yeah, I know this is what [email protected] bank recommended – Canadian equity index funds, Canadian balanced funds, a nice Canadian bond fund, all topped off with a Canadian market-linked GIC – but that’s because the bank makes money from fees, not results.

It’s also not betraying our national ugly aquatic rodent, or even artery-murdering poutine, to point out we’ve all spent the last six years getting pickled in debt as we sell each other houses at ever-higher prices. The average property in 416 traded for $421,110 in the summer of 2009. This summer that number (houses and condos) is $682,264.

But while house prices increased 38%, and household debt doubled, incomes grew less than 12%. Six years after the GFC our dollar is at the same abysmal level, our trade deficit has rocketed higher, provinces and households are swimming in loans, we’ve added $200 billion to the national debt, and the central bank this week was forced to slash interest rates because of a recession.

And this is where you want to have all your money?

Seriously. There is more pain to come. Once the Fed starts to increase its rate, adding 1% per year for the next two, our currency will slump further. There is no doubt in my mind the Bank of Canada will be forced to reverse course and increase its overnight rate, starting some time in 2016. Meanwhile, as posted here yesterday, fixed-rate mortgage rates will be higher months earlier. Imagine what that will do to real estate. And there’s absolutely no reason on the horizon for oil prices to improve, as the world continues to be awash in surplus crude.

This is why a nicely-diversified portfolio would have just 17% Canadian exposure in its growth component, a touch over 20% US and about 18% international. It’s why you also want balance, with close to 20% in rate-reset preferreds which today pump out a 5% tax-reduced dividend, and will chug higher along with rates. (They’re also on sale at the moment.) Other components I have already discussed. Google it.

By the way, did you notice that inflation just popped? That’s what a cheap dollar brings. If you can live without lettuce, iPhones or a Harley, it doesn’t matter. But what a sad life that would be.

By the way, I love my country.

Why else would I do this every day?

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July 17th, 2015

Posted In: The Greater Fool

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