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August 5, 2015 | Could Be Better

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.

 

Here’s the thesis.

Discount it all you want. Ignore me. Believe your mom instead. Or [email protected] You can do what everyone else is – buying what’s going up (houses) and shunning what looks dodgy (equities, commodities). Or you can stop thinking with your pants, and go another way. Whatever. But this sure looks like one of those watershed times.

Here it is: the Canadian economy’s weak and getting weaker. BMO says it’s the worst situation in half a century, outside of disaster periods like 2008-9. There’ll be recessions in Alberta, Saskatchewan and on the Rock. The whole country might actually be in one, with GDP likely to grow for the entire year by only 1%.

Here’s a view of that.

GDP

The interesting point is that only once in our history has a federal election been called when the economy sucked this hard. That was in 1958, when John Diefenbaker buried Lester Pearson with the biggest majority ever. People were obviously in a mood.

Now you also know about the dollar. At 75 cents it’s collapsed 20% against the US currency over the last two years and (as I mentioned recently) is forecast by Oppenheimer to lose another 14%. While this is good for exports (our trade deficit was less of a disaster this week), it’s historically been tough on the governing party. Look here, from Bloomberg…

LOONIE PREDICTOR

Only twice before was an election called when the dollar was croaking. Both of those votes gave the opposition a massive win – for Brian Mulroney in 1984, and for Jean Chretien in 1993 (reducing the Conservatives to just two seats).

So part one of the thesis is that the Canadian economy will probably fall further in the next few months, and could well (if history means anything, plus the vitriol spewing from the steerage section of this blog) result in political instability. That, in turn, will create more economic trouble with the currency reacting negatively. Six months ago I did not believe it, but now I do. A dollar sub-70 cents is out there.

There are two additional reasons for this. First, commodity prices have collapsed and are back at 2008 levels. Poor growth numbers and a dangerous real estate market in China have tanked demand and spooked investors. This is obviously not great for Canada, especially since there’s a multi-year supply of surplus oil sloshing around in storage. Here’s a view of how commodity prices have collapsed, taking gold, oil and copper along for the ride…

COMMODITIES

Meanwhile, the US recovery continues and it looks certain American interest rates will start a long, slow ascent next month. In the last couple of days strong data on service sector growth and hawkish comments by a central banker have heightened expectations that the Fed will indeed pull the trigger in five weeks. Again, here’s a Bloomberg summary showing 52% of observers now counting on the September move…

RATE HIKE

So, there you go. Recessionary economy. Political uncertainty. Commodity tailspin. Higher US rates, leading to a stronger American dollar. This is why the loonie looks cooked. A dramatically lower dollar is inflationary, of course, and leads to higher consumer prices – just in time for winter and all those lettuce imports. (And did I mention what climate change has done to the California breadbasket?)

Historically, consumer spending has declined in Canada along with the dollar. But history ain’t much of a guide right now, because never before have households carried such epic levels of debt. If consumer prices ratchet higher as the currency falls, it’s hard to imagine spending will not be curtailed, leading to more economic fallout. More lost jobs. Especially if oil keeps sinking.

And recall the graph yesterday about the massive share of the economy that residential real estate occupies. This adds additional risk because given all of the above it’s illogical to believe sales and prices will continue their ascent. In fact, expect the opposite.

Conclusions:

  • Be happy you followed my advice and seriously reduced Canadian asset exposure.
  • Living in 416 or YVR, house-rich and indebted? Sell.
  • Always maintain a portion of your liquid assets in US$. I like about 20%.
  • Commodities will be too cheap to pass up. But not yet.
  • Tell your daughter you’re not financing her condo.
  • It’ll be a really lousy time to win this election. You were right. They’re all nuts.

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August 5th, 2015

Posted In: The Greater Fool

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