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August 21, 2015 | Get a Grip

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.

August 21st, 2015 — Book UpdatesE-mail this blog post to a friend


Is the world deflating? If so, what’s it mean for your family? You assets, your house?

The headlines at the end of the week were suggestive. Stock markets shedding two or three per cent in a day. Oil below forty bucks for the first time since 2009. The loonie in the 75-cent range. Weak growth in China. Apple, Twitter and other glam companies whacked. The first meaningful plop since 2011 getting a lot of attention.

Those who invest with their pants were selling. The confident ones were buying. Volatility jumped, and is almost 90% higher than a few weeks ago. That simply means trading volumes and prices have spiked, and adrenalin along with it. After stock prices hovered in a tight zone around record highs for the longest period of time in 90 years, we saw a fat wave of profit-taking.

But, to keep things in perspective, the S&P is down only 7% from the high it hit in May. In a balanced portfolio, bonds were racing ahead while equities were falling. Most investors who have any sense will snooze their way through this. Doomers who see every dip as the End of Days won’t. Sheesh. Get a grip.

Here’s a five-year chart of the major US market. So just imagine if you’d mistaken the big dump in 2011 (the US debt ceiling crisis) for something other than a useful correction.


Is the bull market over?

Hardly. The US expansion continues right on schedule. European markets have been on steroids, thanks to central bank stimulus. Corporate profits are robust and coming in at unanticipated levels. In the last 65 months, private employers in the States have added 13,000,000 jobs, for an average of more than 200,000 a month. Cheap oil is clobbering Canada, but it’s an unprecedented boon to energy-consuming nations. And every day the world gets more technologically advanced, more productive, faster, better connected and deeply entrepreneurial.

It’s only human nature that’s primitive. People want stuff that goes up. They fear things that go down. Investors lose sight of the fact we need corrections like this to keep dangerous asset bubbles from forming. They’re normal and beneficial. But with each decline people fret things are going to zero, just as they believe every advance will be permanent. There’s but one constant. They’re always wrong.

In the past four years the stock market has corrected by 5% or more seven times. On each occasion there was pissing and moaning in the steerage section of this blog. And every time this marked an attractive point to enter the market, which continued to advance. The pullback now is exactly in line with the average of all the others. So, draw your own conclusions. I’m not going to spoon fed it.

Well, we could still have deflation here even as the US economy motors on and markets recover. That’s because Canada is commodity-dependent, with a small population, negative economic growth and epic levels of personal and household debt. This may be masked by the consumer price index, which is rising – up 2.4% thanks to the crashed dollar and higher import costs. So it’s possible to have big assets like houses deflating in value (as they did in the US) while people are paying more for food and other consumer goods. Not a happy combo in a country with 70% home ownership and $1.2 trillion in mortgage debt.

Scotiabank economists this week dissed the notion of Canadian deflation entirely, saying it’s just not in the cards no matter where oil prices go. If anything, we might get disinflation. But deflation itself is probably as remote as hyperinflation, thanks to central banks which are coordinating global monetary policy as never before.

Still, if you think the lights are going out, there are concrete actions to take. Deflation is a far worse destroyer of wealth than inflation, harder to arrest and what policymakers fear the most.

The first defence is to pay off debt. Inflation makes a loan easier to handle since incomes rise along with the value of the thing you borrowed to buy. Deflation means wages decline and so do assets. So your salary and your house might erode together, while the mortgage remains constant. Now do you understand why people walked away from their houses in the States nine years ago, as during the 1930s?

In deflation, cash is a sweet asset since it rises in value and can buy more. Bonds are even sweeter since they preserve wealth and also pay you interest. In deflationary times, corporate profits plunge along with sales, and so do jobs. Thus, no matter how low mortgage rates fall, you can kiss the real estate market goodnight. If you think any of this is in store, you’d be a wise person to sell your house for an inflated price now. Oh yeah, and suck up at work. A lot.

But, don’t sweat it. This is not the prelude to a deflating world. Your investments will not disappear. Nothing has changed to derail the US, even as Canada continues to limp along.

If you possess the kind of portfolio I’ve continuously suggested, you’ll recover and be happy. If you’ve adhered to my Rule of 90, then your real estate is also in balance. If you’re sweaty cold with fear and slobbering in front of BNN, I have no pity.

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August 21st, 2015

Posted In: The Greater Fool

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