- the source for market opinions


August 29, 2015 | Lessons

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.

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This week Wall Street lost a thousand points in mere minutes on Monday and by Friday hosted the biggest two-day rally in six years. Oil crashed by 10% in a single day, then finished the week gaining 16% in two sessions. On Tuesday the mainstream media was wall-to-wall doomerism, screaming “Stocks CRASH.” On Friday they still couldn’t get enough of the whacko who lit up two reporters. The stunning financial recovery was boring.

This is a world in which Ashley Madison and Donald Trump matter. The economy and bond yields don’t stand a chance. It’s no wonder most people are financial illiterates who end up with maybe a house and a mortgage, while expecting the government to send them cheques.

Remember the four things this pathetic blog told you when the markets took a dump?

  • Corrections are normal. Corrections are good. They blow off steam, prevent bubbles and reset markets at more realistic levels. Despite that, people always react the same way, because fear is greater than greed.
  • Nothing about the US changed. America’s job-spewing recovery continues, corporate profits are good and growth is robust. In fact we now know that economic expansion has exceeded all expectations.
  • China will fix itself, but it’s the US that really matters.
  • Commodities are oversold. Prices are below levels experienced during the GFC when the world was contracting, and yet today the world is growing. “It’s hard to see how this will not snap back.” I said. And it did.
  • Create a balanced, diversified portfolio and ignore any storm that comes along. Having both fixed income and growth assets, plus the right geographic mix (little maple, even less China) will mitigate losses. So when the TSX was down 11%, this portfolio was off a faction of that.

Most people will never have this kind of portfolio, never max their TFSA, never find the discipline to invest, never get investment help, never understand markets or financial events, and never try. When reversals come and the media shouts at them, they’ll bail, take a loss and blame others. Most people have a one-asset strategy, embrace debt and ape their parents. In fairness, the biggest goals for the majority are to have a family and a nice house.

So, is it any wonder society’s self-dividing into the 1%, and the rest? If this week taught us anything, well exemplified by the comments on this blog, it’s how incredibly naïve and myopic many can be, even in an age when a few clicks will teach you anything.

Well, there’s more on the way.

The volatility is not over, and the coming weeks will bring more big swings on equity markets and in emotions. China has stemmed the wave of selling, but remains a manipulated market (what else would you expect in a socialist paradise?). The US central bank will raise rates in either September or October, depending on the next round of data. As the first hike in almost 10 years, and marking the start of a cycle of tightening, it will be consequential.

And poor Canada has its own swamp to crawl out of. On Tuesday we’ll get the latest economic data, and it won’t be pretty. The betting is the country contracted in the second quarter of the year by about 1%, on top of the 0.6% negative growth in the first three months. The loonie has fallen against the US dollar by 12% since the beginning of the year – a far worse record than the Chinese yuan. And while the snap-back in oil prices by Friday was welcome, the serious damage has already been done.

Calgary house sales are still running 26% behind last year. Retail sales at the West Edmonton Mall have tanked, and car sales in the West are sagging. The dollar volume of commercial real estate transactions in Cowtown has fallen 57% from last year. And the next round of labour stats for Canada is expected to be grim.

Says Capital Economics: “Further declines in commodity prices, droughts and weaker business confidence indicate that the economy is struggling to escape the mild recession that began in the first half of the year. We still expect the economy to return to positive growth in the second half of the year, but the recovery is going to be even more modest than we feared a couple of months ago.”

Many economists still expect the Bank of Canada to cut its key interest a third time next month, even as the Fed is clearly heading in the opposite direction. That would throw more misery on the loonie, as well as the trading on Bay Street. Thus the yawning gap between the US and us grows right along with the divide between the wealthy and the wannabes. If folks think real estate will save their butts as the economy contracts and rates inevitably rise, may Allah be with them.

By the way, a lead story generated by Bloomberg at the end of the week was about Canada being a bigger threat to the US than China. Maybe Stephen Colbert was right all along?

There is a way out, of course. And it’s not just voting NDP. Do what your neighbours are not – become liquid, balanced and diversified. Between now and Christmas you’ll see why.

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August 29th, 2015

Posted In: The Greater Fool

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