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August 20, 2015 | Pffft

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.


Thomas makes two hundred grand helping manage a northern mine where a semi-rare metal is tugged out of the earth. “Been in mining all my life,” he told me yesterday, “and this is the worst.” You bet. He’ll be unemployed in two months. No pension. Sixty.

Smart guy, though. Instead of piddling away his paycheque on babes and sleds he’s shovelled it into RRSPs and kept the house lust under control. Unlike all the men who will be walking out of this now-bankrupt facility in a few weeks, Tom will get by. No mortgage. Liquidity. Tax-sheltered growth.

Yesterday the commodity rout which is stealing his job continued. It’s spread now to emerging markets, currencies and large-cap stocks. Oil is back at forty bucks and some people (like analyst Gary Shilling) forecast a bottom between $10 and $20 is possible. Stock markets sputtered on Thursday with Bay Street shedding three hundred points and the Dow giving up 350. The sell-off has everything to do with the perception that global growth is slowing, led by a funk in China which is largely responsible for Tom’s mine going belly-up.

Stocks and other assets will eventually get too cheap to resist, as they always do, but nobody has a clue when that will happen. This is exactly why – instead of flipping a few stocks or giving all your money to the bank advisor so he can feed a Canadian equity mutual fund – you should have a balanced and globally-diversified portfolio. Lots of cheap ETFs. Not too much maple. And 40% safe stuff to weather any storm.

However, face it – most people don’t. So expect lots of consequences in the next few months as this rout continues. Here are a few:

Stephen Harper could blow up. The fate of the Conservatives is probably more closely correlated to the price of oil than many people realize. Already the Tory power base in Alberta threw out the local Cons and hoisted a crew of utterly inexperienced, leftist Dippers. That was a direct result of collapsing commodity values and the social pain they brought, once people realized how mismanaged the economy had become.

Hard times always hatch politicians with simple, compelling solutions. They’re also toxic to the guys in power who understand nothing’s simple any more. Too bad. Voters want to change the channel instead of getting educated. Out the bums go. If current trends continue then after October 19th we might have a whole new set of things to worry about.

Housing blows up. This is way more consequential. It has nothing to do with interest rates (see below), and everything to do with jobs. You cannot have a country’s most lucrative export collapse in value without widespread consequences. It also takes time for the ripples to spread and, make no mistake, they’re doing just that. In the days to come, I am told, you will hear of a major industrial collapse.

Already our job creation record is abysmal compared to the US, and coming labour market reports should be disappointing. Wage gains have lagged inflation consistently, and yet household debt has been rising at twice that pace. Meanwhile the price of housing – always notoriously sticky – has not declined even in distressed markets like Calgary. This keeps first-timers from entering and will make the correction sharper and deeper.

People worried about their jobs don’t buy houses. It doesn’t matter if mortgages are 1%. Never lose sight of that.

Deflation is back. At least as a potential threat, given the fact commodity prices have halved and there’s no bottom yet in sight. On Wednesday of this week 50% of equity market analysts who were surveyed thought the US Fed was still on track to raise rates next month. On Thursday that had fallen to 37%. This stemmed from concerns the China mess, oil dump and currency wars will slow everything, trim American inflation and convince central bankers it ain’t the time to tighten monetary policy.

Well, nobody knows. Stock markets are notoriously of-the-moment. Traders in a high-frequency world make their money on a minute-by-minute basis while the rest of us measure our lives in the growth of children or the length of a career. But deflation is a worthy opponent. It makes the value of money increase, decreases hard assets (including houses) and makes debt a whole lot harder to pay. If that’s in our future, along with a potential regime change in Canada, you might wish to prepare.

Tomorrow I’ll tell you how.

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August 20th, 2015

Posted In: The Greater Fool

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