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January 11, 2016 | Pooched (again)

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.

 

Remember two years ago when this blog told all you little beavers to lighten up on maple? May you never doubt again. We’re now in a made-in-Canada mess.

Look at survey results published Monday in what used to be the economic powerhouse of Canada, now the Socialist Republik of Alberistan. Two-thirds of Albertans say oil is wrecking daily life and 45% claim to be personally affected. Over 60% have reduced spending, a quarter have stopped saving and a fifth are already raided their nesteggs. Forty per cent have had their salary frozen and 19% have been punted entirely.

“It’s clear Albertans are feeling the pinch right now,” said Chris Turchansky, president of ATB Investor Services, in a fit of clarity.

But it’s not just Alberta. It’s everywhere – or on the way. “The negative effects of the oil price shock are increasingly spreading beyond the energy-producing regions and sectors,” the Bank of Canada said this week. “Weak commodity prices pose significant challenges for many businesses.”

Oil’s crashed again. It was down over 6% last session, and sits at $31. Suddenly a prediction from Morgan Stanley that crude could go all the way to $20 doesn’t look so goofy. Low oil means a low dollar, too. It seems ripe to slip below 70 cents US in the next day or two. All of a sudden testing its historic low in the 62-cent range doesn’t seem so crazy, either.

Without actually saying so (which would make it happen), the Bank of Canada is signalling we’ll likely slip back into recession. Businesses are investing less, people are getting booted from their jobs, exports are falling and, says the Conference Board, consumer confidence is limp – at the lowest level in two years. It’s all happened just after Canadians, in their wisdom, elected governments in Alberta and Ottawa committed to higher taxes and saving the planet.

So, expect a central bank rate cut, maybe even next week. As stated here before, it will be about the worst news possible for homeowners, especially those who have recently bought into the GTA or YVR. There’s only one reason rates would drop here as they are rising in the US – and it’s not good. Bank of Canada boss Poloz calls this “a seismic shift” that could last half a decade, dash the dollar, swell inflation while draining fifty billion out of the economy. He’s paid to make you feel better, so imagine the real story.

Like I said on the weekend, hoard cauliflower!

Bay Street’s in a funk, since an oil selloff hits Canada hard. Meanwhile Chinese stocks have plopped suggesting demand from that country for the stuff we dig up and sell will fade further. Hard hit have been those investors with a home-country bias, who have let financial advisor stuff their portfolios with ‘high-quality’ Canadian stocks.

Time to face facts. We live in a country with an economy anchored by the resource sector combined with real estate. The low dollar means more inflation and less family cash flow. Weaker business investment means fewer new jobs. Falling stocks and mutual funds hurt savings and our sense of security. It all ends up wounding confidence – as the Conference Bard already discovered.

Will cutting interest rates make a difference?

Sure. That should guarantee a lower currency, higher consumer prices and less money every month for most households already shouldering record debt. For five years now everyone has been warned that excessive borrowing makes them vulnerable to an economic shock. So, here’s a shock. And people are still in denial. Worse – soon it will be rutting season. More people staggering into houses to ‘beat’ the new down payment rules or because they heard rates are falling. Risk on.

What to do?

First, ignore markets when they’re gyrating and volatile. You can’t do anything about it. History shows that 73% of the time markets advance annually and with a balanced portfolio, that rises to 90%. So if things go to hell for a few months, let ‘em rip. The odds are with you. Doing nothing is the best strategy.

Second, don’t sell. In fact never make investment decisions when you’re scared or horny. Doesn’t end well. After all, if you don’t sell you don’t create a loss.

Third, the world still runs on oil. And copper. Zinc, aluminum and grain. Commodities are in a weird, nonsensical slump at a time when the global economy is actually growing. Logic tells us there will be a big snapback down the road. Why would you want to miss that?

Fourth, use the tools you have been given. All of them. Top up the TFSA ($5,500 this year) and get it invested in growth assets like equity-based ETFs and tasty preferreds, now on sale. Invest in your RRSP, which can net you a huge tax refund if you happen to be one of the doctors that T2 has declared war on. Where else can you put $25,000, invest it for tax-free gains and get ten grand back on your tax return?

Fifth, if you’re feeling unloved at work and think you may be thrown overboard, prepare. Stop buying stuff. Shovel money into your RRSP to get a break now so you can collapse it tax-free when you’re out of work. Invest any pension money you’ve accumulated, maybe inside a tax-free LIRA.

Finally, could there be a better time to cash out of real estate than when prices are still stupid and yet the economy’s pooched? Remember that houses are like any other asset – when everybody wants out, prices fall and buyers get rare. Ask a seller in Calgary how that feels. Ask if they wish they hadn’t waited.

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January 11th, 2016

Posted In: The Greater Fool

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