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April 13, 2016 | Now What?

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.

 

As predicted, no cut. The central bank boys decided Wednesday rates are as low as they’ll go. Ever. In fact the next move, when it comes (probably next year) will be up, not down. In the meantime, mortgages are likely to tick higher – but not yet.

The big news in the last two months is what’s happened to the economy, and how it’s rewarding investors. First we had some bullish economic stats from January. Then the March job numbers were so off-the-chart a mess of economists just don’t believe them. Too good. Over forty thousand, most of them full-time and mostly created by the private sector. Huh? What about the unraveling of Albertastan?

Speaking of which, oil at $42 a can means this stuff has exploded in value 60% since Valentine’s Day. That’s propelled the dollar to over 78 cents US, which is a 15% appreciation in just a few weeks. And it’s all led to a mild cavort on Bay Street, where the TSX index is now 5.08% into positive territory for the year. (That compares with a 1.88% advance for the S&P 500.)

Hey, even the trade numbers suck less. And our share of crude oil shipped into the US has just hit a new high of 43%, while that country’s imports from the rest of the world decline. Even without a fat new pipeline.

And then there’s our tax-and-spend PM. Without a torrent of deficit spending about to be unleashed by the feds, says the Bank of Canada, interest rates might have been cut again this week, instead of eventually heading in the other direction. Because of the red ink, Governor Poloz predicts the economy will grow 1.7% this year and 2.3% next year – higher than previously forecast by about a third – despite investment in the energy business plunging 60%.

Here’s what this means:

There’s a good chance the commodities bear market is finished. That would be huge news. Normally downturns last just over two decades and drop prices by half. This one has been ongoing since 2008, and values have dipped by two-thirds. As I said the other day, done and done. Not quite time to back the truck up on more maple, but at least look for the keys.

Speaking of owning Canadian stuff, you might remember that back in the winter you were warned here not to abandon that asset class. The reason a balanced and diversified portfolio works is because you never know what’s lurking around the corner. So, never bail out of losing things or load up on whatever’s rising (the opposite to real estate). Maintaining about 17% of your growth assets in beaver bits has proven to be the correct action. It may soon be appropriate to increase that. But not yet. As Poloz warned reporters this week: “The global economy retains the capacity to disappoint further.” And if that doesn’t scare you, just think of Donald Trump.

Another consequence of our changed fortunes is the cost of money. Rates won’t be doing anything for a few months, but markets still believe the Fed will pull the trigger twice by the end of the year. If it happens, there will have been three rate increases in the US. Remember that history tells us 92% of the time our central bank follows theirs. So if you want to gamble this is the 8% when it won’t happen, good luck.

The changed rate environment, changed economic prospects and changed commodities situation will probably see preferred share prices and REITs regain most of the ground they lost last year when Poloz chopped the cost of money twice. The TSX is certainly poised to continue its advance, even though it’s looking pricey compared to US markets.

As for real estate, not much more to speculate on. Most Canadian markets have done exactly what this pathetic blog predicted – flatlined over the past year and entered into a slow melt that will erode sales and moderate prices, especially when mortgage costs start to change. In Toronto and the GTA, severely reduced supply has boosted prices – a situation unlikely to change unless Ottawa cools things off (which is being actively considered). The real risk lies with Vancouver and the Lower Mainland, where the buy-now-or-buy-never meme has led to panic purchases, bidding orgies, absurd prices and rapidly escalating debt levels. It’s obvious nothing will save the natives now.

So here’s some stuff for the To Do list on your fridge:

  • Convert the VRM to fixed by Labour Day.
  • Better yet, sell the house to a greater fool for an embarrassing, obscene amount. Now.
  • Brim your TFSA with growth assets.
  • Make sure your daughter does not buy that condo. Get her a Corvette Z06 instead.
  • Put your house proceeds in a reasonable and diversified portfolio, and let it pay the rent.
  • No individual stocks (too risky), no mutual funds (too costly).
  • Ignore the media. Ignore realtors. Get new friends. Homeless people are always a good choice.
  • And lay off Trudeau, eh? Sheesh.

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April 13th, 2016

Posted In: The Greater Fool

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