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July 3, 2016 | The Revolt

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.

MOVING TO CANADA

July’s usually a yawner. Not this time.

On the heels of Brexit comes the ascent of Trump, the wounding of Clinton, more hurt from the ISIS nutjobs and, weirdly, Scottish independence. In two weeks American Republicans gather in Cleveland for a convention that could be the most troubling since the 1960s (Google,“The whole world is watching…). A week later Democrats do the same. Then for four months it’ll be a presidential race for the ages. A 68-year-old millionaire establishment career pol ex-first lady with tons of baggage under FBI investigation against a 70-year-old Muslim-baiting, misogynist, anti-immigration billionaire bombastic populist iconoclast.

What’s at stake is the system. Middle-class people everywhere are in a mood. It brought the Oxi vote in Greece last year, and Brexit this year along with the totally unexpected rise of Trump. Everywhere are degrees of disrespect for governments, 1%ers, central banks, elites and trade deals. A new class warfare has broken out based on the fact wealthy people seem to be getting wealthier and middle-class families are getting screwed.

Blame is thrown around loosely, but certainly sticks to politicians, banks and immigrants. Brexit has a lot to do with older voters trying to turn back the clock to simpler days when a working family could live well in a more homogeneous society. They fell for the demagoguery which portrayed foreign trade and foreign people as the reasons for middle-class decline. And they were partially correct.

The famous ‘elephant’ chart below has been making the rounds in financial circles since Brexit as people try to understand why Britons would ever vote to go backwards, likely triggering a recession and reduced standard of living. It shows the winners and losers of globalization over a decade — those whose incomes have risen the most (the bottom 65% and the top 1%) and those who have paid the price (the middle class — the 75% to 90% income brackets).

ELEPHANT CHART

This explains a lot. Brexit. Oxi. Trump. In Canada, like the US and Britain (and much of Europe) middle-class people have seen cheaper consumer goods because of globalization, while lower-value-added jobs have migrated offshore to lower-value-added countries. So people don’t make televisions or hubcaps in southern Ontario any more. And with the commodity price decline, they’re not fabricating pipe or turning out conveyors belts, either. China dominates the manufacture of steel, heavy equipment and all the crap you buy at Wal-Mart.

The loss of higher-paying, often-unionized lifetime jobs with corporate pensions has thrust the middle class into a tough world. Incomes have been stagnant for decades, so in order to maintain that middle-class lifestyle, families have had to borrow. When rates collapsed, excessive borrowing followed, plumping asset values and making real estate a one-asset strategy in Canada.

It’s dangerous and unsustainable, which most people get. They also see wealth pouring into their communities from places like China (where the jobs went), while the gap between the 1% and the 99% yawns as never before. A lack of economic opportunity means 27-year-old children routinely fail to launch, putting more pressure on family finances. Corporate pensions are gone for more than 70%, and investing in RRSPs and other financial assets has plunged as people are overtaken by property porn.

So, being human, they look for solutions. And there she be — populism and protest.

This is probably the beginning of a powerful trend, not something that would end with a Trump or gutting the EU. The creation of the middle class was one of the greatest triumphs of modern capitalism. The erosion of it seems to be the next unstoppable chapter, in a world where operating a drill press for thirty years no longer gets you a new Chevy, a stay-at-home wife, a bung, cottage and a pension. So a lot of Canadians voted last time to tax the rich more, the middle less, to neuter a tax shelter, increase public pensions and move left.

The common wisdom is Trump will fail. But nobody saw Brexit coming. How could the Greeks last year have voted for their own economic destruction? Don’t they understand? How can anyone take seriously a guy saying he’ll build a 1,989-mile-long wall?

This will likely be a summer of volatility, market swings and surprises. Money has fled into safe assets, like bonds, driving prices up and yields down to insane levels. Central banks will be working overtime to prevent fallout, with the Bank of England set to cut rates after revving up the printing press. Politics will be a mess for months more. Years, maybe. But despite however much moaning and bitching takes place, the past ain’t coming back.

Global stock markets, hating surprises, plunged after Brexit. But the recovery was dramatic. The day before the vote the Dow sat at 18,011. On Friday it had recovered to 17,949. The investors who ignored it, sticking with their balanced portfolios, ended up winning. Equities were back to near-record levels. Bond values popped. And those who bought on weakness and middle-class angst, got even wealthier.

There’s a lesson in here somewhere.

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July 3rd, 2016

Posted In: The Greater Fool

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