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December 5, 2016 | Stark Choice

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.


“But what,” she asked, for the first time in our conversation looking truly freaked out, “if I lose it all in a crash?”

Donna has two million dollars, a windfall from selling a long-held house in hot nook of the GTA to people with more money (and debt) than brains. Not bad for a woman who never earned more than $60,000 a year. And while a financial ingénue, she grasped my logic. Houses have never cost more largely because money’s never cost less. That created a speculative bubble, driving citizens insane and pushing prices higher. And now, as conditions start to rapidly change, real estate is smothered in risk.

A smart woman with two mill, a modest pension and three decades of life left needs two things. Income and diversification. Plowing it all back into a house (as she first wanted to do) gives her neither. But still, investing is scary.

Well, actually, there’s a lot less to be worried about as 2016 grinds to a conclusion. In fact, 2017 has the potential to dazzle. Financial markets learned a lot this year about politics, for example. Just look at the big vote in Italy on the weekend which resulted in the prime minister being punted. “After Brexit, it took three days for markets to shake it off, with Trump it took three hours, with Italy it took three minutes,” said a German trader who oversees $260 million. “The outcome was not as much of a surprise as many expected it to be — markets learned their lesson.”

You bet. And the world’s changing for the better because of it, at least for investors.

The US economy (like ours) is showing marked strength all of a sudden. The latest gauge of manufacturing has shot higher. Corporate earnings in the latest quarter, expected to decline by 1% or 2%, actually finished ahead 4.6%. Look at this chart my nerdy portfolio manager partner Ryan just ran around the office with, giggling…


There’s no denying what’s happening with stock markets. Bay Street’s been hotter than a retriever in heat so far this year with a 15% gain on the back of oil prices almost doubling since last winter. Since Trump, US markets have been in a month-long cavort, with the S&P, the Dow and the small-cap Russell 2000 all busting out to make new highs.

So far, Trump has insulted China (the world’s second-biggest economy), penalized Mexico (by blocking corporate expansion there), claimed millions of people cheated in an election he won, put a suspected white supremacist in the White House and appointed a guy called “Mad Dog” to be in charge of the world’s biggest military. And still markets rise.

Here’s another of Ryan’s charts. He’s now apoplectic.


So while there’s no guarantee where markets will head, this is what we expect: more inflation thanks to accelerated government spending in both Canada and the US. Higher interest rates (and lower bond prices) as the Fed tries to counterweight rising prices and our central bank eventually follows. Lower American taxes, leading to higher corporate earnings. Lots more protectionism, less globalization, more populism, more alt-right leaders – all ensuring less efficiency in the world and higher costs as the flow of labour and capital is restricted.

For people like Donna, the choice becomes starker. Stick with real estate, and gamble that higher mortgage rates over time, epic debt and a slower economy – thanks to less free trade with our biggest partner – won’t impact prices. Or, diversify, invest in a sane portfolio of financial assets and muster the emotional courage to stay calm even when volatility hits.

Will financial markets crash? Unlikely. The worst hit in a generation came in 2008-9, and any investor with a balanced account saw a 20% decline, then a rapid recovery. In the three years ending with 2010, investors in a properly-balanced portfolio actually made an average of 5% annually – without selling a single thing. Only those fools who followed the crowd and sold at the bottom – like the herd buying houses at the top – were creamed.

The biggest obstacle to success is not a crazy world. It’s our own nature.

Sadly, that ain’t changing.

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December 5th, 2016

Posted In: The Greater Fool

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