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January 18, 2017 | Canada Goose

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.

There’s one good reason 20% of your portfolio should be in USD. His name is Steve, and he works for the government. Blame him.

On Wednesday Steve said in a world where interest rates have started going up, ours may yet go down. And because the guy controls Canadian monetary policy (he prints all the cash and sets the price of it), the value of the dollar flattened. Roadkill on the highway to Making America Great Again.

This came a day or two after some giants of the financial world, including Vanguard, Moody’s and Deutsche Bank issued reports saying the Bank of Canada (Steve runs it) would be raising its rate later in 2017, lest our currency be skewered, and because the economy’s not half bad. But in a few words – “a cut remains on the table” – Stevo squished that thought. Within a short time the loonie has plunged more than a full cent, suddenly increasing the price of essentials like cauliflower and Harleys.

Besides murdering the currency, Steve signalled the Canadian economy is vulnerable and the T2 gang is quivering at the prospect of what a Trump White House might bring. Nothing good, apparently. Yeah, the US economy will likely swell which is normally a plus for us. But for the first time in decades, the border will harden to trade.

Ouch. One-third of our entire economy is made up of exports, and 75% of those go to one place. So if Trump lives up to his bombastic anti-free-trade rhetoric, we’re screwed. In the past few months he called NAFTA a “disaster” and his new commerce secretary says rewriting the trade deal, to be more pro-America, will be “an early, early priority.”

And don’t forget the BAT. The Border Adjustment Tax – being promoted by Republicans in Congress (especially Speaker Paul Ryan) – could be a game changer. It would disallow US businesses from deducting the cost of Canadian inputs from their revenues when calculating taxable profits. But if they get it from the States, bingo, it’s a valid input cost. The net effect is a 25% tax on stuff coming from the north.

Well, we don’t know what Trump will do, of course. We only know what he says. And for a guy who brags he can grab women by the genitals (because he’s famous), then says he didn’t really mean it, that may not count for much. But Steve’s obviously rattled. So I guess he’s buying into the devil-Trump meme racing across Parliament Hill these days. Either that, or he’s trying to talk the dollar down. And he’s very good at it.

So here’s the deal. If our central bank does freak out and cut its rate by a quarter point, it will drop to just 0.25%. That means one more hike or two by the Fed (perhaps in March, then June) will put the US bank rate a dramatic four times higher than ours – ensuring our dollar plops further as money flows to where it earns a better return. If the Bank of Canada hangs tough, and doesn’t respond to the BAT, a gutted NAFTA, a big American business tax cut or Trump’s 35% border tax on cars, then the dollar’s whacked anyway.

Hard to see an upside here for the money that your entire life is valued in. And that’s exactly why a balanced, globally-diversified portfolio should also be one that constantly hedges against the dollar. As this blog has suggested for years, best to maintain about a fifth in US-denominated securities. That would include, for example, about a 7% portfolio weighting in an ETF holding the S&P 500, plus another 8% in exchange-traded funds which own US mid-cap and small-cap companies, then a few points in US-valued funds giving exposure to emerging market companies, large and small.

A word of caution: don’t ever, ever try to make money trading forex. Stevie’s loose talk on Wednesday should prove that to you – it’s impossible to know when markets will move, on what information, or how sharply. Forex trading is gambling, not investing. Most people who try it end up as somebody else’s lunch. Also, converting CAD to USD or vice versa because you’re a genius is another bad move. The only people guaranteed to profit from that trade are the converters in the middle. And you know what Jesus said about those dudes.

So build this portfolio with a permanent US-dollar component. The stupidity has just begun.

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January 18th, 2017

Posted In: The Greater Fool

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