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February 24, 2017 | Why Saving Sucks

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.

Poor, sodden, misguided savers. Your nation had bad news for you Friday.

The current inflation rate has bloated to 2.1%, thanks to higher energy costs – mostly gas. For many working people, as well as risk-averse savers, this is a disaster. In fact Stats Can has told us wages in many low-end occupations are now declining. Average weekly earnings for retail workers are lower year/year by more than 2% – which sucks, since almost two million people toil in this business (the most of any sector in the entire economy). Down, too, in hotels, tourism and restaurants, by 1.9%.

Overall, wages in Canada have risen in the past year by only 1.2%. Adjusted for the swelling cost of living, it means these millions are earning less now than they were a year ago. This is another reminder of what a fake economy we live in, how fantasy real estate values have become detached from economic reality, and why a growing hunk of our $2 trillion in household debt is absolutely, totally, and forever unrepayable.

Worse, this is creaming seniors with GICs, wuss investors with whimsical “high-yield” savings accounts and anyone misguided enough to keep big bucks in their chequing or regular savings account. In fact, to earn just 2% on a guaranteed investment at one of the big banks, you have to buy a non-cashable five-year GIC. That’s locking up your money for half a decade, and you’re still losing ground. What a dilemma for people too emotional or financially illiterate to properly deploy their capital.

In fairness, the main reason some folks don’t invest is fear. These days they’re afraid of “the markets” which, in popular parlance, means the Dow. Here it is:

Three important thoughts to keep in mind.

First, the Dow Jones Industrial Index (and the S&P 500, and the TSX) are in record territory in terms of their numeric indices. But that’s not the measure to look at – rather the P/E ratios. The P stands for the price of stocks and the E represents the earnings of the underlying companies composing the index. The ratio traditionally (for US markets) is in the 17 range, and lately has floated by to around 21. So, yeah, stocks are not cheap.

But neither are they dangerous. The P/E went to 44 during the dot-com era, or more than twice today’s level. And what were retail investors doing then? You bet – feasting on technology stocks and stuffing their RRSPs with Nortel. Kinda like buying a house in the GTA these days.

Second, a balanced and diversified portfolio with 60% of growth assets divided between Canada, the US and international markets will have maybe 6% exposure to big US companies, and another 7% or 8% invested in medium and smaller enterprises. So when you invest this way you’re hardly “playing the market”, especially when also owning preferred shares, bonds, real estate investment trusts and having exposure across the globe.

Third, there’s a strong case to be made that as robust as markets are now, we ain’t seen nothing yet – with this bull as tawny and pumped as, say, my own glistening abs. The reason is simple. If Trump makes good on his promise to slice corporate tax rates from the current 35% level to 15% (or even 20%, or 25%) then the E in the P/E ratio could  erupt. A tax reduction of that size would drop huge amounts to corporate bottom lines, suddenly making stocks look cheap.

Will he do it?

We might know next week, when the Trumpster makes a key and widely-anticipated speech to Washington lawmakers. Said an economist at Barclays on Friday: “We think that the presentation to Congress will be a good opportunity for the president to more clearly flesh out his policy priorities and goals, especially on trade, taxes, and public investment.” So far this guy has a track record of doing (or trying to do) what he promised on the campaign trail, and slashing both corporate and middle-class taxes was a key plank in getting elected. (The contrast with Canadian politicians is becoming comical.)

By the way, while GICs were collecting between 1% and 2% last year, a highly-balanced and diversified balanced portfolio delivered well north of 8%. Sure, an all-equity account did better, but it came with a ton of volatility. And, after all, what most people want is simple – no losses, and predictable growth.

There are no guarantees financial assets will continue to perform as they have in the past. But neither are there many reasons to think they won’t. The deflationary years that doomers so love have passed. We’re now on the other side. Savers will pay dearly.

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February 24th, 2017

Posted In: The Greater Fool

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