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December 11, 2017 | The Tightening

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.

Yeah, it’s not Bitcoin. But a balanced, low-vol, diversified, 60/40 portfolio has handed investors close to 10% this year. And it was 8.5% last year. The even better news is that there’s more of the same coming, it seems.

The reasons are simple. Don’t overthink them.

Growth is back: the global economy expanded around 3% in 2017, which was a helluva lot better than the 0% of a few years ago. This is expected to explode to 4%, which is the best in half a decade. If it happens, the two-year spurt will top anything since before the credit crisis. Remember all those negative-rate bonds the geniuses in the steerage section said were coming to North America? How CIBC would soon pay you to have a mortgage, instead of the other way around? Phooey. Deflation is inflation, and we’re not going back.

It’s the jobs, stupid: labour stats, month after month, have shown business confidence as employers hire up a relative storm. Unemployment in the US has turned into technical full employment, and in Canada we have the best record going in eight years. Corporations are spending more, making more and expanding as they have not since 2007. Profits have been rising by double-digits – which is exactly why stock markets around the world are bouncing around at record levels.

Trump: Love him or hate him, the election of this wingnut signaled the end of the deflationary post-crisis years and the start of a new era of cowboy capitalism. The tax cut ushered in a week ago is monumental. After all, there is absolutely no reason to slash American corporate tax rates by a third, but that’s exactly what’s about to happen. If you thought the Dow was at nosebleed level, you’ll be awed at what lies ahead. Will there be some corrections along the way? You bet. Ignore them.

Lower taxes, higher profits, rising markets, expanding global growth plus robust spending by more people with jobs will have predictable results. A big win for investors. Higher consumer prices and more inflation. Wage pressure. Inflation. Higher interest rates. Lower house prices.

There’s a 98% chance the US Fed will raise its key rate on Wednesday. That will be the fourth time in 12 months, with three or four more increases to come in 2018. That will total seven or eight moves, raising the Fed rate by a full 2%, in about 24 months. In Canada we’ve had two hikes in 2017 and most economists figure three (or at least two) in 2018. The prime rate next Christmas will be 3.7% and over $280 billion in variable-rate HELOCs will have jumped to around 4.5%.

There will also be higher interest rates in Britain and eventually in Europe. The next Fed boss, Jerome Powell, is expected to lead a coordinated global rate bloat to deal with the inflationary growth spurt and pent-up demand now so evident in these Trumpian times. Fatter economies also mean debt gets less scary, watered down and easier to ignore so eventually we’ll be rid of all those dour guys who say the world economy is heading for a cliff. It’s not.

None of this precludes the possibility of shocks, like a terrorist attack or extreme weather events, or even a recession in the US within the next three years. But market corrections and economic contractions within an overall bullish period are piffles. The only people who suffer are the ones who watch BNN every morning or read blogs by advisors selling fear, then bail when they should be buying.

As for houses, more jobs and higher incomes are catnip, but swelling rates are lethal. Mortgages that were barely over 2% in early 2017 will be at 4% during 2018. Add in the effect of the mortgage stress test, and the qualifying rate will be closer to 6%. The mortgage brokers estimated days ago that this will affect 100,000 families and knock fifty thousand of them out of the real estate market next year. The Bank of Canada figures up to 10% of wannabe buyers will be denied. Overall credit could contract 18% – because of the stress test alone.

So far in 2017 average house prices in the GTA, for example, have declined by 2% even before factoring in the punishing closing costs and commission to sell. For detached homes, the loss has been between 8% and 10%. Meanwhile investors with balanced, diversified portfolios have made the better part of 10%. The gap between those two is huge. In 2018 it will likely yawn further.

If you need a house, can afford one without gutting your liquid net worth, and still retain financial balance in your life, go ahead and buy. The best prices are typically at this time of the year.

But don’t confuse a house with an investment. That would be so 2016.

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December 11th, 2017

Posted In: The Greater Fool

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