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July 27, 2018 | Unthinkable

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.

If the economy’s so great, why did stocks go down?

That simple question’s a good one. On Friday Washington announced a 4% spurt in US economic growth in the latest quarter. Twice that of the previous period. So yuge, said the president, that it was “unthinkable.”

Yeah, it was good. Not as sexy as the 5% jump under Obama in 2015, nor a 7% eruption under Clinton (many things erupted under him), but strong. The number reflected a surge in consumer confidence and since household spending is over 70% of the economy, the GDP swelled. But despite that, the stock market lost over 70 points and the euphoria lasted just a few minutes.


Two things help explain this, and pose a warning of what lies ahead for us all. First, orders for US exports, especially soybeans (whatever they are) surged in advance of the trade war that will make everything more expensive. So it was a one-shot thing. Second, this economic stat is just another nail in the coffin of cheap money which has helped to fuel stocks. There’s no doubt now two more interest rate increases are in store from the Fed, and our central bank will likely follow.

Connect the dots. US unemployment at 4% is considered full employment. The jobless rate is at an 18-year low. There are more job openings than applicants. The cost of living and wages are both rising. The Trump trade war promises to be bigly inflationary. Stock markets are sitting just a few points below all-time highs. The deficit in Washington is on track to hit $1 trillion, for the first time ever. All that borrowing puts upward pressure on the cost of money. And corporate profits are on a tear.

So the Fed, which has upped the cost of money seven times in the past 18 months, will do it again in September and December. Higher rates will eat into consumer spending power, reduce borrowing, increase corporate costs and snaggle economic activity. Stocks don’t like that.

The Bank of Canada has now bumped rates four times and there is another to come, for sure, this year. More in 2019. Our guys can’t afford to fall far behind the American central bank or the dollar will fade more than Jagmeet Singh. It’s probably safe to say mortgages will cost a full 1% more by next autumn, which would push the stress test rate to almost 6.5%. As reported here a day or two ago, this is exactly what all those mortgage brokers nightmare about. Already this year, they say, 100,000 buyers have been shut out of the market – a big reason sales are tanking.

Donald Trump is the inflation president. He wants growth, expansion, jobs and spending. The price of that will be higher debt and rates. To think otherwise is rash.

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“Long time reader,” says Malcolm, sucking up, “and dedicated follower of the balanced-diversified lifestyle. Thanks for all you do!”

Of course, he has a problem. His mother. She’s 78 and recently went bananas.

“She came into an unexpected windfall and I’m trying to help her figure out how to handle the change to her circumstances, and just wondering if I could get a bit of direction to the best way of going about it.  She’s definitely not a very financially literate person, all her life she’s lived paycheque to paycheque.  Along the way, a combination of bad luck and bad choices, she eventually found herself retired at 70yrs old, single, and essentially penniless.

After a few very lean years of living off CPP & OAS, while living in a subsidized seniors residence, she got news that some family land in SE Sask inherited years ago had been targeted by an Oil & Gas company with news they were interested in drilling.  In one of life’s crazy twists, they ended up with a successful well and subsequently my mom started receiving royalty cheques for her mineral rights on the land.

For someone who had always lived hand to mouth to suddenly start receiving monthly cheques averaging about $10K per month, it was a life changer.  For the first few months she splurged and treated herself and family, paying off all her debts and moving to a new condo (as she no longer qualified for subsidized housing). Now reality is setting in and she realizes this money needs to be handled properly going forward.

What are your suggestions for someone in this situation?  I told her to make an appointment with an accountant for professional advice as there will be tax repercussions, obviously.  She has no interest in investing, doesn’t want to have money tied up in the market. She bought a GIC to cover half her taxes next year and aside from that just puts the remainder in her savings account.

I’m not sure what her next move should be, any advice would be greatly appreciated.”

Royalty money can end as fast as it appears. It’s unpredictable, non-guaranteed and entirely at the discretion of the issuer. Besides, wells dry up. Mom must understand this. She also can’t afford to blow the cash because the CRA needs to be fed. Royalty income is treated like regular earned wages – so mom now has a marginal tax rate of 36% and will owe at least $35,000 on the windfall being received over 12 months. This will also affect her CPP, plus there’s the OAS recovery tax (which clicks in at $75,000).

The woman may be nice, and your mom etc., but she obviously can’t be trusted with money. Time for you to man up, move in, craft a budget, go joint on her chequing account, cut off credit, make quarterly tax payments and protect her from herself. Do you have power of attorney? No? Then get it.

There comes a time child and parent must change places. She cared for you during the idiot years. Now rescue her.

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July 27th, 2018

Posted In: The Greater Fool

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