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October 10, 2018 | Plop

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.

Markets are funking out this week. Why?

Topping the list is interest rates. As explained here earlier, the benchmark US Treasury swelled to more than 3.25%, the highest in seven years. When investors can scoop that return with no risk, money flows from stocks to bonds. Equities drop – especially the over-valued ones (think Tesla).

Also on the list: trade wars. Markets worry about Trump and China’s Xi. Both are take-no-prisoner kinda guys. This will get uglier before it gets solved.

And inflation’s back. Wages in the US are rising by 3%, or 50% faster than the cost-of-living. Amazon just caved to the pressure with a $15-per-hour minimum pay. Meanwhile there are more empty jobs than unemployed people in the US, so competition is on for workers. As corporate payrolls increase, bottom lines retreat. Lower earnings guidance results. Weaker markets.

And oil. Talk of eighty-buck-a-barrel crude is common now as global demand for the black stuff hits a new, historic, never-experienced high. Higher energy costs bite into GDP everywhere, except maybe the Saudis. And they sure have issues. You might have noticed that Irving blew up Saint John this week. The country’s largest refinery belched smoke and flames, then shut down. Six thousand people out of work for a while. And imagine what this will do to prices at the pump.

Of course, investors are locking in gains after a year when markets hit record after record. In fact, it’s useful to remember what US stocks have done over the past five years. If you eschewed this, it was a bad decision…

 

In Canada some wags are blaming the feds for sub-par performance and a sense of drift in the country. To the south, a quixotic, unpredictable and possibly unhinged leader is racing through a frenzied agenda of tax cuts, deregulation, protectionism and rightist policies which have dropped the jobless rate to a 50-year low and cleaved the country as never before. The result is intense. Explosive. Dangerous and historic.

Here? Well, as academic George Athanassakos wrote in the Financial Post on Wednesday:

Canada’s future looks less than clear under the stewardship of this Liberal government.

Trudeau and his ministers have made it clear they want corporations to become benevolent organizations that put workers before shareholders. They favour taxing corporations and the rich, and adding regulatory impediments and red tape to corporate activity. They are big supporters of income redistribution as opposed to making the pie bigger for everyone. They want to regulate the economy and nudge corporations to submit to the Liberal government’s social views and economic philosophy. Their policies take away economic entrepreneurship and wealth creation and replace it with handouts to every significant lobby and activist group… Canadians are getting the sense that they are governed by a bunch of idealistic and dogmatic college students convinced they will save the world.

Our biggest export – oil – now sells at an unprecedented discount to world prices. One reason is our inability to ship it efficiently. Now there’s talk the $4.5 billion unbuilt pipeline Trudeau bought with public money – bailing out an American company only too happy to dump it – will be gifted to aboriginal groups. Mr. Market is not impressed.

This malaise is certainly affecting people. In Calgary, for example, despite a doubling in world oil prices, the housing market is cascading lower. “We didn’t expect this much of a decline,” says the real estate board’s chief economist, when asked about the slowest sales in a decade.  In BC, as noted here, a leftist government is using new taxes to deliberately crash a property market which accounts for 25% of provincial GDP and in which 70% of people are invested – in the name of social justice.

In Toronto a leading mayoralty candidate wants to rip $80 million per year from the hides of people owning high-end homes in order to gift down payments to renters. In Vancouver local politicians are rezoning traditional single-home neighbourhoods into duplex alleys. In other words, Americans are solving the wealth gap by lifting up the lowly, while we pillage the lofty. Only one approach will work. And it’s not ours.

What should an investor do?

Simple. Stay invested. In a storm, shelter in place. Don’t set off in a new vessel. A balanced, globally-diversified portfolio is the best bet, as it has been for ages – precisely because you’ve no idea what happens next. Do you?

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October 10th, 2018

Posted In: The Greater Fool

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