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January 24, 2019 | Not Fake

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.

Earlier this week a poll claimed 46% of Canadians are less than $200 from financial insolvency at the end of each month. Some critics scoffed. Fake news, they said. One cell bill from oblivion? Absurd.

But there was more. The Ipsos survey results included this: a third of respondents said they routinely cannot pay monthly bills and 45% stated they’ll have to take on more debt to pay family expenses. This came around the same time as a new federal government study showed households are paying nothing on $100 billion in home equity loans. In addition, the Canadian Payroll Association claims 40% of people are overwhelmed by their debts and 47% would have a cow if they missed one paycheque.

In fact, a steady stream of similar reports, polls, surveys and studies have been published in the last three years. Personal and family debt during this time has reached an historic high. As reported here a few days ago, between July and November families added more than $17 billion in new mortgage debt, bringing the total to $1.54 trillion – or $1,540,000,000,000. The average mortgage debt, HELOC debt, car loan debt and student debt have all increased in the last few years. And (to restate an important fact) income gains are trailing inflation (1.4% vs 2%).

Is this all fake news? If not, why are no leaders, politicians, bank CEOs or chief economists talking about it? After all, it sounds like a disaster in the making. If families are so stretched, how can they possibly survive the next inevitable economic downturn?

The answer (if it’s remotely true): they can’t. In fact the next mess may be inevitable exactly because of what people have done to themselves.

You will recall we handled  the GFC of 2008-9 in a different way than the US. There the federal government spend a few trillion bailing out institutions and over-leveraged homeowners. In Canada the government dropped mortgage rates to insane levels, and stood back. Hormones and house lust did the rest. As rates plunged, buying surged, house prices escalated wildly and family debt flew off the chart. But all that spending saved the GDP.

Now here we are, on the far side of the mountain. We blew the wad. Big houses. Big debt. The savings rate sitting lower than a dachshund’s package. Half of us say if interest rates edge up any more (they will) financial trouble will follow. And that’s not even with the job losses a recession would inevitably herald. Meanwhile central banks have been struggling to break our worse-than-crack dependency on cheap loans.

Among those worried about this is TD’s chief economist. Beata Caranci said it a few months ago: “Past 2020 it’s really going to hit the fan. At that point you have high level of indebtedness combined with income stress happening simultaneously. So we are definitely not out of the woods.” So, the next rough patch will not be solved by consumers, the way the last one way. Instead it will be “a household-led recession.”

That means, pickled in debt, struggling to make the monthlies and, yeah, two hundred bucks from the cliff’s edge, families no longer have the capacity to rescue the economy. As for the Bank of Canada, it’s been a tough slog to raise rates four times when the Fed has increased on nine occasions. So in the next downturn, interest rates can only retrace a relatively short distance. That big bag of stimulus central bankers had to sprinkle over everything in 2009 isn’t there.

By the way, 2020 is the year of the next presidential election. There may be no good outcome for that event.

Most at risk are those in debt. Job loss and economic downturn are your enemies. The best course of action in 2019 is to change your life. If that means dumping the mortgage along with the house, so be it. Trash the HELOC. And, for the love of Allah, stop borrowing.

Also be careful when investing. Rebalance to take profits and de-risk. Embrace a balanced approach so you have fixed-income assets to offset inevitable equity volatility. Be wary of weed and FAANGs. Use some of the tactics laid out on this blog in recent weeks to drop your tax profile. After all, it’s not what you make, but what you keep. It’s also time to up your cash a little. Unless you have millions already, stay invested. Never exit an asset class since you have no idea what’s coming. Yes, ignore the noise

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January 24th, 2019

Posted In: The Greater Fool

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