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July 28, 2019 | No Guts

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.

Let’s recap.

So far this year (it’s the end of July) the US stock market has gained 20.7%. In seven months. Once again it’s at a record level. Since last July the advance is 9.5%, including the big (and temporary, Trump-inspired) plop of late 2018.

On Bay Street the TSX had added 15.4%, is ahead 4% year/year and also in record territory. A balanced and globally-diversified, middle-of-the-road-risk-lower-vol-kinda-boring portfolio has advanced about 10% in 2019. Inflation is now 2%. Preferreds are paying 4.6%. Five-year government bonds yield 1.4%. High-interest savings accounts are in the 2% range. Since Christmas, financial market volatility has plunged 60%.

Hmm. What does this mean, and what’s it portend?

First, anyone who sold into the storm in Q4 of 2018 was a fool. You turned paper losses into real ones for no reason. The decision was emotional, not logical. At the time I wrote here about investors with millions who crystallized a loss and went to cash. They’ve now missed making hundreds of thousands in gains during 2019. Never, ever listen to your gut.

Second, as much as the weenies who flock here like to say, there is no disaster looming. Not even a hint of a US recession. Economic growth is okay, corporate profits are okay and consumer spending’s okay. The VIX is low because markets are cool – despite having Trump as the world’s most powerful guy, despite trade wars, regional conflicts, accumulated debts and Selena Gomez. Besides, 2020 is coming. As explained here a few times, you’d be unwise to bet against America before the next presidential election. Or after.

This is a big week on that front. Talks between the US and China take place to dial back that injurious trade war. And on Wednesday the Fed will announce a teensy interest rate cut, the first in a decade and one of two likely by the end of the year. But not to worry. The US central bank ain’t chopping the cost of money and throwing gas on the fire because the economy is retreating. Rather it’s (a) insurance against a slowdown after ten years of growth and (b) because Trump has been thumping on the Fed for months to cut and, yes, throw gas on the markets.

Odds are the Fed will be back raising rates in a year, erasing the half-point decline of 2019. And why not? The States has essentially full employment, wages have been rising and the threat is inflation, not deflation. The formula is for long-term corporate profitability, barring an asteroid strike, so investors would be smart to stay invested.

As for Canada, no rate cut now. Probably none this year. Maybe not for a long time to come. There’s just no reason for the Bank of Canada to ease, and a compelling reason not to – more debt. In a country with $1.6 trillion in mortgages and $300 billion in home equity loans, why would the bankers make money cheaper? Why encourage more borrowing? In the absence of a recession, why take the risk?

Having said all this, the current bull market is ten years old, just like the economic expansion. This is breaking records. It scares those who think things will go down just because they went up. It has analysts pouring over the latest data, looking for cracks, like weaker business investment. Meanwhile the effect of Trump’s big tax cut seems to have worn off, and the trade war’s higher input costs are reducing bottom lines while corporate debt keeps inching higher. So, yeah, there are risks. Volatility will return. What happened in late 2018 could return – a wrenching decline, followed by a crawl back.

That is exactly why most people – maybe all people – would be better off owning some fixed income along with growthy assets. Sure, bonds may pay only 1.4%, for example, but it’s sure nice to have some when equities decline and debt prices jump higher. That 40% safe-stuff component in a balanced portfolio mitigates against equity market drops, makes things less volatile, helps retain wealth and keeps you from repeating the mistakes of those who follow their guts.

Remember: not everything you own needs to go up in value at the same time. Bond ETF prices may decline when equity fund vales rise. And vice versa. Preferreds may lose altitude when rates fall, but churn out a low-tax dividend, pay you to own them and will rise again. Emerging market assets may plump when Trump stumbles and US markets follow. The point of investing is to preserve capital, as well as creating it. The three rules remain. Be balanced. Be diversified. Be liquid.

It’s the opposite, in other words, of owing an investment condo.

Note: If you read Friday’s post and the response that flowed from it, you know the decision on adopting threaded comments for the steerage section. Not. Happening. If you want to fight and bully, go to Reddit. Real men stay linear.

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July 28th, 2019

Posted In: The Greater Fool

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