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March 7, 2021 | Prepare

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.

Soon it will be two full years since Canada had a federal budget. When one comes, it will be shocking. Expect the date to be announced this week.

Recall there’s been no budget since the election. But events since have been numbing. Two years ago the finance minister (poor Bill) unveiled a $19 billion annual deficit and promised to get back into balance eventually. Now the new minister (Chrystia the Impaler) will unveil a $400 billion shortfall with zero plans to turn the red ink black. Our national debt in 2015 when the Libs took over was $612 billion. It took 148 years to accumulate that. Now it’s almost doubled in six years.

Covid, of course. Ottawa spent more money, per capita, on the virus than any other country. The CERB, rent subsidy, child pogey and payroll cheques flew so thick they blotted the sun. Lots of people suffered because of the virus, but there’s no denying over $100 billion landed in personal chequing accounts. Savings have exploded. Combined with cheap loans, real estate inflated as never before. Two-by-fours are seven bucks and puppies sell for up to six grand. All while the government sinks into a morass of borrowing.

Now what?

So the budget is coming soon. Maybe by the ides. The Trudeau government wants it delivered as spring arrives, the vaccine begins flowing freely, the economy reopens and prior to this summer’s federal election.

Will the feds recognize the spending/debt path they’re on leads to perdition?

Nah. Not a chance.

That’s boomer talk. Nobody cares anymore, since we have Modern Monetary Theory, central bank intervention and a mass of voters who want to WFH, flip houses and buy Teslas with Bitcoin. Fiscal restraint is so 2014. If the prime minister needs hundreds of millions for native fishers, black-led businesses, windmills, international maternal health or women’s initiatives, well, he can just print it. And he does. So here we are.

The odds are that C’s maiden budget will keep the spigots open. Ottawa has promised to do pharmacare. More paid sick leave. Enhanced child care. Tons more to the provinces for health care. Money to revive small business. An airline bail out. Big green initiatives. Plus there’s pressure (from you-know-who) for a UBI. Given that the NDP has Mr. Socks by the shorts, the drift left – more government, more programs, more expenditures – will continue.

In short, your children’s grandchildren will still be impacted by what happened in 2020 and how politicians dealt with it.

Now what about taxes?

The meme is that people should be shielded from disease by a benevolent leader, and the rich should pay more. But we’re running out of them. Already 40% of households receive more than they contribute and the top tax bracket is 54%. Under 800,000 people in Canada have $1 million or more in investible assets. Fewer than 100,000 have five million. So, obviously, almost all of the spending must be funded by borrowing more, not taxing more. (Although there are a couple of bombs coming.)

So, our nation hangs on the bond market.

These days we’re paying about $30 billion a year in interest on federal debt at an average rate of 2.2%. We owe $165,000 per household. Gross debt equaled 52% of the economy when the Libs took office in 2015, and it’s 73% now. Provincial and other agency borrowing is in addition. About 12% of the federal government’s entire budget is spent on interest (it was 30% during Mulroney’s time) – and that’s with the cost of money at an historic low. So the big question is how we cope with (a) more spending, (b) more debt and (c) rising rates?

With difficulty.

There’ll be two inevitable outcomes after Trudeau wins a majority later this year: higher levels of tax (since the economy’s too fragile now for a big hit), and lots more inflation. Plus steadily increasing bond yields as CBs cut back stimulus and investors demand better returns.

So, it’s best to prepare.

Expect rising rates along with insane prices and some government intervention to cool real estate. If you’re buying now, prepare for a potential equity hit. No flipping. If you’re selling, this is nirvana, baby.

Investing? Forget cash, HISAs, investment certificates or anything else where returns will quickly fall below the inflation/tax threshold. Every portfolio needs broadly-diversified growth assets, preferably low-cost ETFs. And avoid home country bias – ensure exposure to the US and global markets. Own rate reset preferreds, providing real protection from rising rates and also paying you to own them. And make sure your TFSA, RRSP, RRIF, RESP or RPP accounts are brimming. Funds inside can grow tax-free. Also crucial are effective tax minimization strategies, like spousal retirement plans, family-funded TFSAs or income-splitting through a spousal loan.

In a country with out-of-control public spending and a voter base clamouring for more, where most people think a house is the only financial strategy and envy is the national pastime, govern yourself accordingly.

She’s coming for you.

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March 7th, 2021

Posted In: The Greater Fool

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