Misconceptions: Falling interest rates and a war on fossil fuels will create a strong economy.

Fossil Fuels:

Climate change is an excuse used by the Greens to preach doom and gloom.  They love to call for ‘net-zero’ even though the earth has always greened in lockstep with every increase in CO2. This is a natural phenomenon that occurred even during Covid when the global economy shutdown.  It has become so insane that governments are trying to make companies use carbon capture to remove it from the atmosphere even though it is the life support for the plants that create the oxygen we need to survive. Even ice core samples provide evidence that life thrived on Earth when CO2 levels were close to five times higher than today's level. 

You will never hear a member of the Climate Clan complain about the high emissions China, India, the U.S. or Russia emit. Instead, they go after Canadians who are responsible for one of the lowest levels of GHG at 1.5% globally. If the climate alarmists had any dignity, they would at least be pushing their hardest to eliminate the use of coal power across the planet because it is the worst fossil fuel for emissions.

The astronomical cost of the green transition is never mentioned because it will be paid for by the consumer. via higher electricity prices and lost employment. 350,000 jobs are tied to the Oil & Gas industry in Canada. It is the largest single employer of Indigenous people and may turn out to be the most life changing for them when it comes to wealth.  This sector generates up to $140 billion to GDP (depending on oil prices), every year, and demand for our oil is growing.  The newly opened TMX pipeline will produce an additional $26 billion this year alone. In comparison, the Auto industry only generates $20 billion a year, and it relies heavily on government help eventhough it is a crumbling industry because of foreign competition.

According to Natural Resources Canada, the vehicle transition could cost up to $300 billion by 2040 just to expand the electrical grid.  This cost is not surprising considering that, using data from Statistics Canada, the average Canadian household uses about 10,861 kWh in electricity per year. Meanwhile, the average EV uses about 4,500 kWh of energy per year which means a household’s electricity use would jump by about 40 per cent if they bought only one EV and charged it at home.  

Canada is home to 24 million cars and light trucks that run on gasoline and diesel. If all those vehicles were powered by batteries, they would require 108 million mWh of power every year. These costs will be paid for by higher electricity prices which makes our economy less competitive globally because it consumes more income. Plus, there are non-electrical costs such upgrading every road in the country to be able to handle the increased weight created by batteries.

Interest Rates:

Falling interest rates are only good for people with too much debt, those who gamble their money, and spend on high price goods likes cars and homes. But there are also very negative aspects of low interest rates that never gets mentioned. A few are disposable income falls with rates, and they allow for larger loans that will ultimately end in higher interest expense when rates increase.  Both scenarios take money out of the economy. 

If you want to maintain the current level of passive income in a low-interest rate environment, the savings must be much larger than they actually are. As we have mentioned in the past, a healthy economy needs interest rates between 4 and 6%.  At 4% the saver gets an inflation adjusted risk-free return on savings and lending at 6% the bank can make a good profit. A spread below 2 percentage points results in less cash to reinvest and to pay out to shareholders.

Be prepared if interest rates fall further because it means the economy is shrinking.  The healthiest economies are the ones that  reward the saver rather than coddle the financially irresponsible.  Trudeau is a disaster, and we are paying for it today.  Thankfully, him and his party’s days are numbered.

We are amid three government elections in North America, one being in the U.S.  New Brunswick has the only leader who has cut debt and taxes. However, during this election  Premier Higgs has stated he will add $2b to the debt if re-elected.  Here in B.C. our Premier believes in Trudeau style of government; spend as much as possible and “let the budget balance itself”. 

Today’s elections should be fought on how to cut government spending by decreasing the size of the bureaucracy, reallocate funds we send outside our borders to the medical sector, education system, and military, and more importantly cut taxes so people have more money to spend. In 2023 the average Canadian family income was $109,225 and from that 44.8% ($46,988) went to taxes, compared to 33.5% in 1961.  An economy cannot flourish when it loses so much money to taxes. 

Canada’s economy is in a 5-year downward trend with no sign that the bottom is near as long as Trudeau is in power.  Yet our stock market is doing well because of falling interest rates, but more so because foreign investors are returning to Canada the more it looks like Trudeau is on his way out.  The Toronto stock market is up 14% this year, an excellent record considering Ottawa wants to make Canada a third world country. 

Other than investing in Chubb(a Canadian insurer) and Occidental Petroleum, Warren Buffett’s Berkshire Hathaway has been selling shares, including a sizeable investment in Apple. According to recent filings with the US Securities Commission, at the end of June, Berkshire Hathaway held $234.6 billion in T-bills, which is more than the U.S. Federal Reserve held on September 25. As of the end of June, Berkshire’s investments in stocks totaled $284.8 billion. It is easy to conclude that Buffett shares Sacola’s belief that Cash is King in this market and shows the world wants to invest in Canada. 

Even though falling interest rates tend to result in climbing share prices, the economy is slowing and the risks of a sell-off or a sustained period of falling corporate profits is growing.  Due to the stock markets being in expensive territory, continue to hold all those nice dividend paying shares, but currently do not to add to positions.  Place the available cash into one-year GIC’s which today is roughly 4%.  When reality returns to the stock markets we expect the correction to be fast but there will be no long-term bounce back due to too much debt holding back the economy. 

We strongly believe Canada has the best potential in the world.  The only thing missing is the will to make it happen.  We are one of the world’s richest countries due to our resources which will be needed for the rest of this century and well into the next. Investment returns will come from dividends and interest for the rest of 2024 and probably most of 2025.  Let commonsense be your guide for the next eighteen months. Stock markets in North America are vulnerable to sizeable drop.  

Today Canada must immediately change direction.  Whoever wins the coming election will need a couple of years of trying to begin to correct the mess Trudeau and the Liberals have created.  Canada has so much potential but zero drive to join the real world.  We desperately need an election today, not tomorrow.

Once again Trudeau has declared war against those who use Canadian tax laws to save themselves some money.  He already changed the capital gains tax, now his latest target is the Trust because he has decided these people do not pay enough taxes and has ordered a full review of all laws with the aim of increasing taxes.  These legal entities are necessary to attract many essential services such as doctors, dentists, lawyers and owners of small businesses.  

No doubt the new rules when implemented will be confusing for businesses and users.  It will mean more expense for trust holders because many will have to go to court to get rulings on the new laws.  With a shortage of judges, it could easily take years to settle any new financial laws.  

This will be another blow to attracting foreign investors and doctors who might wish to move to Canada.  Numerous companies have indicated they want to come to Canada but for now refuse to because of the mess Trudeau is making. By changing the existing laws, the Liberals are essentially exacerbating some of the problems they created.    

Since he became Prime Minister, Trudeau has doubled our national debt.  He has created more debt than all previous Prime Ministers in Canada combined.  Ottawa this year will pay out $54b in interest payments, or $1,371 per every child and adult.  This money creates only a handful of jobs and results in wealth for very few.  You can expect a further increase in interest next year as Ottawa will have to borrow more money to pay for the continuing increase in debt.  

Canada’s housing mess is the fault of Trudeau. Nobody else. Last year’s official figure was 1.3m new immigrants came to Canada, yet only 200,000 housing units were built. It is clear not one Liberal or NDP member passed grade 5 math.  

Trudeau recently announced a cap of 488,000 immigrants for 2024.  This figure was hit last month and then he quietly raised the number to 500,000 for both 2024 and 2025.  Unless Trudeau closed the borders in July, by the end of the year the number will be close to 900,000. Meanwhile there will be only 250,000 units of housing built, at best.

Government policy on housing is hurting the sector. BC made most short-term rentals illegal across the province. It makes sense socially, but the policy was like hitting a switch and has ended up doing more damage that good. Rather than banning them altogether on a certain date and hurt the tourism industry, they should have phased the service out overtime giving the hotel industry time to fill the demand.   Socially it was a smart move to ban short-term rentals, but it is causing pain for the private investor.

It is these people who are the biggest builders of new housing. This is critical because they take all the financial risk and manage it to make a profit and limit losses whereas governments do not care if they make money. 

Trudeau is determined to make Canada poor and continue to make Canada even less attractive to foreign investors.  It is time for Ottawa to grow up.  Canada has the potential to be the most prosperous country in the world.  Yet today’s ruling politicians all agree to make Canada a third world country. 

Retirement

We are often asked by people if or when they can retire based on their savings.  Bay Street always says we need to have liquid assets totalling over $1m to survive in retirement.  This is nonsense.  The key is to own a paid off home and be debt free. If one achieves this, all the average person needs is around $250,000 ($450,000 for a couple) to maintain a middle-class lifestyle in retirement.  At the same time there will be the monthly Old Age Pension and CPP which can add an additional few thousand a month. 

How does one prepare for retirement? In addition to savings, there are other things to plan for that are just as important such as a proper will drawn up.  If you do not have one, do so immediately and then pick an executor.  I always recommend you must be careful picking one for your estate.  You want someone who will obey your wishes fully.  Lawyers and accountants will do the job, but both are very expensive and most likely have no emotional commitment to you as a client.  Plus, they never have enough time to do an estate all at once.  Because of this we suggest a reliable family member or a close friend who you trust.  

We then ask the client what they plan on doing when retired.  Most never give it much serious thought. One client told me what she planned, and I then mentioned that is great for first few weeks, but what are you going to do with the rest of your life? She ended up working two more years. 

When it comes to saving for retirement always start early. We are groomed to save for a downpayment before anything else.  We disagree.  If the average home price is reasonable, it can make sense, but today it is better to focus on retirement savings and favor the significant compound returns that financial assets can offer over time. Based on Canada’s average home price in June the bare minimum downpayment should be $70,000, although $138,000 (20%) is better because it will qualify for a CMHC loan. If you can save the latter by 35, you are better off building a retirement portfolio first rather than save for a downpayment.

Time is the most important variable to growing money, and the more you have the better off you will be.  The average return for most stock indices is roughly 7% annually which means your money will double every 10 years, if reinvested.  However, if done properly, one should be able to double the average return. This is why we suggest start by building up as much savings as possible at a young age.  

We always recommend saving $10,000 ($20,000 for a couple) and invest in GIC’s first. This money is strictly for emergencies.  After that, begin a retirement fund of $100,000 in safe blue-chip companies that have a history of increasing dividends.  These dividends can be used to help build a downpayment fund. Once the downpayment is saved, the income from the portfolio can then be reinvested.  

When buying a home, always try and pay it off ASAP because the tens of thousands of dollars in interest you will save can be directed to retirement savings. These savings are easily achieved by choosing a weekly mortgage payment or by adding extra cash each month. On a 20-year mortgage each dollar of principal paid early can result in savings of up to $3 in future interest charges and will shorten the life of the mortgage by a few months at least. The faster a mortgage is paid down the closer one becomes to a comfortable retirement. 

Make sure your equity portfolio is filled with top-quality Canadian firms that have a history of raising their dividends annually, like all our recommendations. As well, get rid of all mutual funds, options and ETFs. These are designed solely to make the banking industry rich. 

As you age, increase holdings in insured GICs until they become roughly 70% of your portfolio at retirement, in today’s economy.  Once you enter this chapter of your life you cannot afford to take any major losses.  If one does it is almost impossible to recover from them because time is now running against you.  Plus, we never know when fate will deal us a bad hand, like poor health. 

Never gamble. Commonsense is always your best guide to saving for retirement. Stick to blue chip securities like banks, utilities, energy and the major retailers because these investments will always grow with the economy. The main key to investing is, if possible, always re-invest all income and capital gains.  Even more important than having a large nest egg, always settle in a life that keeps your mind and body active. Neglecting both will result in a shortened retirement making the money you worked so hard to save irrelevant.

After the recent cut to interest rates, people are out in full force predicting a Bank rate as low as 3-percent. These same people are thinking it is going to be an economic saviour.  We doubt it, because if we do see rates that low, it will cut consumer spending and exacerbate our housing problems by pushing prices up because one will be able to borrow more.  Let’s hope this does not occur since affordability is one of the main issues in our economy.   

If interest rates do fall to 3% it will mean our economy has entered a recession and unless interest rates drop south of the border, our dollar will probably fall to 70 cents U.S., thereby creating inflation which makes Canadians worse off. Ottawa and most current Western governments do not understand that it is savings that build the economy. Without it our financial system would collapse. If anyone questions this, provide a country that has prospered without household savings.  One cannot because it does not exist.

Yesterday’s economy was based on record consumer debt that is now restricting today’s GDP growth. This is why rates today should be used to reward savings and protect the dollar, nothing else. It makes more sense to allow those with savings a minimum $5000 in low-risk passive income annually per $100k than to save those on the edge of insolvency a few hundred per month.  These savings in interest will do little for the economy because it will most likely be forced towards paying off debt rather than being productive and work its way through the local economy like higher passive income will do. No matter what, those who are being squeezed by higher rates today will still be in trouble with a bank rate two-points lower. They are pooched and will only be valuable to our economy with a clean financial slate.  

We predict that sometime during the fall deflation will become more obvious.  Led by a continued housing correction, prices for most goods and many financial assets will fall. Housing demand is there but few can afford today’s interest rates and prices.  The latest numbers show the average family income has fallen slightly to $112,000, which means people can qualify for a CHMC loan of $340,000.  This is enough for maybe a condo in small town Maritimes or the Prairies but nothing in the main centres across Canada where prices range between six-and-eight hundred thousand dollars, with Toronto and Vancouver costing over seven digits.

There is an acute shortage of tradespeople, and these positions are not being filled even with excessive immigration. This is just adding more flames to the housing market.  For 2024 it is now estimated there will be only 200,000 new housing starts, down from 230,000 last year because of a shortage of skilled labour and newly enacted laws that deter speculation. Here in B.C., it seems like the government is the largest developer. This is not a surprise since it can take up to three years to get the needed building permits.  It is the speculators that will fulfill the demand for housing but only if they can make money in a timely manner.

If you want to see what low rates do to an economy, look across the Pacific to Japan. Their economy is finally starting to recover from decades of contractions created by an exploding real-estate bubble that was followed by a period of excessively low interest rates.  As the chart above shows, accommodating the borrower by sheltering them from higher rates does not fix an economy.  It does more harm because those who are drowning in debt no longer contribute to economic growth no matter what rates are. This is why it is so important to reward the saver. 

Squeezing the indebted into bankruptcy speeds up a recovery since the process lasts only seven years at which time their credit record is wiped clean and a new one can be rebuilt. As harsh as it sounds, it is better to strangle the indebted and force a recession that may last a few years rather than decades as Japan’s economy has proven over the last 35 years. It was not until this last February that Japan’s major stock index, the Nikkei, broke the last high set in 1989 because of an irresponsible monetary policy that kept interest rates low and punished the saver.  

If a country wants to maintain a population, there needs to be 2.1 births per female.  Like most wealthy nations, we do not fall into this category and are thankful that foreigners choose Canada as their new home.  However, this policy is only productive when managed properly. An immigration policy that allows for a population growth above 1% annually creates chaos across the economy because there is not enough time for it to adapt, like what we are witnessing in Canada today. Ottawa is going to allow 488,000 people into Canada both this year and next even though the housing shortage was 500,000 units last year.  If we want to reach a balance between housing demand and population growth, we must limit immigration to 200,000 people for a few years.  

The only solution that will allow Canada to reach its potential is to have a government that puts the saver first, allows our businesses to develop, and let the labour market dictate our immigration policy for the time being. Without these three, the economy will continue to be lost. 

Chart from www.tradingeconomics.com