Tuesday, August 15, 2017 at 4:18AM Something is not right. After raising interest rates for the 2nd time this year in the U.S., markets rates have fallen. The 10 year U.S. Treasuries were around 2.45%. After the rate increases they have fallen back to the 2.3% area. We believe this signals weak demand by business to borrow and suggest deflation is gaining strength. To be fair, American business is cash rich, led by Apple, which has $240b in the bank. Total cash hoarding by American business is $2 trillion. One has to ask, why are these companies not investing in new plants and research and development?
Stock market values bear no relationship to corporate earnings. On July 24th, 2015 the companies in the Dow Jones Industrial Index combined earnings were $107.58, NASDAQ $21.98, and S&P 500 $9.82. Today, those earnings are $104.41, $24.21, and $10.15, respectively. Yet, all three indexes have increased by 23%, 26% and 19%, respectively (the TSX is up 7%). This means the stock markets have been going up based on speculation that Trump is going to save the country and make corporate earnings double in 3.4 years. This is next to impossible due to lack of new investment, the ever growing debt by governments and individuals, numerous leaderless governments in the U.S., Britain, Canada and Japan, and, the threat of China falling into a recession. Plus, there are surpluses of just about everything mined, harvested, and manufactured.
There is surplus of housing. Calgary has 23,600 empty homes. Condos make up 45% of the total. Toronto and Vancouver have around 60,000 each. In Penticton, homes under construction equal a 10 year supply based on population growth. While not as big, overbuilding is taking place in Kelowna and most of the Fraser Valley. Where are people going to come from for all these homes? Increased immigration?
Without immigration Canada’s population is shrinking, as are most Catholic countries. The shortages will not be noticeable for about another 10 years when the Boomer generation begins to decline. Canada is going to need massive immigration to offset the coming shrinkage. Japan is the first country to feel the effects of a declining population. Japan already has surplus housing. Just like Canada is going to have for years to come.
Stock market growth is limited for the rest of this decade. By every yardstick they are very expensive. Portfolio growth will be coming from cash and from dividends. Our 7.7% annual return from dividends will be one of the highest rates of return for all investments over the next couple of years. Not to be cocky, but the 7.7% will be higher because most of the companies on page 6 will increase their dividends.
Stock markets are warning us to be careful, risk little and pay down debt. There will be another interest rate hike later this year, and probably two more next year. Stick to terms of 1 year or less on all money market assets and ride the interest rates up.
All bonds with terms greater than one year should be sold immediately. Like preferred shares, they trade based on the going rate of interest. Bond prices for the next few years will be heading lower. They will be a horrible investment.