Not surprising, the market outlook from Wall Street and Bay Street is bullish for all of 2021. We have no idea where all this money is going to come from to propel share prices higher. We do know that the last hundred years have delivered numerous corrections with the worst being 1929-39.  It took 25 years for the NYSE to recover its August 1929 high. The next three major corrections happened in the last 40 years. We will most likely experience the fourth soon. 

The Eighties was the era of soaring interest rates.  Canada Savings Bonds yielded 21% for a one-year term.  People lost their homes as mortgage rates hit 22% or higher for a first mortgage.  Stock markets got slaughtered because stocks could not compete with those interest rates.

Between 1998 and 2000 we experienced the Dot-com bubble.  Shares were trading in the stratosphere based only on being in the hi-tech sector.  Profits were not important to investors since these companies would be printing enormous amounts of money in a few years.  Most of these companies disappeared when the bubble popped.  It wiped out billions of savings - mostly from the amateur investor.

2008 to 2010 is known for the CDO Mess (Collateral Debt Obligations).  Most banks, finance companies, and brokerage houses bundled up their mortgages, no matter the quality of the loans, and sold them as Guaranteed Investment Certificates.   Some of these CDO’s were representing up to 110% of the value of homes they were covering.  When the market turned many of these CDO’s became worthless and billions of dollars were wiped out overnight.  A few lenders went broke, but most were unscathed as it was their customers that lost their savings. It took about three years to clean up this mess.  This is why it is so important that investors make sure the GIC they purchase is insured.

Today is the fourth troubling market.  Based on recent price/earnings ratios the markets are expecting profits to double in 3 years. Based on the same metrics, investors expect the combined profits of the companies making up the gambling exchange NASDAQ to double in only 55 weeks. This is impossible.  It is safe to say we are experiencing a repeat of 1998-2000.  Hi-tech share prices share no relationship to earnings (if there is any), book value, or sales.  It is the old Greater Fool Theory all over again. This party will end the same way as past bubbles, only this time the losses in dollar terms will be the biggest on record. 

The global economy is hiding behind zero interest rates.  There seems to be a theory the good times can last forever with them.  Japan’s economy has proved this wrong over the last 30 years. It was not until last month the Japanese stock market finally hit a new high (previously set in late 1989). To date, the average home price remains far below their 1990 high. This works out to roughly 31 years of asset price contraction. Japan’s central bank kept interest rates near zero during this period exemplifying that low rates do little, if anything at all, to promote growth over time.

 Contrary to popular belief, a central bank does not control interest rates.  It is the demand for money in the open market that sets the lending rate. A lender will always seek out the best rate of return possible and the borrower is often forced to accept it. When the market gets scared, private lenders demand a higher risk premium. The demand for money by governments and leveraged consumers will continue to increase moving forward.    It is not only going to be interest rates that will squeeze the economy, but higher taxes needed to finance historic deficits across the global economy. Both consume disposable income.

For the past 100 hundred years interest rates between 4 and 6% occurred during a healthy economy (anything below this was used to fend off a contraction that inevitably took place).  These rates kept asset prices in check with fundamentals.  It allowed for people to borrow responsibly because they could afford the cost and lenders to earn a decent return.  Today, real estate prices have increased so much (a direct result of falling interest rates) that they have wiped out any benefit of zero interest rates.  Current interest rates are being used as a temporary bandage while on the way to the hospital for stitches.  The wound will heal, but there will be everlasting scars.

We do know that all excesses are eventually wiped clean from all markets.  When this will occur is anyone’s guess, but it will most likely be within the year. Therefore, we strongly suggest everyone get rid of all debt.  Zero interest rates are a signal that there is something wrong with the economic system. 

The lesson for the next few years will be that debt is the enemy while cash will be king. Continue to hold blue-chip companies with a lengthy history of pre-pandemic dividend increases.  Many of these shares are currently trading at ridiculously cheap valuations that only occur every decade or so. No matter one’s age, maintain at least 30% of a portfolio in cash equivalents.   This is not a time to speculate.