The greatest threat today is deflation. All stock markets have been in a dream world. Valuations have meant zero. New issues are raising billions of dollars from Investment Banks even though the company might be small and not profitable. Once the company goes public, they seem to raise even more billions. Brokers are pushing these new issues as they make gobs of profit from each underwriting. Many share price increases are based on who the promoter is, just the same as the crypto currencies. All markets have become a replicate of the Tech Bubble.

An example is Tesla. It produces a good car(supposedly), except from its Chinese factory where it is poorly built. Tesla has few dealerships around the world, even in Germany where the car is a big seller. The brokerage industry is predicting the company will make $1 a share in profit for 2021. Assuming earnings will increase by 20% a year for the next decade (highly unlikely) this means in 10 years the profit will be $6.48 a share, and the stock will trade at roughly 100 times earnings if the share price stays around $650. We feel the share price today should be around $78 based on the projected 2031 earnings.

Using the price-earnings ratio of the NASDAQ (110-times) means investors expect profits will double in 7 months. If this was possible governments would be raising capital gains taxes substantially which would kill the economy. The combined profits of the companies making up this index have fallen from $13.65 down to $12.52 over the past two years. Meanwhile, the index is up 40%. It does not make any sense whatsoever.

Today the Dow Jones Industrial Average is trading roughly 40% above its 101-year average price-earnings ratio. The TSX and the S&P is trading closer to 50% above their averages since 1954. Falling to just their long-term averages will be deflationary.

Our biggest threat is real estate. As the chart on the next page shows, our prices are in the stratosphere. This is perhaps the highest leveraged asset out there. Statistic Canada says the average family income is $111, 000 (2020 numbers). I have bumped this number to $120,000 due to government handouts and less spending. This means that for a person to buy a new home with an insured CHMC mortgage and using the required 20% down payment the family can safely afford a home priced around $360,000. You might be able to stretch thisto $400,000 with today’s low interest rates.

The average selling price across Canada is $696,000, or roughly 5.8-times household income. For those who put only a 10% down payment the number rises to 11 times household income. No one can afford this for a long period of time. Obviously, many people are being squeezed financially.

Canada’s population growth is almostflat. Trudeau wants to bring in 401,000 new citizens but he will be lucky to get 190,000 people this year. Housing starts today are 282,700 and growing, which means a surplus of over 100,000 housing units. Also, a lot of recent immigrants are leaving Canada for other countries because those that are skilled are only getting low payingjobs since Canada will not accept their past country’s qualifications.

When interest rates begin to climb house prices will fall. We expect a small interest rate hike during the fall months and next year a 1 percentage point jump, then climbing to 2% in 2024. Each increase will force house prices lower. Since house prices are so rich, when the decline begins the fall will be substantial because there will suddenly be few buyers. This is the worst thing that can happen to any market.

In the coming recession, trillions of dollars will be wiped out of existence. So many people have invested in illiquid investments like nonfungible tokens (part art ownerships in almost everything like paintings and jewelry), cryptos, and SPACs which takes investors’ money and invests in some business that needs cash. Just on Bitcoin we can see the price falling to $22,000, down almost 66% from its peak just a few weeks ago. If we are in deflation, bitcoin will go under $10,000.

Deflation is the enemy of leverage. Debt becomes more dangerous because wages can be lowered, and many assets lose their values while the debt stays the same. Do not take undue risk. You want to invest in insured GICs and only blue-chip shares that pay a dividend. This means the banks, utilities, and big energy companies. Canada is lucky we are rich in resources. Deflation will force a huge change in Ottawa since they will be desperate to keep the economy afloat. The energy sector will be the savior, not renewables which are unprofitable, make no improvement to our environment and only cost the consumer more.

Cash is and will be King until the markets correct