During the late 1970’s and all of the 1980’s the hottest economy was Japan.  It’s main stock market, the Nikkei, was one of the best performers during this period.  So much wealth was created for the Japanese that the worry of the day was they would end up buying the world.  At the time they were buying prime real-estate across the globe.  Their companies were amongst the wealthiest and Datsun at the time was the leader in the building of reasonably priced cars.  It seemed as if nothing could go wrong for the country.

By the late eighties, the economy started to slow.  On December 29, 1989, the Nikkei closed its all-time high of 38,916. After falling for over 8 years, it bottomed in February 2009 at 7,650, or by roughly 80%. The collapse of the stock market was not because of horrible earnings but rather too much debt. On December 31^st   of last year, the index closed at 28,000, which is still 33.8% below the peak set 32 years ago. 

 Japan’s interest rates have been stuck below one percent and there were a few short periods of negative rates since then.  Yet the economy never really experienced a depression. It mostly bounced along as asset prices deflated around them.  It is interesting that home prices fell by 70% by 2001 even though interest rates stayed low. This is because there were no more capital gains to be made and investment left slowly, creating rental yields that competed with dividend.  The same will occur in Canada.

There are many similarities between Japan 30 years ago and the West today. Mainly record consumer and corporate debt on the back of record low interest rates. Throughout history whenever bouts of wild speculation like we are experiencing occurred (Tulip Bulb, South Sea Bubble, U.S. railroad bonds, the Tech Bubble etc.), all the excess money was eventually wiped out of existence and left many people and banks bankrupt.  When one looks back, we are now into 77 years without a meaningful contraction.  This is either the longest on record or close to it.

Since we rarely learn from past mistakes, are we about to repeat history?  Prices can still go higher since greed is abundant around the world and money is cheap.  No one can say when the party will end, but it will.  Most people and all governments are not prepared for a correction.  Both are drowning in debt with little savings in the bank, a prescription for future trouble. 

A correction across the whole economy is inevitable. Prepare today, so you’re not caught off guard.  It is amazing when trouble begins how many buyers disappear and how many investors are forced to sell at any price to save what they can, thereby sending prices even lower.

Most of the 11,000 crypto will become worthless over night.  Bitcoin has already wiped out over $2t of investors money since late November. Once all the borrowed money used to buy it is included the losses total $2.5t.  Home prices will fall in Canada to a level justified by family income (buying a home at 3-4 time’s household income compared to 6 today).  Like cryptos, NFT prices will collapse as there is no real exchange for this market.  How do you sell at fair market value without one?  I have never seen one standardized trading history of crypto tokens and NFT’s. 

We believe we will go down the same path Japan did over 30 years ago and experience a generation of price deflation and slow economic growth. The economy will experience a slow leak before flattening.  Prices for just about everything today are too high because of debt, low interest rates and temporary supply issues. When you add in low personal savings and huge debts, trouble is just around the corner. CASH is and will stay for months to come the number one investment as assets decline in value.

The only thing holding Canada back is Ottawa. This will be the case until the Liberal’s days are numbered.  They have zero leadership. They only react rather than plan for tomorrow.  Surely the next PM cannot be as bad as the one we have today.

Since Canada has the best potential (energy, metals, farming, water) of any country in the world, you can feel safe holding only blue-chip shares that pay a dividend yield of between 4-7%.  Get rid of all debts.  Place at least 30% of savings in insured GICs for a term of one year.  We expect 3 interest rate hikes during 2022.  Yields are terrible today but the aim is preserving your life savings rather than speculate with it.