If Trudeau gets re-elected, he will continue to do whatever it takes to close our energy sector and scare away foreign investors.  He would prefer to see most parts of Canada use American, Saudi Arabia, Nigerian and Venezuelan oil.  He wants to help these countries create jobs and get rich off Canada.

Now that Bill C-69 is about to become law, no major development will be started because it makes Canada uncompetitive on a grand scale. It will take roughly 10 years and cost billions to get a project off the ground. What business would be crazy to waste so much time and money before a project under these conditions?  Look for unemployment in Ontario to increase over the years if Trudeau remains in power, even though it could be easily avoided by eliminating the bill because Ontario is the biggest supplier of steel and other needed goods for the energy sector.

With the Trans Mountain Pipeline (TMP) given the green light (for now), this should alleviate some pressure on the energy sector as well as give a good boost to the national economy.  Three native groups want to buy TMP to make money for their respective bands.  The Alberta government is offering them up to $1b in loans to buy the pipeline.  No doubt whoever buys the pipeline Ottawa too will offer cheap loans.

Today, the stock markets are near the end of the longest bull market on record.  We believe it will last until the end of summer. As a note of interest, two of the greatest stock market retreats began when the markets peaked on the last Friday of August. 

For the past few issues we have stressed building up a cash reserve.  We have been doing so with our finances.  Get rid of all debts.  Keep credit card limits to your monthly budget.  Eliminate and avoid a line of credit except to be used strictly for emergencies.  Sadly, because of bills C-69 and C-48, Guaranteed Investment Certificates will most likely outperform the Toronto stock market next year as capital flees the country, unless the bills are scrapped by a new government. 

Fortunately, we have invested for dividends because this will continue to be paid and the income will outperform the TSX.   At roughly 2.2%, interest rate yields are terrible for a 1-year term.  Still, investors should put money into insured Guaranteed Investment Certificates (GIC) to earn what little return on cash one can. 

Most of your equities should be Canadian dividend paying shares.  This is so you can take advantage of the Canadian Dividend Tax Credit.  Not to mention, with today’s interest rates, dividends paid are generally higher than GICs, resulting in a higher income. 

As in the past we prefer to wait for share prices to come to us.  Today, we see no buys.  Sit patiently and collect all those dividends.

During the Tulip Bulb Mania, each bulb was considered as good as gold. At its peak one was worth as much as a home in Amsterdam.  It took roughly one year before the bubble burst and people lost everything.  

Then there was The South Sea Company which was considered too big to fail. In the early 1700’s, investing in the company was the path to prosperity.  Even the Bank of England was a major shareholder.  In March 1720 the share price hit 300£.  By July 10^th the share price was 1,000£.  Not even two months later the shares were worth 400£.  Soon thereafter the company disappeared.  One large group of shareholders that lost their fortunes to the South Sea Company was British politicians. 

During the 1870’s the road to riches was U.S. railway bonds.  During this time the population was growing and business was expanding.  Rail lines were being built across the landscape to accommodate the economic expansion.  Banks and investors were throwing their money at any railway bond they could.  However, there was overbuilding and most of the railroads went bust, taking down tons of investors and banks with them.

Today there are two financial mistakes being made. The first is like the Tech Bubble. In fact, it is so similar that we will call it Tech Bubble Two. Hedge Funds, mutual funds, and individuals are throwing their money at companies like Tesla, Uber, and Lyft.  Uber and Lyft have lost $8.9b since 2009 and $2.9b since 2012, respectively.  Tesla has just made its first miniscule profit (it is questionable if it will continue).  Yet, all three are cash short and have a high share price which bears no relationship to their financials.  It is based solely on the hope that one day they will be the next Microsoft.  We see each of these share prices declining by at least 80%, or simply disappear like South Sea.  The result will be billions of dollars being wiped out of existence. 

The other mistake that we will never learn from is borrowing as much as possible to enjoy the good life.  Canadians are at the top of the most indebted consumer while having the lowest savings rate in the world . People are also paying historical prices for homes, even though it is far more profitable to rent than it is to buy. Today’s housing prices are declining and will do so until the average person can afford a home.  We will not see a repeat of the last ten years in the housing market for at least a generation.

Today we are now near the end of the longest bull market in stock market history.  We predict the beginning of the downturn will begin after August.  The world has an abundance of just about everything farmed, manufactured, housing, energy liquids, and more.  Prices should be falling, but they are not, yet.               

The world learns very little from past mistakes and history provides many examples of how we love to repeat them. One thing history tell us is that when everyone is in the same boat, trouble comes, and it wipes out wealth.  This is coming sooner rather than later.  It is silly we have companies worth billions that have no profits.  People think this time it will be different or that they will sell at the peak.  Unfortunately, this never happens.

Do something rare today; pay off debts.  Throw away credit cards and cancel lines of credit or reduce the limit to below your monthly budget.  Do not touch any Reverse Mortgages.  Build up savings and invest in companies with profits that pay increasing dividends only. We do not know when a recession will take place, but we believe today’s golden era is just about over. Deflation is the biggest threat to our system today. Cash is King. Build up a reserve and follow our recommendations in our monthly publication.

Canada's Banks

Some Hedge Funds are shorting Canadian banks.  Their main argument is that the Canadian real-estate market is pooched, and many consumers are facing massive defaults due to excessive personal debt.  There is no doubt there are some risky loans on the bank’s books, but the hedge funds are fear mongering.  We feel the risk to our banks are minimal. 

First off, it will take a 1930 style depression or a world war for this to occur.  If this happens, it would make little difference where your money is parked.  Everything, except actual cash, will experience a substantial price drop.  It should be pointed out our banks only lowered their dividends, as opposed to cutting them all together, during the Great Depression and both World Wars. 

Secondly, Canadian banks are amongst the most financially sound in the world today. Sure, some more than others, but overall our banks are very safe.  Banks must maintain a capital ratio of 8 or higher.  BNS is just over 11 as most other banks are as well.  TD is at 12.  These numbers are amongst the highest in the world. 

Last, but not least, the Canadian banks have been transferring high risk loans and mortgages, plus a few high-quality loans, to their mutual funds.  By doing so, they are reallocating the risk from their balance sheet to the unitholders of the mutual funds.   The banks in turn take a fee every year to manage these types of loans in their funds. During the 2007-09 meltdown, Canada’s loan losses ended up being just over 1% of assets. Not a big deal. Banks do not want to foreclose so in many cases the loans are re-negotiated.

While the Hedge Funds did not say how many shares they shorted, the banks are showing significant short sales according to the most recent IIROC Consolidated Short Positions Report.   Hedge funds begin shorting prior to making their predictions public.  The public hears this and sell their holdings, forcing the price down.  Guess who buys back their shorts at a profit?  While illegal, it is a common practice and very hard to prove market manipulation in the courts.  

We expect all Canadian banks to raise their dividends at least once over the next 12 months. We will not be selling our holdings and recommend purchasing more in any sell-off.

It is official, the latest Federal Budget shows Ottawa will continue to hurt the energy sector.  There was not one item that will benefit Alberta or Saskatchewan.  Take this as a sure sign that if the Liberals get re-elected in October, they will attempt to shrink the energy sector even more. This destroys any hope of a West to East pipeline under the Liberals.  Rather than helping his own country, he has made it so demand for Saudi Arabia’s oil, and other nations with questionable human rights records, from the East Coast will continue.

Shrinking the West’s energy sector does the same to Ontario’s economy.  This is because the province provides most of the steel needed by the energy sector.  We would not hold any shares in any Ontario business that provides the steel and other needed materials for the energy sector for as long as Trudeau is in power.

One budget item that might help the economy is that first time home buyers may borrow up to $35,000 from their RRSP’s. This could possibly slow the housing correction in many cities. The one flaw in this of this policy is how many young people have saved $35,000 in an RRSP, especially if they have student loans, car loans, and other debt? Plus, the money must be paid back. If not, Revenue Canada will consider the $35,000 as income from the year the money was withdrawn.  The person will have to pay back the taxes owed, plus interest.  Revenue Canada can also add in a penalty at its own discretion.  

This is just an example of one of Trudeaus promises he made in the Budget. Most of the goodies in this terrible budget are spread out over five years.  In other words, most will be cancelled after the election. It is a political move, but in realty has no value.  Not surprising, this gimmick starts in September - just in time for photo-ops for the election.

The Liberals continue to tell us how great the Canadian economy is doing. Conveniently, they omit that is on the back of record household debt.   The truth is the economy is slowing as Canadians have started to feel the pinch. Normally every smart government (and individuals) uses this good time to pay down debt and build up a cash reserve.  Not this bunch. The Liberals intend to add to a mountain of debt, which means in the coming recession (beginning in the fourth quarter) taxes will have to go up even more.  Plus, it appears they want to push the value of the Loonie down.  A sinking currency causes citizen to lose purchasing power and always results in rising unemployment.  At all times every government must try to push their currency up.  This is the road to prosperity.

Then there is the destructive carbon tax which is going to shrink the disposable income of every Canadian.  Only the government will benefit, and they be increasing this revenue every year until 2024.  Add to that, CPP premiums will be increasing every year until 2026.  It is estimated that a Canadian with an income of $55,000 in 2026 they will pay an extra $500 a year in premiums. At least if one lives long enough, they will get some of this money back. 

The coming recession is going to be 100% Ottawa induced.  There is obviously no one in the Liberal party that has a clue of basic economics.  But, what do you expect when both the Prime Minister and the Finance Minister have been handed their wealth?  Trudeau has never had to meet a payroll.  His trust is from his Grandfather building a chain of gas stations in Quebec.  He is a Golden Spoon benefactor.

The good news is that once the fools in Ottawa clue in to what the real economy is like, they will have to rush and save the energy sector.  Ottawa will become desperate for all that tax revenue oil and gas generate across Canada.  They will have to stop the rising unemployment.  Rough times in Canada are coming.  Build up a cash reserves and fast.

The action of a stock market reflects the way investors see the future of a country.  Since Trudeau came to power the TSX has been flat and foreign investment has fallen significantly. The hardest hit sector has been the energy.  As soon as Trudeau announced the  Carbon Tax, investment in new pipelines and oil fields collapsed.  Very significant companies have also moved their money elsewhere since then.  Roughly 50% of small energy companies have disappeared since Trudeau came to power.  Energy is one of the biggest tax generators for all levels of governments. Ironically, it was not until it looked like Trudeau was going to be given the boot that the TSX and foreign investment started to rise again. 

Since the Liberals were in power the average Joe investor has seen little gains investing in mutual funds and ETF’s because the markets have been flat. Add to that few mutual funds out perform the stock market to begin with. Plus, they are designed to transfer one’s money via fees to management over time.  When you add in roughly the 2% annual management fee, investors are down around 8% if they have held for the past five years.   It will take an 8.7% gain just to break even.  Sadly, Guaranteed Investment Certificates easily beat most mutual funds over that period. Considering most mutual funds are owned by the banks and insurance companies, it is better to invest in the companies that own the funds.  They offer higher yields and have a better history of capital gains.

Interest rates have been at record lows for the past decade.  After paying taxes the average return on GIC’s has been slightly over 1%.  This means it will take 72 years to double one’s money if you re-invest the interest earned.  Not to mention inflation would eat most of those returns, which means even though your capital remains intact, it has lost purchasing power.

Many have also gambled their retirement on real estate.  Most who have bought a principle residency in the past 5 years have either lost capital or are barely breaking even once the costs of ownership are included.  Many investors in real-estate are renting out property at rates that are below the monthly carrying costs.  Even if the place is paid off, you could earn a much higher yield elsewhere.  As we are witnessing today, prices are falling and many are finding it is difficult to sell at their desired price, creating even more risk.  Yes, house prices have increased the past decade exponentially, but todays buyers have disappeared, inventory has skyrocketed, and now prices are falling. This will turn out as a disaster for many.

There are too many retired people taking out those terrible Reversed Mortgages to continue the good life. We are 100% against this. Suppose a home is worth $500,000.  You can borrow up to $225,000. minus expenses (lawyers fees to register the deed plus annual fees).  The term can be up to 20 years.  Over those 20 years the lender adds the monthly payments based on the interest rate of the loan to the outstanding debt.  After the 20 years the debt grows to $500,000.  Hopefully the house grew in value over that period. If it didn’t, the borrower ends up with zero equity at the end.  It would be cheaper to sell the home and invest $250k in a GIC.  Today they would receive around $12,000 a year in additional income without risk. The remaining funds can be used to downsize ones home. 

No matter what age you are, we recommend you start to readjust your spending to take in account an increase in taxes via the Carbon Tax. Ottawa is determined to destroy the Canadian economy by this tax.  If re-elected in the fall they will become very successful at it and all Canadians will have less money to spend..