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.                        

2020 is behind us and just about every analyst is calling for a tremendous year in the stock markets.  It appears that no one seems to mind that earnings have been falling since pre-Covid. This is evident by stock markets breaking numerous highs in 2020.   Based on their price earnings ratios investors believe the profits from the companies comprising the TSX to double in 2.7 years. The Dow Jones Industrial Average is priced as if profits will double in 2.8 years, the S&P 500 in 2.6 years and the NASDAQ in only 53 weeks.  Never has this taken place in the history of stock markets.

People got tired of making .2 of 1% on savings accounts and have decided to make a killing on shares like Tesla.  Tesla is a well-run company and from everything I have read, a good car. But no matter how you adjust the numbers the share price is not justified.  No company is worth 1,000 times earnings, let alone 30. Tesla makes few cars, relies on grants and subsides, and continues to issue new shares. The company has some interesting business plans, but most are out of touch with reality within the next 50 years, if we are lucky. One broker predicts the share price will go to $2,400 in 2021.   IF this happens the price earnings ratio will be trading at around 1200 times earnings. Would you pay $1200 in return for $1 in profits?

This past year the brokers had their best year on record for new account openings.  These are amateurs betting their life savings on garbage trying to catch the next Microsoft and Apple. There were so many IPO’s based on nothing but ideas (this continues today) that got snapped up by amateur investors while the firms underwriting them made a killing selling their own shares.   There are no ifs, ands, or buts about it - this is the Tech-Bubble Volume II.    When the stock markets return to reality most of these new issues will crash, or even worse, go broke.  The FANG stocks will follow the markets down to metrics that make sense. 

Obviously, all these amateur investors, whether it be in real-estate or the stock market, know they will sell the day before the market collapses.  My 56 years in this business tells me a different story.  When their hot investment drops below their purchase price, they tell themselves the price will bounce back and then they will sell once they are breaking even.  I would estimate that 98% of these people will sell after a couple of years at a tremendous loss.  There is a reason why 10% of the population controls 90% of the wealth.

The next gamble is real estate.  Home prices across Canada in almost every city are greater than 5-times family income.     In the Okanagan people are paying roughly 6 times income with a minimal downpayment.  A mortgage should never exceed 3 times income, yet lenders are handing upwards of 6-times income. So many people are going to experience a mortgage squeeze when interest rates move higher.  This will force an increase in inventory and a decline in price. Unless Justin gets his wish and brings in 1.4m immigrants this year (400,000 through regular channels plus grant 1m people who are on work and/or school visas free Canadian citizenship) there is going to be a surplus of empty homes throughout the country.

Since house and share prices are in the stratosphere a major correction is coming.   No one knows when it will begin, but thanks to the huge debt load, inevitable higher interest rates and taxes, it is probably sooner rather than later. This contraction will last any where between 1 to 3 years.  It will take this length of time to wipe out the damage the debt has caused.  It is government action that will dictate how long it will be. No doubt Justin and his absent members of Parliament will make things worse.

Remember that Canada has the best potential of any country.  It is Ottawa that is holding us back.  Sadly, there is no one in Ottawa that knows what to do.   Hopefully, this destructive group will be gone soon because most consumers are so far out of touch with reality and need guidance.  The rush to buy overvalued homes and cars, plus overpay for shares that bare no relation to the present and future economy means the correction could be deep and take place over a short period of time - maybe 3 to 4 months.  This will be followed by the economy contracting for several years.

The bottom line today is do everything to protect your savings.  Pay off debts and build up a cash reserve.  If you got cash buy some insured GICs and blue-chip shares that yield between 4 and 6%.  

Stock markets soared on the results of the U.S. election.  This upswing has placed stock valuations  further into the stratosphere.  Earnings were falling prior to Covid and will continue to decline for the next couple of years.  This has happened while governments have been giving out so called free money to help keep businesses and individuals afloat. 

At first individuals used the money to save or lower debt.  But, it did not take long before they went back to their old ways. Today, home and car sales are strong. Credit card debt is soaring again, and total loans secured by real-estate is quickly approaching their September highs. Today’s zero interest rates are destroying the world economy by allowing debt to balloon.  People are willing to pay higher prices for homes thereby wiping out any benefit from low mortgage rates.  These buyers will pay a heavy price when interest rates begin to climb.

With little to no savings and the government eventually stopping their handouts, people will stop spending as businesses close and people lose their jobs.  Sadly,  the majority of job growth is on Parliament Hill.  Justin is increasing the civil servants and giving out pay raises on the backs of Canadians who will be paying higher taxes for decades to come.  Meanwhile, for the rest of us he will do nothing.  He refuses to move the country forward.  Britain and Taiwan will do lots of trading with us, yet there is no effort from Ottawa to encourage it.  Plus, China has told all governments, including Canada, to not sell any military equipment to Taiwan or they will feel the consequences.  Even though it would be good for our defence industry, Justin will follow their orders.  Not only that, he has allowed training of the Chinese military on our soil. 

Canada should be opening the energy sector, but Justin will continue to try and close it down and destroy hundreds of thousands of direct and indirect jobs in the process.   After five years in power Justin has continually told foreign investor go elsewhere.  Business has listened and have moved over $200b of investment monies from Canada.  In the U.S., the Americans will tell the world it is still open for business.

As a note of interest, between the 2015 US election and November 3rd, the S&P index gained 55%.  Under Justin, the TSX was up only 9% during the same period due to his do-nothing government.  All Canadians have paid a big price.  Nothing will change as long as Justin is Prime Minister.

If Mr Biden follows through on cancelling the Keystone Pipeline it will be a costly mistake for America.  It opens the U.S. to being sued for the billions that Trans Canada has already spent.  It would tell foreign businesspeople Washington cannot be trusted, so their money will move elsewhere.  Most of the US fracking at today’s oil prices is not profitable.  Plus, these wells have a short life, maybe up to 3 years. As a result, the U.S. will need Canadian oil for decades to come – if our politicians allow it. 

If Washington does cancel the project, it will show how useless Ottawa is.  They want no new development eventhough we could sell all the oil we can produce to the Far East.  We also need the Wild West Rose oil off Newfoundland to be developed.  Every drop could be sold to Europe, yet Ottawa is doing everything to close it down.

The truth is Canada is going nowhere under Justin.  Hopefully soon we can throw out his ‘do nothings’ in Ottawa.  The U.S. under Mr. Biden will continue to grow while we in Canada sit and watch. 

Stock markets soared on the results of the U.S. election.  This upswing has placed price-earnings ratios even further into the stratosphere. Meanwhile many blue-chips are in the ditch even though dividend yields have not been as high for years.  While Covid has had an impact, earnings were falling even before it hit and will continue to decline for the next couple of years.  This has happened while governments have been handing out free money to help keep businesses and individuals afloat. 

At first, individuals used the handouts to save and pay down debt.  Many deferred mortgage payments (still 250,000 of them passed due) went to pay down credit cards, while some went to buy toys and cars.  Today the consumer is back to borrowing. According to the Bank of Canada, household debt to GDP reached 115% in Q2 2020, up from 101% the previous quarter. The same quarter last year came in at 97%. House and car sales are strong along with credit card balances again.  

Today’s zero interest rate is a band aid on a sick economy.  The truth is this makes thing worse because it allows people to borrow more which has resulted in higher home prices and stock markets.  Ironically, people are willing to pay higher prices for homes thereby wiping out any benefit down the road from low interest rates.  These buyers will pay a hefty price when interest rates begin to climb, and the amount of debt stays the same.  Just ask any Calgarian who bought a home a decade ago. 

With little to no savings, increasing debt, and a third of businesses on the brink of closing across the country, people will have to stop spending.   Not surprising, the only job growth in Canada comes from the civil service who Justin is happily handing out pay raises to.  For the rest of us he will do nothing.  He is making sure that disposable income will decrease for a generation because taxes must increase to cover our national debt, which now stands at roughly $37,000 per person. 

Justin refuses to move the country forward.  Britain and Taiwan would be more than happy to trade with us, yet there is no effort from Ottawa to encourage it. Our oil and by-products are already demanded across the globe but cannot be supplied because a lack of pipelines.  Plus, China has told all governments, including Canada, do not sell any military equipment to Taiwan or they will feel the consequences.  Justin always listens to his idol Xi Jinping.

He should be opening the fossil fuel energy sector rather than closing it and destroy thousands of jobs.  Non-renewables create mostly one-time construction jobs compared to fossil fuels which require year-round staff to operate.  These jobs would increase corporate, personal and consumption income tax.  Yet after 5 years in power Justin has told foreign investors to go elsewhere. Companies listened and took over $200b of investment out of Canada, mostly from our natural resource sector.

If Mr. Biden follows through on cancelling the Keystone Pipeline, it will be a costly mistake for America.  Not only does it open the U.S. to being sued for billions that Trans Canada has already spent,  it would tell foreign businesspeople Washington cannot be trusted, so their money will move elsewhere.  Much like Canada under Trudeau.  Not to mention, it will increase other energy costs since the U.S. fracking industry is rarely profitable and requires a much higher price of oil to be feasible.  Canada should be taking advantage of this.

As a note of interest, the S&P index has increased 55% since the 2015 election, compared to only 9% for the TSX thanks to Justin’s do-nothing government.  All Canadians have paid a big price as a result. The truth is Canada is going nowhere under Trudeau’s lack of leadership and nothing will change without a new government.

A few years ago, many Canadian banks raised around $1b as interest rates fell to record lows.  Firms like Microsoft did the same thing.  Not one needed the money, but it was just too cheap to pass up to fund investments and it was cheaper than issuing stock and paying a dividend.  Soon many other big corporations were doing the same thing.  Ant Group (Chinese) has applied to list its shares on the Hong Kong Stock Exchange.  If successful Ant hopes to raise $30b in added capital via issuing new shares.  Tesla is in the process of raising new money by selling $5b in new shares, or by borrowing money.  The London Stock Exchange is trying to buy Refinitiv, a market-data firm for $27b.  All the above are in U.S. dollars.

Today, a billion dollars is fast becoming a small amount.  This is a worrying signal that money is losing value.  A decade ago, you could buy a nice size home for about a $1/4m.  Today that home value has risen to near $1m.  Today, including one’s home, the world has the highest number of millionaires on record.  Billionaires are now common, while 10 years ago there were only a handful.  

For years you could buy all the apples, oranges, tomatoes, and so on for under a dollar per pound.  Today count on $2 or higher for just 1 of the 3.  One Honey Crisp apple, which is a large locally grown apple for sale in our local Save on Foods, costs close to $4.  This is more expensive than a sugar rich ice cream cone.  If lucky, the local farmer might get 50 cents for each apple.  Other varieties of apples maybe up to 30 cents a pound.

My point is our money is fast losing purchasing power which is making everyone poorer.  Unless we get a change of attitude out of Ottawa, which has created this inflation, we can expect prices for everything to continue to rise until the public is forced to stop buying.  We believe we are now entering this phase.  To make matters worse pay raises will be thing of the past for the next year or so because business will not be able to afford to give raises due to COVID-19. 

Ottawa is bankrupt if proper accounting is conducted because of an out-of-control debt mountain and falling tax revenue.  They will raise taxes, but revenue will not increase since Canadians are already one of the highest taxed in the world.  The taxpayer must give up spending elsewhere to meet the coming tax increases.  This is something no one in Ottawa understands.

Ottawa is setting the country up for an economic crash.  The 1929-39 crash was made greater by politicians doing the wrong thing.  Back then it was taking too much cash out of the system.  Today, the problem is the floating of too much inflated dollars.  Ottawa has no clue that savings are the backbone of every economy.  They should be encouraging people to save and allow higher interest rates to reward savers.  This money goes into the banking system where it is lent out to create jobs, built plants, machinery and so on.

We have no idea of how long this party can continue.  If it does the big question of the day will soon be who will be the first person to be worth $1 trillion dollars.   Will it be Bill Gates, Jack Ma, Elon Musk, Jeff Bezos or someone whose name we do not know today?  And being a billionaire will become what a millionaire is today - just someone who has a little extra cash.

Strange as it is, cash is what is needed when the correction comes.  So much value will disappear over night just as what happened during the 1930s.  Avoid unnecessary debt because it will be a fast trip to the poor house.  As was shown during the 1930’s once the economy slips past a certain unknown point it can not be stopped until it has run its course.  The 1929 crash took 33 months to reach the bottom.

You want some of your cash tied up in only blue-chip shares that will continue to pay dividends, as well as insured money market investments.  No politicians will allow insured money market vehicles to default as this would mean the politician will never get re-elected.

Commonsense and caution are the order of the day.