There is an old saying: “The more the world changes the more it stays the same.”  Since the end of WWII the world has had the greatest improvement in mankind.  Better knowledge gives us new ideas everyday that makes our life easier.  Yet we must never forget history.  Since the Dirty Thirties there has not been a serious economic pullback anywhere.  When there has been it was political like in Zimbabwe and Venezuela. 

During the 19^th century and lasting up to the 1930’s deflation caused economic corrections to occur.  In those days it was hard to borrow money.  There were no credit cards, Payday loans, no lines-of-credit, no hedge funds, and too many small banks.  The small banks were always vulnerable to one bankruptcy and it would go broke.  As a result, money in the financial system was able to dry up quickly.

Today, access to debt has never been easier. It has allowed levels to reach heights never experienced before.  It is not just consumers, but every government (the worst is Japan with 240% of GDP) and, to some extent businesses, especially in China.  Many companies today are cash rich, have manageable debt, and continue to increase their dividends.

Up until this last decade, the average consumer interest rates bounced between four and six percent, with credit card and Payday Loans hitting upwards of 29%.  Only fools borrow at this rate.  Before when interest rates went below 4% it was a signal of an economic slowdown coming.  Rates that climbed above six percent warned of inflation becoming the enemy.  For this decade, low interest rates have only encouraged people to borrow too much at the expense of savings. 

One outcome of low interest rates is that prices of homes bear no relationship to household income.  The rule of thumb with a 20% down payment is to never borrow more than 3-times household income.  Today it is normal to see many people paying 5-times or greater.  In places like Sydney, Hong Kong, and Vancouver prices are over 8-times. This will be a trip to the poorhouse for many.  Like the last financial meltdown, the issuing of bonds backed by poor mortgage portfolios has returned, and while the current numbers are not bad, the trend is for a repeat of 2007-2009.

Wages are improving, albeit at a snail’s pace.  However, governments, including many throughout Canada, are dipping into our pockets for all those wage gains, plus some. The result is that wages are shrinking. Of course, there is no sign of governments wanting to use the extra tax revenue for paying down debt, instead they prefer to spend it wastefully. Plus, the continue to borrow more.  This means further tax increases are coming to meet the growing interest charges.  At some unknown point consumer spending will stop and deflation will take over. Signs of this are already appearing in housing markets across the globe.

The financial system cannot sustain this level of debt.  Where is Washington going to get $15.4t to pay off the Treasury Bills outstanding, plus interest?

When it will implode is anyone’s guess.  It could be as early as tomorrow or five years from now.  It will be like all past corrections we failed to learn from, quick and vicious.  History always wipes out the excesses.  Tomorrow will be no different.  

We follow numerous indexes to help us make our investment decisions.  The CRB Index is our favourite.  It is a futures price index based on commodities.  It indicates demand for the necessities of the global economy and has been showing little change for months. This tells us that demand for goods are flat.  Only one chart really concerns us, the Baltic Dry Index, which measures shipping activity across the oceans.  Over the past 12 months this index is down 62%, with 52% of the decline taking place since January 2019.  This means Trump’s destructive tariffs are working and world trade is slowing down rapidly.  This will show up in global GDP figures in the next year.

The 2007-2009 meltdown had a lucky result because interest rates could be lowered a significant amount.  The next one will be much worse as the debt is substantially higher and there is very little room for monetary stimulus.  This is a big election year. There is no leadership anywhere in the world.   Let’s hope we can get some smart people to make the hard decisions that are needed.  Sadly, there is not one on the horizon.

We cannot stress enough get rid of all debt.  Hold only ‘blue chip’ shares and insured money market investments.

Four of our recommendations increased their dividends since the last blog. 

2019

We will begin to see the first signs of an economic slowdown in North America in late 2019.  The main cause will be real estate, politics, and excessive personal debt.  Other notable reasons for a slowing economy is a lack of world leadership, the attack on world trade by the United States, and surpluses in just about everything we grow and produce.  Plus, Ottawa and B.C. continue to tell the world to not invest in Canada.  Business people are listening and directing their investment dollars elsewhere, mostly to the U.S.

National home prices are falling only slightly now, but we expect sizeable drops in the new year as house sales will confirm they are falling off a cliff. No matter how one twists the numbers, house prices share no relationship to family income.  History says house prices must fall or wage gains must soar.  Since after-tax wage gains do not equal inflation, coupled with numerous tax increases coming to Canada in 2019, Canadian house prices must fall.  The same can be said for most major cities across the globe. 

The TSX is trading at the same level as it was in June 2014.  This is four and a half years of no growth. Investors either broke even or lost about 6% due to commission.  Fortunately, if you followed our portfolio you have had one of the best rates of return in all of Canada.  Almost every company has raised the dividend at least once a year.  In the 195th issue we predicted that “for the rest of this decade dividend income will be the main source of earnings from investments.”  On August 1st, 2016 the portfolio dividend yield was 7.5% while the GIC rate of return was .75 of 1%.  The yield had grown to 10.4% in 2018 based on the recommended purchase price.  It should be higher again in 2019.    The TSX is not going to experience new highs until Trudeau stops scaring away foreign direct investment. 

Other warnings are that copper prices are down 8.5% from a year ago.   This is the most important industrial metal and is a leading indicator. Its price decline is warning that construction and manufacturing spending is falling. The Baltic Dry Index, which measures the cost of shipping, is down 15.1%.  Is this a sign of shrinking world trade?  Figures show that car sales are falling.  Platinum warned of this as the price of it is now down 12.3% from a year ago.  The CRB Index is off slightly which shows people are still carrying on their day-to-day spending.

The sell-off in the stock markets in December was due to two things; no leadership anywhere in the world and, more importantly, stock markets were seriously overvalued.  Markets over the long term are based solely on corporate earnings.  The Dow Jones a year ago was trading 28.45 times earnings.  This was double the 99-year average and indicated that investors expected corporate profits to double every 2.5 years, which is literally impossible.  Today, the stock market is trading in this millennium’s average price earnings ratio of 18, but still high compared to its historical average of 14.6 times.  At 19.6 times, the S&P 500 Index is also trading in expensive territory based on their 119-year average.

The North American economy is currently running well enough to justify rate hikes.  This should mean interest rates will go up in the U.S. and Canada at least twice in 2019. Not even a slowing consumer will stop the coming increases.  The stock markets are probably at or near the bottom. But there will not be a big rebound due to the dysfunction of Washington and Trudeau.  It is time for investors to buy the blue-chip shares that offer a good yield and chances for increases in the years ahead.  Our selection in the Sacola Financial Newsletter have yields of between 6 and 8% at current prices.  They remain a buy.

One thing is certain, 2019 is going to be very different from 2018.  Based on their latest economic report in November, the Liberals are going to continue their relentless efforts to close the Canadian energy sector.  For some unknown reason they hate this sector and the province of Alberta.  Yet, it loves Alberta’s transfer payments to Quebec, which today they do not need. As the Globe and Mail reports, “Quebec will receive $13.1-billion in equalization payments next year – a $1.4-billion increase – while Alberta, Saskatchewan and Newfoundland and Labrador continue to be left out even though Canada’s oil-producing provinces are facing deficits and hard times.” 

Canada has enjoyed a booming economy, of which Trudeau’s party has only limited its growth.  They have no intention to curb their wasteful spending.  It will take a decade to rein in Ottawa’s finances.  Young people today can look forward to rising taxes in the years ahead.  These added taxes will be needed just to pay the huge increase in interest charges Ottawa is creating.

Washington is also a mess and it is set to get worse. The only changes made under their new free trade agreements are an increase in tariffs that have so far hurt the American consumer the most.  Trump is pushing for all countries to work together based on U.S. rules only.  He is under the false impression countries want to trade only with his country.  He is from another planet for thinking so.  The U.S. market is 360m people, whereas Asian countries have a population ten-times them and becoming wealthier.  The average American (and Canadian for that matter) has experienced very little income growth.  The States is losing respect in many parts of the world.  As a result, global trade pacts are being developed without them. Most nations want little to do with America. Who can blame them?

American stock markets will eventually slide to their 119-year average price-earnings ratio of 14.2, versus today’s 21.1. The TSX has done nothing under Trudeau and is at the same level it was in August 2014.  This is a sure sign that foreign investors have no faith in our government.  Can you blame them when Ottawa’s only intention is to close Canada’s biggest industry?  Trudeau’s solution to all of Canada’s troubles is to impose a carbon tax.  This will do nothing for the environment and make all Canadians poorer.  If the Toronto stock market (TSX) perceives Trudeau will lose the next election, the TSX will become one of the world’s hottest stock markets and foreign investment will pour back into Canada.

If Trudeau gets re-elected, the Canadian economy will slide into recession.  If you believe he will win, we strongly suggest you build up a huge cash reserve.  You will need it as interest rates will have climb.  Fewer investors lending to Ottawa means they must bribe these people with higher coupon rates to buy our government debt.

A 1% Guaranteed Investment Certificate over the past 4.5 years has outperformed the TSX and just about every mutual fund.  Dividends probably earned investors at least a 5% gain in each of those 4 years. As we stated in the 206^th issue (August 1, 2016), “rising dividends will be the main source of investment gains for 2017 and 2018.”  We now extend the prediction for 2019.  If Trudeau gets elected until 2023, we will have a leader who makes it clear he hates Western Canada and constantly tells foreign investors go elsewhere.

Canada has so much economic potential, yet so little interest by our current politicians.  So sad.

Ottawa’s carbon tax will have zero impact on our environment.  This is a 100% tax grab.  Prime Minister Trudeau states all carbon taxes collected will be returned to the taxpayer.  Not a chance!  This tax is just an excuse to build another set of bureaucracy which will be very expensive and continue to scare much needed investment away from Canada.  In a speech Trudeau stated he wanted “little carbon”.  Not once has he defined what he means by “little carbon”.  All he sees is tax revenue.

It is competition amongst industry that cuts greenhouse gases (GHG).  Competition makes fuel efficient autos and jet engines, builders are making homes more solid thereby cutting down on heat fuel.  From land extraction to offshore mining, oil and mineral companies spend millions of dollars every year researching and creating new environmental technologies.  Contrary to what anti-oilsands activists preach, the grounds leftover from tar sand extraction is cleaner and lusher.

Just a few things to ponder regarding climate change:

• What is a safe level of CO2?  You will never get the same answer twice, except from a handful of protesters who flunked primary school science - they want zero.  Without CO2 we would die.   

• I have been in 4 provinces in 2018.  I have noticed with all the new home construction probably 99.9% of the homes do not have any solar power.  Why are the Greens not protesting this?

• Is today’s “global warming” a result of a long-term weather pattern that is repeating itself?  The Russian Academy of Science’s, Pulkovo Observatory, in St. Petersburg, found using science, that the world has begun the next mini ice age based on the disappearing sun spots from the face of the sun.  This occurred in the 1700's.  The National Astronomical Observatory of Japan, the University of California, and Northumbria University (to name a few) have also confirmed this. Why have the Greens not disproved these findings?

• Hurricane Michael was the third worst in Florida history.  The snow storm last month in Calgary was a repeat of a storm a hundred years ago.  Today, every storm like these two are proof Green House Gases(GHG) are creating them, so say environmentalists.  However, after each major storm the weather reporters will tell us the last time we had that same type of storm.  In other words, this is nothing new, but rather Mother Nature repeating herself.

• Why are they not protesting about methane, hydrofluorocarbons, nitrogen trifluoride, or the use of lithium in batteries which are a worse poison than CO2?

• Why is there no protest about the global increase in the use of coal?

• The University of California’s, Berkley National Laboratory states since 2002 CO2 levels have hardly budged, even though we are pumping out more CO2 than ever. 

• Why do the Greens not demand the more planting of trees?  Trees are the cheapest and the most efficient means to soak up CO2.

• An article in Nature Geoscience stated “we (scientists) haven’t seen that rapid acceleration in warming after 2000 that we see in the models that were on the hot side  leading to forecasts of warming and inundations of Pacific islands."    Reality has been the Pacific Ocean is cooling, the Arctic ice is expanding, the polar bears are thriving, and temperatures did indeed stop climbing over the last 15 years.  Where are the Greens telling us it is wrong?

• Average drought conditions across the US have varied since records began in 1895. The 1930s and 1950s saw the most widespread droughts, while the last 50 years have generally been wetter than average. US Environmental Protection Agency

All the Greens have succeeded in is trying to destroy Canada’s energy industry, which our Prime Minister clearly is content with.  Businesses do not invest billions of dollars into projects that will last decades if they know will get shut down for whatever reason.  Contrary to environmentalists, companies are the heart of innovation and without them we would not see advancements in environmental technology. Afterall, when was the last time the David Suzuki Foundation or Greenpeace invested a hundred million into innovation like the Suncor’s and Enbridge’s do nearly every year?  The energy sector is one of the few groups that is trying to do their share to protect the environment and should not be taxed for doing so.  All the carbon tax will accomplish  is to make every Canadian poorer.  The actions of the Toronto stock market confirm this.  It is a disaster.

Stick to Dividends

You rarely hear investment advisors recommend portfolios based on dividends.  The main reason is because buyers of these types of shares rarely trade, generating very few commissions in the process.  A broker’s sole job is to turn over an account at least once a year, or put investor’s savings into mutual funds and ETF’s, especially if the firm owns and manages them.  These funds are designed to slowly, over several years, to transfer investor’s savings to the brokerage house via commissions and hidden management fees.  If the customer makes money, then it is a bonus.

I have a list of 14 Canadian companies and two American that have raised their dividends for at least the past 9 years.  There are around 80 American companies that have the same record.  It is rare for any brokerage house to recommend these shares.  When they do recommend it is usually because the brokerage house will be underwriting new shares for the company. As a result, the brokerage house will come out with a bullish stance to help unload these new shares.  The brokerage house will earn huge commissions in the process. The brokerage house represents the company not its clients.

In our financial publication we have two shares which we have held since 2004.  Both have raised their dividend once a year this century.  These two have increased in value by 125% since we first recommended them. Two others of our recommendations have also raised dividends yearly.  They have realized a capital gain of around 300%.  Another benefit of holding Canadian dividend paying shares you can benefit from the Canadian Dividend Tax Credit which can lower taxes you owe (this is only available outside of the TFSA and RRSP).  

This is a slow but steady way to increase wealth.  No matter what stock markets are doing, dividends continue to be paid and many companies will increase their payouts.  In severe down markets, like the one in 2008/09, the dividends continued to flow.  There might not be a dividend increase but one still gets an income.  We recommend people enjoy spending some of this money.  When have you heard your broker make this statement? 

If you believe in the future of Canada, you can buy Canadian dividend paying shares and hold through up and down markets.  In many cases you will be rewarded with an increase in payouts.  When a new bull market begins these types of shares move up faster than most companies because of the steady income.

Today, the governments of Ottawa, B.C. and Quebec have closed Canada to foreign investment.  When these negative governments are gone the Toronto stock market will be one of the world’s best performing exchanges.  All good dividend paying shares will join the party.  Hopefully, the new Quebec government will want development in the energy industry.  The previous government was only interested in supporting Saudi Arabia, Libya and other than ruthless countries by buying their oil, rather than supporting Canada by buying Western Canada’s oil and natural gas.