The Terrible Five

The Canadian dollar has been sliding because the Federal Government and the provincial governments of B.C., Alberta, Ontario, and Quebec -  also known as the Terrible Five (T5) - have done everything possible to tell foreigners not to invest in Canada.  The T5 hates the energy sector and wants to close it down, even though it is the biggest generator of tax dollars.  Plus, it means directly and indirectly about one million jobs.

The T5 wants to close down all pipelines because maybe one day in the future a spill might occur.  Instead, they will accept solar and wind power.  For obvious reasons wind power is limited.              

Solar power is interesting in that it could become another ‘Asbestos’.  Panels are made of heavy metals such as lead, chromium and cadmium, as well as sulphuric acid and phosphine gas.  Each panel emits nitrogen trifluoride, which is 17,200 times more potent than CO2 as a green house gas over a 100 year period.  It is estimated the panels create 300 times more toxic waste per kilowatt-hour than nuclear reactors.  Will these metals leech into homes and buildings and slowly destroy people’s health just as asbestos does?

Toronto, Winnipeg, Vancouver, Victoria, Halifax and many other cities have an abundance of tall healthy trees that provide tonnes of oxygen every day.  If homes are getting solar panels it will mean many of these trees must be cut down because branches block out the sun rays.  Interestingly, not one Green, or any of the T-5, mention the planting of more trees.  They are the cheapest and most efficient way to destroy CO2.

Prime Minister Trudeau is not defending the Trans Mountain Pipeline, even though he gave it the green light.  He hopes the B.C. government will stop it, and the Site-C Dam, as he is on record that it will do everything possible to stop both.  Last summer the P.M. changed regulations for the West to East Pipeline.  Trans Canada Pipeline (TCP), nor any other pipeline company for that matter, would ever be able to fulfill his new rules.  As a result, he was 100% responsible for its demise.  Yet, the PM loves doing business with Saudi Arabia, so we import their oil.  I guess their oil will never do any damage if spilt.

Every energy company around the world sees this and now will not consider investing in Canada.  Apache Corp., a huge American energy producer pulled completely out of Canada last summer.  Apache said at the time “it will focus its efforts on its existing assets in Egypt, the U.K. North Sea, and the U.S.”.  Clearly, they rate Egypt a better investment climate than Canada!

The carbon tax, set to begin on January first and rise for five consecutive years, will scare away foreign investment.  This tax will make all Canadian goods non-competitive because no other country is imposing this negative tax.  In fact, the Paris Accord is dead.  Only Canada is trying to implement the goals.  All other countries are talking the talk but doing nothing.  The tax will not change the level of Green House Gases.  It is a 100% tax grab which will increase Canadian unemployment. Sadly, T5 does not understand that there is only one taxpayer – the consumer.  Not one corporation pays a cent of taxes.  This expense is passed on to the consumer in higher prices.

Using Australia as an example, they had a carbon tax but quickly cancelled it as it put Qantas Airline on the road to bankruptcy.  We would not own shares in Air Canada or Westjet.  Both will become uncompetitive with U.S. airlines on flights between the two countries. 

The Bank of Canada predicts Canada’s growth rate will drop to 2% in 2018 and 1.6% in 2019, from today’s 3.1%.  Business investment in Canada has fallen by 18% since the third quarter of 2014, the second worst of seventeen industrialized countries.  Investment in machinery and equipment has steadily fallen since 1998.  The World Bank states Canada’s “Ease of Doing Business” has dropped to 22^nd place from 14^th in 2016.  All this is negative for our dollar.

Today, the T5 should be doing everything to attract foreign investment and support the Loonie.  Letting the dollar to sink is making Canada’s economy a terrible investment.  There has never been one instant anywhere in the world where a weak currency has brought prosperity.  Instead, it makes a country poorer and creates rising unemployment.  Yet, governments keep on trying to devalue their currencies for no benefit.

Today, the U.S. economy is strong because the dollar is the strongest in the world.  Canada’s most prosperous period, which was between 2002 to 2007, saw the Canadian dollar rise from 65 cent to $1.12US.  The strengthening Loonie added to our full employment. 

We expect our dollar will trade between 75 cents to 81 cents until the election period a year from now.  If the Terrible Five are re-elected, they will push the Canadian dollar down to between 60 and 65 cents.  Yet, of all countries Canada has the best potential.  The Terrible Five are Canada’s enemy.

Norway’s sovereign wealth fund, the world’s largest, became the first to pass the $1t in assets mark.  Twenty years ago it was rare to hear of $1b in assets.  Today, there are thousands of people worth more than a billion dollars.  In about 20 years time there will be thousands more individuals, funds and companies worth more than a trillion dollars. 

This means in a few short decades that old tear-down homes will go for a minimum $1m.  The average size homes will sell for over $20m and jumbo size homes for well over $50m.  We will pay $10 for an apple or orange.  A jug of milk will sell for $50.  The average wage will be over $250,000, of which we in Canada will be paying over 50% in taxes.  

In the September 11^th issue of Bloomberg Business Week it stated, “if we can avoid another recession (and that’s a bit if), 1 out of every 10 American households will be worth at least $1m within the next 4 years”.   In other words, the world is marching toward a situation where money loses value.  This is a trend that started about 10 years ago.  Yet, the world is drowning in everything we grow, mine and manufacture.  In theory prices should be falling, not hitting all-time highs. 

Governments around the world, using the excuse we must go green no matter what the cost, will see all power rates soar in the years ahead.  For many, hydro costs will exceed what a family pays for food.  Yet, solar, wind, hydro dams, and so on will not lower Green House Gases (GHG) significantly.  Solar and wind power at their peaks will represent roughly 6% of the total energy we use.  We will experience soaring power prices when it would not be necessary if governments did not meddle. 

There is only one way to stop this nonsense of ever rising prices.  That is world-wide deflation where trillions of currency is wiped out of existence.  This will bankrupt governments, businesses and individuals due to the excessive amount of debt outstanding; exactly what took place from August 1929 to May 1932.   Then, currency becomes valuable and the world starts the next round of 100 years growth. 

Today, we see results of the past decade.  The Dow Jones Industrial Average and the S&P 500 indexes are trading at their all-time highs. Plus, they are trading just shy of their most expensive valuations based on corporate profits.  On the last trading day of 2014, the companies making up the Dow Jones Industrial Average had combined earnings of $106.40.  Today, earnings are up 2.17% to $108.71.  Yet, the index has gone up 28%.  For the S&P 500, earnings were $10.47 compared to $10.40 today.  During this time the index has soared 24.5%. This, as with the real estate market, points to too much money floating around the world resulting in higher prices. 

While Norway’s sovereign wealth fund has exceeded the magic trillion number, the Americans have done the opposite.  Their government debt is $20.1t. However, if you include government obligations, such as pensions and military the liability is $67.9t, or $7,714 per every citizen.  One day this debt mountain will destroy the American economy and the U.S. dollar.  The world is drowning in dollars.  If people lose faith in the Greenback it will collapse in value against all currencies----just history repeating itself. 

When the correction comes is anyone’s guess, but it is definitely coming.  It could be tomorrow or ten years from now.  Those with debt will be destroyed.  There is an old saying which is true today - few learn anything from history and love to repeat past mistakes.

The year is nearing its third quarter and America is finally “Great Again”.

Supposedly the world will not survive with all the carbon floating around the world today.  So let’s tax it and scare investment away.  Afterall, jobs no longer matter.  Money is no object anywhere in the world because all you need to do is borrow it.

Thankfully, soon we will be using 100% renewable energy.  The truth is it is estimated renewable energy will be able to produce only 5.5% of the world’s electricity.  Do not tell the Greens, but renewable energy will cost more than coal, oil and natural gas.  Fortunately, all consumers will gladly pay the extra costs even though it will do little to cut green house gases.  If you do not believe us, just ask the consumer in Ontario.  They are paying North America’s highest electricity prices.  Plus, they love to send their extra energy to New York State cheaper than what it is sold for in Ontario.

The Dow Jones, NASDAQ and S&P 500 indexes are up 27% this year eventhough corporate profits are where they were in late 2015. The Dow Jones Industrial average is at an expensive 20 times earnings versus the long term average of just over 15 times.

No profits?  Not a problem!  Who needs them?  Tesla is worth more than GM even though they lose gobs of money and will not make any for years to come.  The company relies heavily on government handouts.  Ontario rewards buyers with a $14,000 rebate from the taxpayer for buying one.  Oddly enough, sales of the vehicles have collapsed in all markets that pulled the plug on government incentives for electric vehicles. The only reason the company is afloat is because they are loved by Wall Street who makes wads of cash from the numerous underwritings needed to keep Tesla afloat.  Of course, Wall Street will gladly unload these new “blue chip” shares to investors.  There is no shortage of these companies out there.

Amazon will soon take over the world once we wake up to the fact we never have to leave our couch to go shopping.  The stock is only trading at 625 times earnings.  In other words, it will take a short 625 years to return its current $1000 purchase price to the shareholder. What a bargain! 

Most preferred shares on the Toronto stock market traded at yearly highs over the past few weeks, thereby lowering the yield.  At the same time interest rates have increased pushing up the risk-free rate of return.  This has never happened in recent history.  I  guess finance theory is no longer relevant.

Ottawa, Alberta, Ontario, and B.C. are saving Canada from the evil oil & gas sectors.  It’s OK though; governments do not need the billions in tax revenue or jobs created by them.  Instead, the consumer and small business will make up the shortfalls without affecting consumption…somehow. 

Buying a home is the ultimate retirement fund they tell us.  Real estate prices just continue to increase.  Stress tests and higher interest rates will never affect the market.  Prices will continue to soar for years to come.  Wages no longer matter, so why wait for yours to increase?  Just join the largest mortgage club in Canada’s history and buy right now.

Enjoy it while it lasts. There is a huge economic correction coming. When?  It is hard to give a time line which is why we stay invested, collect those wonderful dividends, and keep a 30% cash position for future opportunities.  

Something is not right.  After raising interest rates for the 2^nd time this year in the U.S., markets rates have fallen.  The 10 year U.S. Treasuries were around 2.45%.  After the rate increases they have fallen back to the 2.3% area.  We believe this signals weak demand by business to borrow and suggest deflation is gaining strength.  To be fair, American business is cash rich, led by Apple, which has $240b in the bank.  Total cash hoarding by American business is $2 trillion.  One has to ask, why are these companies not investing in new plants and research and development?

Stock market values bear no relationship to corporate earnings.  On July 24^th, 2015 the companies in the Dow Jones Industrial Index combined earnings were $107.58, NASDAQ $21.98, and S&P 500 $9.82.  Today, those earnings are $104.41, $24.21, and $10.15, respectively.  Yet, all three indexes have increased by 23%, 26% and 19%, respectively (the TSX is up 7%).  This means the stock markets have been going up based on speculation that Trump is going to save the country and make corporate earnings double in 3.4 years.  This is next to impossible due to lack of new investment, the ever growing debt by governments and individuals, numerous leaderless governments in the U.S., Britain, Canada and Japan, and, the threat of China falling into a recession.  Plus, there are surpluses of just about everything mined, harvested, and manufactured. 

There is surplus of housing. Calgary has 23,600 empty homes.  Condos make up 45% of the total.  Toronto and Vancouver have around 60,000 each.  In Penticton, homes under construction equal a 10 year supply based on population growth.  While not as big, overbuilding is taking place in Kelowna and most of the Fraser Valley.  Where are people going to come from for all these homes? Increased immigration?

Without immigration Canada’s population is shrinking, as are most Catholic countries.  The shortages will not be noticeable for about another 10 years when the Boomer generation begins to decline.  Canada is going to need massive immigration to offset the coming shrinkage.  Japan is the first country to feel the effects of a declining population.  Japan already has surplus housing. Just like Canada is going to have for years to come.

Stock market growth is limited for the rest of this decade.  By every yardstick they are very expensive.  Portfolio growth will be coming from cash and from dividends.  Our 7.7% annual return from dividends will be one of the highest rates of return for all investments over the next couple of years. Not to be cocky, but the 7.7% will be higher because most of the companies on page 6 will increase their dividends.

Stock markets are warning us to be careful, risk little and pay down debt.  There will be another interest rate hike later this year, and probably two more next year.  Stick to terms of 1 year or less on all money market assets and ride the interest rates up.

All bonds with terms greater than one year should be sold immediately.  Like preferred shares, they trade based on the going rate of interest.  Bond prices for the next few years will be heading lower.  They will be a horrible investment.  

Human nature loves to follow the crowd, especially when it comes to investing.  Years ago mutual funds were the road to riches for Bay and Wall Street.  Few investors made money.  Then came the ETFs which have been a gold mine for the companies managing as each trading day all funds must be reset to maintain the balance as required by the ETF.

This decade the road to riches has been buying real estate.  Stock markets have also been very kind as they are trading at their all time highs in the U.S. even though corporate earnings are down from two years ago. Real estate and stock markets have benefited from zero interest rates. Falling interest rates push up asset values.  Investors have benefited from this, but only on paper, unless they sold to rent or to downsize. 

People either believe the good times will never end, or, they will be smart enough to get out the day before the correction begins.  If they are correct then this will be the first time in economic history.  Unfortunately, history and common sense says, once again, these people will be wrong and lose a large portion of their savings.  They will end up deep in debt, and will have a poor future for their retirement.

Today, yellow lights are flashing.  Personal and national debt around the world is skyrocketing with not one government attempting to bring down their wasteful spending.  Consumers have been on a record spending spree, with a large portion of the spending via debt.  When in Canada the debt is at $169 versus $100 of income, trouble is coming for the consumer and the economy.

Gold is telling us deflation is coming.  Platinum prices are telling us car sales are about tumble.  We have record surpluses in natural gas and oil.  Farmers are producing too much food.  Stores are over flowing with goods.  The Baltic Dry Index confirms weak world trade.  President Trump is doing everything possible to destroy free trade.  The CRB index continues to slide as weak prices are a sign of deflation.  Until this decade it was rare for the index to go below 200.  Since mid 2015 it has been rare to be at or near 200, trading mostly around 185.  The all time low was set on February. 11, 2016 at 155.53.

Any real estate and stock market pull backs will wipe out trillions of dollars, again 100% deflation.  It will take years, maybe over a decade, to recover most of this lost money.

Asset values have peaked and are about to tumble.  Thanks to debt, consumers have less cash to sustain the economy.  All this means is time is running out for the average investor.  Today, as deflation grows, cash becomes the best investment followed by strong companies that have cash and a reliable dividend.