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.  

It was between 1929 and 1932 when depression slaughtered the stock markets and real estate.  Back then the economy was based on the rural segment and the stock market.   The real estate collapse was mostly through the prairies of North America where most people lived in the countryside and in small towns.  It was this financial meltdown that changed North American life.  People began the exodus from the farm to the cities. 

In the 1920’s the New York Stock Exchange was a gambling casino.  Like real-estate today, you could buy shares with 10% down.  Investors were required to keep a cash-to-margin ratio of 90:10.  This worked well until August 1929 when the collapse began.  Investors did not have the cash to maintain this ratio.  This caused forced selling which drove the stock markets even lower as it fed upon itself.  To make matters worse, the Federal Reserve pulled money out of the financial system bringing real-estate down in the process.  This made it impossible to borrow, so prices for everything collapsed. 

Between August 1929 and May 1932 the Dow Jones Industrial Average lost 89.9%.  This drop has been repeated only once since.  It was when the NASDAQ dropped 89% during the-hi tech implosion in 2000.  

It is so obvious that Canadian house prices are in the stratosphere. They bear no relationship to family income. For years prices have soared faster than wages and inflation.  At the same time families have piled up personalized debt to record levels to match these house gains.  The market is now changing as sales have peaked and are down double digits in many of the hot markets today.  Falling sales result in price drops leading us to believe prices will begin to decline by late summer, if they are not already.  It will be amazing how many potential buyers will disappear and how many homes will go up for sale. 

Stock Markets are based on profits.  Nothing else!  Because of this, stock markets are the second most expensive on record.  They are up slightly from two years ago while the markets are up over 10%.  The Dow Jones Industrial Average is currently trading at 20.5 times earnings.  The 97 year history of the index is between 13 times (set mostly last century) to this century’s average of 15 times earnings. 

In order for homes prices to return to their norms, prices must drop between 20% and 40%, depending on the location.  Stock markets face a potential decline of 25%.  The danger today is if the stock market and house prices decline at the same time.  If this takes place the economy will contract. You will want income (dividends) and to maintain a cash reserve that you can use to take advantage of the deals that will be out there. 

History has shown that when the average person is buying the same thing and getting rich at it, all the wealth gets taken away at some point rather quickly.  Even worse, it takes years to recover.  Just a few samples of this, the Tulip Bulb craze, American railway bonds in the 18^th century, the Great Depression, the hi tech during the nineties, and the Financial Crisis of 2007-2008.

Both corporate and household income do not justify current prices.  Real-estate and stocks markets need to clean themselves of the rampant speculation taking place. This will occur. It is a given.  Let’s just cross out fingers both do not occur at once.