Post Election Depression

There was one group who won big thanks to the election - the Greens.  They have made great strides the past few years in trying to turn Canada into a 3^rd world country thanks to our useless Trudeau government.  The Greens want to shut down our whole energy sector and replace it with renewable, and rechargeable, both which require huge amounts of mining, water, oil and natural gas and so many other resources to build and maintain.   The result will be substantially higher energy costs with no change to the climate. 

We believe Justin will be run out of office within 2 years by the people behind the scenes of the Liberal Party because he has caused billions of investment monies to leave Canada.  To date it is estimated over $665b has left the country since Justin took office, most from the energy sector.  It will never return so long as Justin continues to be PM.  He does not understand that the energy sector is the country’s biggest tax generator and job creator.  Plus, we have one of the lowest amounts of GHG, at roughly 1.2% of the world total.  China, India, Russia, and the U.S. each produce 15% of GHG’s.  Yet, Trudeau considers us the worst offender.

Ottawa for some unknown reason refuses to take advantage of all the Free Trade agreements we are a part of.  Perhaps it is because Trudeau is embarrassed that world leaders laugh at him. Most countries including the U.S. are avoiding Canada because we are directionless and not reliable. A perfect example is the slow but deliberate destruction of our military.  England is preparing to help Canada defend our Arctic from both China and Russia who plan to take it over in the next decade.  To date Canada is doing zero to protect our Arctic, making it easier for the two. 

There is a good chance that Justin will prorogue Parliament again if he feels he will be kicked out of office.  This time he will place no time limit.  He will use dictator policies to keep himself in power.  Justin will not leave peacefully because he is addicted to power. He is on record that he wants to be PM for life.  He praises China’s one person government, which is what he wants.   He has announced he will re-introduce Bill C-10 that gives Ottawa control over what the Press can report.  Ironically, it the same as what China has.

After the election results the Toronto Stock Market moved higher. We are guessing investors must expect more of the same - plenty of free money for those who do not want to work, which will make it harder for businesses to rebuild.   This is about to end.  Canada cannot afford to do so.  If they do, there is a good chance our dollar will slide to $0.70US within 2 years and will cause prices of imports to rise. The consumer is already going to experience higher taxes and interest rates, just imagine the effect a cheaper Loonie will have on disposable income.

I was hoping to hear at least one politician tell us what they will do for Canada as a whole.  Instead, they all tried to bribe separate regions. Not one talked about our military which has been underfunded for years.  They not once mentioned about the Carbon Tax, which is set to go up again next year.  There was not a comment by anyone about COVID, nor about the rising overdose and crime rates across Canada.  Surprisingly, not one mentioned how they are going to fight climate change (not that we care, it was a nice break). 

Sadly, our new government is filled with the same useless politicians.  This means Canada will continue down the road to becoming a 3^rd world country.   Our potential as a country is the best in the world, but it will not be released until at least a year after the Liberal party is out, and the next PM figures out how to unravel the mess Justin has made of this country. Canada did not deserve the treatment it has suffered over the past 6 years.  And now we are stuck with in it for another four.      

This election is an embarrassment!  The Liberals and NDP promise nothing but spending as if money grows on trees.  One wants a wealth tax, which has been a failure in every country because money travels to the highest return. Both back the Carbon Tax which taxes us for the activities of the three largest emitters of pollution in the world. They do not understand money always flows to where it is welcomed.  Taxes deter investment, destroy jobs and lowers the standard of living for the average person.

Both leaders have their family money tied up in Trusts which pay no tax.  Taxing this financial instrument would raise more money than any wealth tax would.  Even though both are wealthy and backed by the most generous pension in the world, Singh and Trudeau will never recommend this because they do not want their wealth shrink like the majority are experiencing via higher taxes coupled with higher inflation. I notice that both Trudeau and Singh have not once complained that every Canadian taxpayer is already faced with high taxes and will be going forward.

Both have not provided any idea how we are to repay the debt Justin has borrowed or how their new spending will be paid for. Since Ottawa is broke, they will have to borrow more money just to pay the interest on the growing debt. All that interest creates no jobs or wealth.   Interest is the biggest waste of money in our financial system.    Our worst ever Finance Minister, Ms. Freeland, said spending money is what they do, and she (and Justin) will continue to do so, with zero plan to cut down on borrowing.  By not cutting down on their spending there can be no tax cuts.  It is estimated that if Ottawa ever grows up and decides to pay down the debt it could take up to 75 years.  Shame on all of Ottawa. 

The Green Party is promising to shut down all oil production without one recommendation how to replace the goods it produces.  Furthermore, there is not one economically viable alternative that can compete with liquid energy.  Even renewable energy relies on oil by-products and fossil fuels for back-up.  Greens have never offered a plan to replace soaps, plastics, medicines and so on. Ridding the country of resource development will result in the loss of millions high paying jobs.  They have not explained what will replace all those lost jobs. Thankfully they have no chance of being voted into power.   

Our dollar dropped over a cent against the U.S. $ when the election was called.  We predict that if one of the 2 Golden Spoon boys win the election our dollar will drop to 70 cents within 2 years.  This will automatically increase our international debt burden by 11% and cause inflation since our imports will cost more. This will force Ottawa to raise more money to meet higher interest payments.   As it is, Ottawa’s spending is out-of-control with no sign they will ever stop.  The Consecutives at least say they will try to balance the books within 10 years.  An easy plan to cut the deficit is to get rid of at least half of the 37 cabinets.  No one will miss the bureaucracy and it will save taxpayers billions of dollars. 

Not one politician has mentioned what they will do for Canada as a whole.    They shamefully try to bribe us all.  Not one politician mentions how they will get us more doctors, nurses, and home caregivers.  Other than Quebec, they do not mention giving money for old folk’s homes, which was promised by Trudeau when COVID became front page news.  

At least the Conservatives offer a choice.  Tax credits for having children are cheaper and more productive than doling out free money.  Mr. O’Toole spent 5 years as a military helicopter pilot.  He knows that the whole military must be rebuilt.  Justin has basically made our military an embarrassment to the rest of the world.  A prosperous country always takes care of it’s military.  Canada does not under Trudeau and will not under the NDP. 

Canada must do something to attract quality people into politics. Running a country requires skill and educated people who understand economics, world trade, exploiting the resources we are blessed with, the importance of military, and most importantly have love for the whole country.  People who want power for themselves are always destructive.  This is exactly what has taken place in Ottawa for the past 6 years.

The greatest threat today is deflation. All stock markets have been in a dream world. Valuations have meant zero. New issues are raising billions of dollars from Investment Banks even though the company might be small and not profitable. Once the company goes public, they seem to raise even more billions. Brokers are pushing these new issues as they make gobs of profit from each underwriting. Many share price increases are based on who the promoter is, just the same as the crypto currencies. All markets have become a replicate of the Tech Bubble.

An example is Tesla. It produces a good car(supposedly), except from its Chinese factory where it is poorly built. Tesla has few dealerships around the world, even in Germany where the car is a big seller. The brokerage industry is predicting the company will make $1 a share in profit for 2021. Assuming earnings will increase by 20% a year for the next decade (highly unlikely) this means in 10 years the profit will be $6.48 a share, and the stock will trade at roughly 100 times earnings if the share price stays around $650. We feel the share price today should be around $78 based on the projected 2031 earnings.

Using the price-earnings ratio of the NASDAQ (110-times) means investors expect profits will double in 7 months. If this was possible governments would be raising capital gains taxes substantially which would kill the economy. The combined profits of the companies making up this index have fallen from $13.65 down to $12.52 over the past two years. Meanwhile, the index is up 40%. It does not make any sense whatsoever.

Today the Dow Jones Industrial Average is trading roughly 40% above its 101-year average price-earnings ratio. The TSX and the S&P is trading closer to 50% above their averages since 1954. Falling to just their long-term averages will be deflationary.

Our biggest threat is real estate. As the chart on the next page shows, our prices are in the stratosphere. This is perhaps the highest leveraged asset out there. Statistic Canada says the average family income is $111, 000 (2020 numbers). I have bumped this number to $120,000 due to government handouts and less spending. This means that for a person to buy a new home with an insured CHMC mortgage and using the required 20% down payment the family can safely afford a home priced around $360,000. You might be able to stretch thisto $400,000 with today’s low interest rates.

The average selling price across Canada is $696,000, or roughly 5.8-times household income. For those who put only a 10% down payment the number rises to 11 times household income. No one can afford this for a long period of time. Obviously, many people are being squeezed financially.

Canada’s population growth is almostflat. Trudeau wants to bring in 401,000 new citizens but he will be lucky to get 190,000 people this year. Housing starts today are 282,700 and growing, which means a surplus of over 100,000 housing units. Also, a lot of recent immigrants are leaving Canada for other countries because those that are skilled are only getting low payingjobs since Canada will not accept their past country’s qualifications.

When interest rates begin to climb house prices will fall. We expect a small interest rate hike during the fall months and next year a 1 percentage point jump, then climbing to 2% in 2024. Each increase will force house prices lower. Since house prices are so rich, when the decline begins the fall will be substantial because there will suddenly be few buyers. This is the worst thing that can happen to any market.

In the coming recession, trillions of dollars will be wiped out of existence. So many people have invested in illiquid investments like nonfungible tokens (part art ownerships in almost everything like paintings and jewelry), cryptos, and SPACs which takes investors’ money and invests in some business that needs cash. Just on Bitcoin we can see the price falling to $22,000, down almost 66% from its peak just a few weeks ago. If we are in deflation, bitcoin will go under $10,000.

Deflation is the enemy of leverage. Debt becomes more dangerous because wages can be lowered, and many assets lose their values while the debt stays the same. Do not take undue risk. You want to invest in insured GICs and only blue-chip shares that pay a dividend. This means the banks, utilities, and big energy companies. Canada is lucky we are rich in resources. Deflation will force a huge change in Ottawa since they will be desperate to keep the economy afloat. The energy sector will be the savior, not renewables which are unprofitable, make no improvement to our environment and only cost the consumer more.

Cash is and will be King until the markets correct

The stock markets are acting like the consumer is going to rack up debt and spend what little savings they have like never before. Supposedly the consumer has the most savings in decades because of Covid restrictions.  If this is true, it may come as a shock to the experts, but some people might like the feeling of having savings and many will not spend.  Plus, much of the shopping has already taken place during the past 16 months because people had nothing else to do.  All one must do is look around any neighbourhood and you will see driveways with new cars, boats, RVs, and so on. It is believed that the immediate future will put the Roaring Twenties to shame.  We believe this will turn out to be a pipe dream. 

Stock markets continue to make new records based solely on hope. Both the TSX and the DJIA are trading around 25 times-earnings which means investors expect the combined profits of the companies making up the indexes to double in just under 3 years.  This will be the fastest on record.  At 100 times- earnings, investors expect profits on the NASDAQ to double within 7 months.  This is literally impossible.

Demand for real-estate will begin to dry-up this fall. Most people who wanted a house probably bought over the past 2 years taking advantage of the low interest rates.  It is estimated that 10 to 12% of today’s purchases are for investment.  When capital gains disappear, many of these properties will end up on the market. No matter which way one bends the numbers, when it comes to cash-flow, real-estate today cannot compete with dividends.   

Without increased immigration, Canada’s population will continue to shrink. Justin wants to let about 180,000 immigrants into Canada by year end. Yet, during May 275,916 housing units were under construction. Given there are over 2 people per household on average, it is safe to say that there is surplus housing. Sadly, Canada is becoming less appealing to foreigners because we have useless governments who are only interested in being re-elected rather than long-term prosperity.  There is not one person in Ottawa that has any idea of how to unwind the mess they have created.

Interest rates will be heading higher.  This is going to force prices lower for housing and all those extra toys in the driveway.  Ontario has already begun to feel the pain with many consumers defaulting on their mortgages, bank loans and rent. It will take close to two years for these cases to be settled considering the wait time for a first court appearance is around six months.  Plus, there is now a shortage of courts and judges.

The bottom line is markets are telling us utopia has arrived.  Unfortunately, soon reality will set in, and we will not be prepared. Like pre-Covid, there is far too much debt out there that needs to be wiped out.  Deflation is tomorrow’s biggest threat.  

Keep at least 30% of your portfolio in GIC’s or other insured money market vehicles and the rest in dividend paying shares.  Wait for the market to come to you.

We must issue a warning: most pension plans will find it difficult to maintain monthly payouts in the years ahead.  All pension funds must invest based on a 30-to-40-year horizon.  This means today they are big buyers of 30-year Government bonds paying roughly 2.5%, office towers, roads, and rental apartments that also offer dismal yields.  When the economy returns, these assets will experience large price drops because there will be higher returns elsewhere.  Real-estate and bond prices are at a peak and the decline in prices will force pension funds to hold onto the asset while earning a dismal cashflow.  With a slowing economy for years to come, plus excessive construction it is going to be a fight to maintain the monthly payouts.  Pensioners will not notice this change for a few years, but it is coming.  Pensions are going to shrink, so everyone that plans on one for retirement should begin to build up their savings to offset the cut in future pension payouts.

“Net-zero by 2050” is a phony play to make Greens feel warm and fuzzy. They believe it to be the answer to something that is not even an issue - Carbon.  We need Carbon.  It is the building block of life and, contrary to the climate alarmists, the earth has become healthier as levels increased.  Their dreams will result in only one outcome: making energy more expensive while making zero change to carbon levels.  

The big push today is the conversion to Electric Vehicles (EV).  While it sounds great, it will be difficult to achieve. Both infrastructure and materials needed will be a roadblock to widespread adoption. Plus, the EV will not eliminate carbon.  Oil will always be needed to make the tires, lubricants, carbon fibre for frames, asphalt for cars to drive on, and fossil fuels will be needed in manufacturing and shipping.

Charging infrastructure will be an ongoing hurdle. While private enterprise is making small investments, the largest financiers are governments (which says enough).  President Biden announced the government will build 500,000 charging stations throughout the U.S. (they currently have 115,000 gas stations).  Here in Canada, only a few utility companies are installing them.  And when they do, there is maybe 1 for every 50 parking spots.  Petro Canada has made the biggest investment in Canada that we know of, by installing some at their gas stations along the Trans Canada Highway. With little infrastructure committed to, it is easy to conclude that private investors do not see this business model as a profitable venture at this phase in the game. Large subsidies the sector demands also confirm this.

A move towards the EV will increase demand for all sorts of resources and energy. The most obvious is electricity. It will cost the U.S. alone $7t to convert to an EV grid. Who is going to pay for this?    Charging stations will increase the demand for copper, plastics, aluminum, and carbon fibre which all rely on oil-based products and production. This will result in expanding mine operations on a grand scale, offsetting what lower emissions that might be created by the EV.

Lithium is the main hurdle to overcome. There is not enough of it. Lithium also has a large negative environmental impact which is never mentioned.   Lithium comes at the expense of farmland because it uses so much water that it causes drought in the surrounding area.  Mining 1 ton of lithium will supply only 90 EV’s and requires 500k gallons of water. Can you imagine how much water it will take to convert the 1.5 billion cars in the world to electric and then continue this cycle every time a car is retired (roughly every 10 years)? This means that governments will have to choose between agriculture and lithium mining.  For some reason, I think governments would prefer to keep the arable land to feed their people.

The price for one ton of the metal is $355U.S.  It is priced in China's currency because they are the world's biggest user.  There are numerous lithium reserves around the world, but most are not being mined because they are not profitable.  For it to become lucrative the price must increase, but this means more expensive batteries.  Will the consumer be willing to pay the added cost?  

Not only is it expensive to mine, but the supply is also questionable. A paper produced by Lappeenranta-Lahti University of Technology, in Finland, and the University of Augsburg, in Germany found that ‘when researchers examined various models to determine how much lithium remains on Earth, with estimates varying from 30-95 million tons (Mt)…a scenario which assumes 73 Mt of lithium supply left, using best policies (recycling, V2G, second-life) implemented and around 3 billion EVs produced sees lithium fully depleted a few years beyond 2100. If the same policies and number of cars were matched with just 26 Mt of lithium, but recycling efforts would only grow slowly, battery manufacturers will close shops even before 2040." If this is correct, we could expect the supply of Lithium would disappear before the next century if the world switched to the EV.      

There is no doubt that the EV is going to exist and grow in popularity. However, it will be a niche market utilized by specific businesses and consumers.  Cost savings will be the biggest stimulus. Currently, the only reason the EV is price competitive is because of very generous subsidies to consumers and manufacturers. With government deficits in record territory, cuts to subsidies will occur before tax hikes, and demand will increase the price of electricity and minerals.  The EV market does not look promising in the long-term.

We will one day move away from gas and diesel, but it will not be to the EV. There are too many cost constraints. It will most likely be a switch to cleaner carbon-based fuels such as hydrogen and natural gas.  The infrastructure is already in place and the technology to produce on a grand scale is getting near.   If you are an earnings investor, avoid all companies catering to the EV market.   

"Carbon dioxide from burning fossil fuels is the stuff of life, the staff of life, the currency of life, indeed the backbone of life on Earth." 

...Dr. Patrick Moore, cofounder of Greenpeace, 2015