It is becoming more apparent every day that the consumer is feeling the pinch. It is no surprise though given the chart above clearly indicates the spending since Covid has been on the back of debt.  If this was not the case, there would be a widening gap between consumer credit and spending like what occurred between 2005 and 2020. Unless everyone wins a lottery, spending is about to slow down significantly for the rest of this year and next.  People have no choice but to clean up their balance sheets and central banks are willing to speed up the process.  There is nothing the government can do, except cut taxes that will stimulate the economy and we all know this will not happen under Trudeau. Over the next two years, the indebted are going to feel more pain from their bad financial decisions. 

After announcing that same-store sales dropped 10.9 per cent and EPS dropped nearly 40 per cent during the second quarter, the CEO of Sleep Country, Steward Schafer, stated “we continue to see softness in the second quarter following a slowdown in consumer spending on large discretionary goods”.  He was, however, “cautiously optimistic” that the shift in spending is temporary (obviously – good times will follow the bad). The same week Canadian Tire reported ok earnings but rescinded on a three-year financial forecast and stated, “as inflation persisted and rate hikes continued, consumer demand for discretionary goods softened, particularly in the latter half of the quarter, and Canadians shifted to more essentials”. 

The Office of the Superintendent of Bankruptcy reported that the 31,224 consumer insolvencies between April and June was up 23.5 per cent compared with the same period last year, while business insolvencies rose 36.9 per cent to 1,090. The agency said total insolvencies for the 12-month period ending June 30 were 116,653, up 23.2 per cent from the previous period. On the business bankruptcies front, it is estimated that there are 250,000 small businesses on the brink of insolvency across the country.

It is no surprise that bankruptcies are increasing. Driving through the neighbourhood leading to my favourite hiking area there is subdivision consisting of middle-class homes built in the sixties and seventies.  Today they start at $750,000. Homes in the new subdivision up the street are all priced between one and two million dollars.  Just about every driveway along the way had between two-and-four cars and a toy on it.  How can people afford these luxuries when the average family income is now $122,000 per year?  Even with a $200,000 income people cannot afford all these toys and big houses. 

To gauge how much trouble is coming take note of how many cars, RVs, and boats are for sale in driveways and parking lots. Keep an eye on websites like leasebusters.ca and autotrader.ca as well. Today it is not serious, but if the amount spikes, then you know people are getting stressed. If few are up for sale in the fall it means the borrowing party will continue, along with higher interest rates. Central banks are vocal about their goal to push down debt levels, but too few are listening.

Sadly, Europe, the US and Canada continue to throw endless amounts of money at pseudoscience. Wasting money on renewable energy, EV customers and manufacturers is a drag on the economy because it is funded by taxes which comes at the expense of the disposable income needed to buy the goods and services in the first place. If the above business models worked, corporate titans would be investing their own money, but they’re not. Most that did have already sold or are considering selling their holdings.

Climate change driven industries should be funded by stakeholders, like every other business.  Shareholders are smarter than politicians and always prove they do better with their own money rather than giving it to the government to manage.  The world has 400 years’ worth of natural gas reserves backed by an existing clean and reliable infrastructure created by shareholder funds, freeing taxes for areas that benefit everyone such as healthcare, education, and military.     

Spending has continued to slow and will appear in the third quarter earnings reports.  This is already evident in the Baltic Dry Index (dry-bulk shipping rates) which is still falling, and down 9% this year already. It is a sign that world-trade has slowed and will slide further in the weeks ahead. There should be an uptick in the index in the fall as stores stock for Christmas.  If there is not, watch out, because it means household finances are falling apart.

It is becoming evident everyday that the economy is close to contraction. To protect your savings, continue to buy one-year insured GICs and blue-chip shares which have with yields between 5 and 6.5 per cent. These include utilities, Canadian banks, and energy shares. A yield above this level tends to indicate a future dividend cut.   Avoid shares that do not pay a dividend. 

Do not own any investment in the U.S. commercial real estate market.  The market is a disaster.  So many office towers are at least 25% empty which makes it impossible for investors to get interest on the debt.  Brookfield Corporation, a Canadian company has put some of their U.S. holdings into bankruptcies.  In L.A. it defaulted on 3 buildings, one which included handing it back to lenders.  They want to raise $1b for a new real estate fund which they will most likely not have an issue doing. All they will do is get Bay Street and Wall Street to promote their underwriting. Canada’s situation is not as severe, yet I would not buy these types of investments here either. In fact, I would dump all real-estate holdings in favor of stocks.   

The problem in the debt market is the hedge, pension, and mutual funds acquire all the high-risk loans and then push them onto their owners.  Since interest rates have gone up, too many people are close to defaulting. You see this in all lending markets. There are many of these firms that are the brink in trouble because of this.    

These funds leasing companies bundle their instruments and issue them as $1,000 bonds to the mutual, hedge, and pension funds. These loans are for vehicles, equipment leases and offer a much higher rate of interest.  While I have not seen any accurate numbers of people handing back their car keys, a story in the U.S. is that the people who repossess cars are extremely busy. 

If you want to buy government bonds, stick to Canada. So many countries are in trouble. One is China where many Chinese states have issued them and are now covered by empty buildings (Youtube China’s empty cities). It was recently mandated that interest owed is now delayed for at least 10 years. In other words, they are basically worthless.

We are heading into deflation. The most obvious is real estate prices.  Values will continue to fall for the simple reason that higher interest rates and the Carbon tax are using more disposable income that could be diverted to a mortgage.

How bad deflation will get is anyone’s guess, but due to an excessive debt load backed by overpriced real estate, it could become substantial.   The average Canadian house price is roughly $716,000.  This means buyers must have a down payment of $180,000 to qualify for a CMHC loan, which in our opinion is a large mistake.  The rewards from investing the $180,000 in stocks and GIC’s will exceed the returns on homeownership over 25 years at today’s prices. If you wanted to, the downpayment will would easily generate $10,800 today to offset your rent. If you choose not to offset rent then after 25 years of reinvesting into companies that increase their dividends, the portfolio will create more wealth than homeownership. The portfolio will create a much larger downpayment and the remaining capital could generate enough income to cover your mortgage for the rest of your life, plus some. Based on the long-term average average home prices must fall to three-times household income, which today is roughly $330 thousand based on 2022 average household income. We are not saying prices will fall to this level, but there will be a substantial decline. 30% from today’s levels is most likely.  

Canadian banks are safe.  They will take some losses, but most of their booked mortgages are low-risk CMHC loans. Whatever risky ones they do write, most are sold to the three types of funds mentioned above, and they will all receive commissions and fees from a third-party selling garbage to their clients.

Ever since Trudeau enacted an extra tax on quarterly bank profits over one-billion dollars, our banks have been writing down their loans. The bulk of declining earnings are due to paper losses and not cash. They are still safe and when we look back in a decade, today will prove to be an excellent entry point. Most of our recommendations have raised their dividends recently and probably will increase them again next year.

The next interest rate hike will take place before Fall.  That should be the end because today’s rates are slightly above the 70-year average. The increase will be due to Canadians continuing to spend via credit.   

For the past few months, we have stressed eliminate debt first, then build savings because we are about to experience what damage debt can cause and the opportunities that will follow.  It will be a noticeable downturn that the Bank of Canada will allow to occur, albeit on its’ terms. They know the right thing to do is to encourage deleveraging in the credit market. This could take years to unravel, and the BOC knows this. By raising rates, they are speeding up the process, which is the right thing to do. 

Unanswered Questions

1. We are into our seventh year with shortages of medical professionals, military personnel, and tradespeople.  Why has the federal government not attempted to correct this situation?  
2. Why has Ottawa deliberately made the housing market worse by increasing immigration to crazy levels when they know there is an acute shortage of affordable homes?  For the rest of this decade, they must cut back immigration to around 200,000 people annually until there is a stable population growth of 1%.
3. There is no argument that Canada has the best potential of any country in the world.  Why are we in a race to the bottom of the OECD economically and why does Trudeau and Freeland not care?
4. There are 6000 goods we depend on everyday that is made with oil. Since the Libs and NDP are determined to phase out this sector, what is going to replace this main ingredient in our day-to-day products? Do they expect us to import everything?
5. Why is Ottawa giving handouts to the EV industry when, according to the National Post, there are 250,000 small businesses on the brink of bankruptcy because they cannot afford to pay back the Covid loans they were forced to take due to mandated closures. Small business is responsible for 8.6 million jobs. Why did Trudeau spend $13 billion on VW when only 3,000 jobs will be created? He gave this money to a company that could pay for the project with less than a years’ profits. Accommodating small business would be more productive rather than slapping it in the face. 
6. Why is Trudeau purposely destroying our dollar? It is the government’s job to protect it.  A higher valued currency lowers inflation and taxes, attracts investment, and accommodates lower interest rates.  There is not one economy that has been hurt by a strong currency. Yet, Ottawa is working hard to make Canada a third world country, guaranteeing a $0.70 Loonie by the next election.
7. When are the Greens going to tell us what is going to replace CO2 with if they are successful at lowering it to levels where plant life reverses course?  Is photosynthesis no longer a necessity for life on earth?
8. Ottawa has forty cabinet ministers for thirty-nine cabinets. Why?  Most government do great with around ten.  Our ministers are clueless and rely on consultants to make laws for everything, something they were elected to do.  This is extremely expensive and almost everything consultants suggest is thrown in the dust bin by Trudeau. 
9. We live in a democratic country.  So why do we put up with a PM who controls his ministers and tries hard to silence the opposition?  There might even be one or two right leaning MP’s who has a brain, but they are threatened with losing their job. 
10. Ottawa refuses to tell us where all the money is going to come from for the Green Transition. Today it costs $20,000 per home to convert from natural gas to electricity. Will the homeowner be responsible for the cost?  
11. What is the purpose of the Carbon Tax when China and India send us their pollution via the Tradewinds?  Not surprising, since this destructive tax was enacted there has been no decrease in the amount of CO2 and no climate anomalies.
12. Why do the Liberals and NDP not learn about balancing books?  This alone will bring prosperity to all because it drives down taxes and increases disposable income which allows for savings. There is no excuse for discouraging saving. It is the backbone of every county.
13. How does a Prime Minister allow accusations of foreign involvement go unscrutinised? 
14. Why does Trudeau have no respect for our military?  He gave another $500m this month to Ukraine. This brings Canada’s total contributions to Ukraine since the war began to over $8 billion. Meanwhile, our soldiers must buy some of their own military equipment while on deployment and our veterans must beg for services. Why not fund our own military and offer peace keeping rather than killing?
15. In the last five months, our great leader has probably made a record for personal CO2 creation from his tax funded private aircraft. He spent May flying all over the world preaching his gospel of saving the planet.  He is a part of the exclusive club of climate alarmists who feel they should be excluded from lowering their own emissions. Should a Prime Minister not lead by example?

All we hear today is that interest rates are high.  In comparison with the past 3 years this is true.  But, based on records since 1954 they are in the normal range, between four-and- six percent, depending on what side of the transaction one is on. A risk-free rate of four-points provides savers a decent return on savings while banks can lend at 6%, a healthy two-percent spread.  These interest rates have served Canada well. Interest rates are not the main issue.

The biggest problem is Trudeau. He has put in place severe government regulations and higher taxes that must continue to cover his wasteful spending on our dime. Our tight regulations make permit applications last upwards of a decade and cost millions of dollars before shovels can break ground.  This is amongst the longest wait time in the world and makes us non-competitive.  The result is that we kiss goodbye trillions of foreign investments and encourage Canadians to invest outside of the country. Both started occurring once it became likely Trudeau would be voted in.

Countries around the world are developing their resources while we refuse to even though the world prefers ours.  If Trudeau was a true EV believer, he would have opened The Ring of Fire, a vast area located in Northern Ontario rich in the metals used in batteries.   This has been known since the fifties but there has never been a reason too until now. Yet these resources cannot be mined until a heavy-duty highway and airports are built which will take at least a decade because of current government regulations. 

The EV market is so baffling from an economic perspective.  The cars cost too much. They certainly do not result in less greenhouse gas once the supply chain is factored in, and it is a welfare business that survives on legislation, subsidies, and tax incentives.  Governments around the world are throwing gobs of money at the sector, even though they cannot afford to. These companies can very easily finance these projects themselves with cash, but they see no long-term investment. They would have already jumped into the market or bought out Tesla a decade ago if they did.  

Ottawa gave Volkswagen $13b that will be disbursed over 10 years and the Ontario government is also pitching in half a billion. The company made $29b(Cdn) in profits last year and are laughing all the way to the bank thanking Canadians for not putting their shareholders at risk.  These companies realize that EVs will not be around long because cleaner forms of energy based on existing infrastructure are being developed, like hydrogen. Governments are also giving consumers part of the purchase price because the cars are too expensive. The same bells and whistles can be had in an ICE for 30% less. There is no incentive to buy without the gift. This has been proven in every country that has cut these handouts.    

The market price of the metals used to make batteries have been in a freefall for the past two months.  The price of lithium is down 60% from one year ago.  Cobalt, nickel, and copper are down 55%, 28%, and 15%, respectively.  Given the falling cost of inputs, why are governments rushing to throw our money at these businesses?  When governments do this, you know the chances of survival are slim.  The EV is shaping up to be one of the biggest frauds put on taxpayers.  By next decade the world will have moved beyond the EV, just like they did in the 1850’s.

The transition from gasoline and diesel could be fatal for the economy because the two make up sixty percent of oil company revenues which shares in the cost of operations and investment. Once this is removed, the price of everything you touch which includes all construction, EV's, solar panels, and wind turbines will increase substantially because the lost revenue will be recovered further downstream in the more-refined markets in the form of higher prices. There are roughly 6000 products used daily that exists only because of oil.  People say these companies will just shrink or even shrivel away with a switch to EV’s, but the truth is our whole civilization relies on the resouce in some form or other and always will, meaning these companies are not going to disappear. Tampering with the current system is nothing but a recipe for disaster. 

The G7 is allowing unelected environmentalists such as the UN and the Intergovernmental Panel on Climate Change to run their countries.  These extremists only care about their paycheque which is earned by strangling the economy. Every country that has allowed this experienced a declining standard of living for the majority, like we are experiencing here in Canada today. Sacola’s view is that the climate change movement is based on politics and fantasy, not science. There is no denying that the climate is changing, but the earth is 4.5 billion years old and there is nothing occurring today that did not occur in the past. That is a fact. Governments falling for this trap have increased household expenses, have not changed the pace or form at which the climate is changing, and has made zero improvement to the economy. Much of Europe has realized this and are back to using more coal, nuclear, and natural gas.    

The earth is the greenest it has ever been since the last ice age. The world population has grown, and the average life span has increased every year since the use of oil.  The negative effects from oil on the environment and humans have clearly been minimal. The only fossil fuel environmentalists should be targeting is coal which China and India are building hundreds of plants  meant to last 80 years. Isn't it convenient that climate alarmists never talk about this? That is because when it comes to professional protestors and lobbyists, Canada and the other G7 nations are where the money is at.

“In Canada waiting times have reached an all-time high, with a median delay of half a year between referral and treatment”.

  ...The Economist (January 21^st)

The Premiers met with Justin in February to discuss Medicare. It appears as if nothing is going to be done to fix the issues.  The meeting proved they have no idea what is wrong with it. Their resolution was more money.  This helps but the issue is the management. Demand persistently outstrips supply in our health system and will increase for about 15 years while the largest demographic shift takes place.  The problem is as much systemic as it is money.

We need more trained professionals at every level of the medical system.  There has been an acute shortage of staff for years. Over the next 4 years many professionals will quit, retire, or move to another country where they are welcomed. This will persist until we allow more medical professionals to enter the system.  The only ‘expertise’ that seems to be growing is a bureaucracy with a horrible track record.  These people only want two things; create lots of useless paperwork (ask your doctor, if you have one) and more money to build a bigger bureaucracy. 

There are two simple changes that will result in instant benefits. The first is we must make it easier for medical professionals trained outside of Canada to enter our system. The second is to add seats at our universities and tech schools.  By the governments inaction it means there will be no new seats in September.  This staffing shortage is set to last until 2028 at the earliest, assuming more seats are available in 18 months time.

There are plenty of changes Trudeau could be making. One is to lower the size of the government. It is over-governing and wasting a fortune in the process. Most national governments have fewer than 15 departments/ministries and things get done in a reasonable time. We have 39 and many are overlapping. Trudeau likes to hand out these positions to make each of his puppets feel important.  This gives them courage to build a huge set of unproductive laws that hurt the consumer.

Trudeau has increased the number of federal employees by 30%, to 336,000, since he became PM. The average salary is $74k. This does not include benefits or the use of consultants. Provinces have followed Ottawa in this wasteful spending.  Cutting at least half of the government across Canada will save billions that can be used to repair the military, the education and medical system combined.  Using the federal government as an example,  slashing 25% of the employees will save at least $6.2b every year. But of course, there is zero leadership with common sense to do so. 

Sadly, we suggest everyone build up a medical savings account for private treatments available out of country at a fraction of the cost here.  Many are already going to Mexico and Eastern Europe for treatment.  Notice not one of our political leaders talk about this? 

They simply do not care.