Another month of savers being punished by zero interest rates has passed.  For every $100,000 a person has in a risk free asset they will make between $85 and $250 per year, depending on how long one wishes to lock-in for. With a return this small there is no wonder more retirees are accumulating excessive debt and taking undue risks with their savings.

The Boomers have started to kick off the largest demographic shift in western civilization. Just how exactly are they expected not to spend their nest egg quickly when it makes next to nothing? It appears as if politicians and central bankers cannot understand that the recipe for a healthy economy is an interest rate that rewards the saver and deters excessive debt at the same time.

The Boomer demographic holds the majority of wealth in our economy.  Can you imagine what effect higher interest rates would have if ones passive income jumped a few hundred percent?  Sure it would also cause pain but it would teach responsibility as well.  It would also encourage saving and reward it more at the same time. As long as interest rates remain where they are the economy will continue to do nothing but move closer to contraction.

A recent report showed that seniors in Ontario accounted for 10 per cent of all insolvencies in the province.  It also found that they had the highest level of unsecured debt at the time of their insolvency, averaging $69,031 each.  This works out to an average monthly interest charge of $400, with no change in the principal.

Many seniors have taken out reverse mortgages where the house is used as collateral but no monthly payment is made.   Instead, the interest is accumulated until the term ends at which point the house must be sold or the principal and interest is returned.  People hope the value of the house will increase greater than the outstanding debt by the end of the term.  Given today's interest rates can only increase, the chances of this occurring are zilch. We recommend people sell their homes rather than use a CHIP.

Unless you have been lucky enough to save a small fortune your retirement plans are in jeopardy.  Interest rates are going to ensure you will not have enough savings to retire at age 65 and have the life you wish.  Many will be forced to work longer than planned or cut their spending substantially.

It is becoming apparent that the world economy is going to be flat for the rest of this decade.   Capital gains will be hard to achieve so any the bulk of returns will come from rising dividends.  A one year GIC needs to pay 4% or higher before the economy returns to normal.  Unless the market forces them higher, this will not occur this decade   As a result, an economic recovery is many years away.

Based on this investors should be rethinking their retirement plans because the money probably will not be there unless one starts to save more today.

A major change is taking place and little is being reported about it.  While today the deviation is minor, if it continues to develop, which appears likely, we will begin to see a different world in a decade’s time that will change the economic landscape.  This change is a declining fertility rate.  Led by Japan, the industrialized world faces a shrinking population along with all its consequences.  Only the Middle East, India and most of Africa will continue to have a growing population.  Yet, even most of these countries rates are sliding. 

For the second year in a row, Japans population will shrink and continue to do so for the foreseeable future.  At 1.4, the fertility rate is one of the lowest in the world (2.1 is required for growth). To exacerbate the situation, their population is aging and the country allows little immigration.  This means market demand for all goods and services will weaken naturally over time.  What is to become of excess homes, stores, and local manufacturing?

Last year was the first time in years that America’s birth rate slipped under 2.1.  The U.S. is the only industrialized country that had a fertility rate above 2.1.  If this trend continues their population will also begin to shrink without immigration.  As the map above illustrates, a negative birth rate is common all over the world. The trend appears to be that the more democratic and well educated the society becomes, the lower the birth rate is.

Adding to the potential for a shrinking population, 2015 is the second year in a row that more Mexicans are leaving the U.S. than are entering.  Today, Mexico offers the local’s better jobs than they can get in America.  Their car industry is growing and taking jobs away from Canada and America.   It is believed that Mexico will soon be the world’s biggest auto manufacturer.  If Mexicans returning home is a new trend it will hurt America even more. 

In order for North America and Europe to maintain today’s standard of living they will have to increase immigration.  Unfortunately, as the map above illustrates, we will be competing with many other regions of the world.  Even when immigration does increase, it will not lead to a growing fertility rate overnight because it is the immigrants’ offspring that tends to have the larger family.  Therefore, a climbing fertility rate is at least 2 decades away.

With zero interest rates destroying personal savings throughout the world, historic levels of debt and population changes in force today, the global economy is setting itself up for slow economic growth (0 to2% annually) for the next few decades.  The outcome will be a transfer of wealth from the West to Africa, Asia and the Middle East.  This is already evident with GDP growth in these three regions surpassing most of the Western nations. 

Since 2007 global debt has risen by $57t, or about 3 times faster than inflation. The biggest increase was in home mortgages.  The Economist magazine (Feb. 7/15) says 10 countries have debt ratios of more than 300% of GDP.  This will prove to be a huge burden for these governments moving forward.

Nobody talks about all the money that is wasted on interest charges from passed outstanding debt.  In the case of the U.S., USdebtclock.org estimates it has paid $2.567t, or $8,012 per citizen.  Sadly, almost all national borrowing is used to keep government’s alive rather than building wealth.

The Baltic Dry Index, which measures the cost of shipping, has set 40 year record lows almost every trading day since the first of the year.  This signals that world trade is falling off a cliff.  Either no one notices or nobody cares.

Stock markets are outperforming their country’s growth.  Interest rates are generally around 1%, yet few people want 4% dividend paying shares (banks, utilities, pipelines).   For Canadians who qualify for the Canadian Dividend Tax Credit the yield is close to 5%.  If income was important to people those 4% dividend shares today would trade closer to a 2.5 to 3% yield (share price would be higher).

Today, we are experiencing the longest period (86 years) between depressions.  We could be overdue for a major correction.  There is nothing the politicians and Central Bankers can do to stop it once it begins.  They can only delay the action by a few weeks or months.

These are confusing times.  This means you must protect you wealth.  Investors should eliminate all debt and build up cash reserves.  In periods of deflation cash is the number one asset to hold.  After that come hard assets like farm land and blue chip securities.

We seem to be the only ones who think this, but when interest rates start to rise they will climb faster than anyone expects.  We can see 10% early next decade.  The world is awash in currency especially the U.S. dollar.  Deflation has had a nasty habit of wiping out currency causing a sudden shortage of cash.  As a result, demand for money rises and so does the price of it.  Do not take any unnecessary risk with your savings.

The Weaker the Better?

We are told that a weak currency helps to increase the sale of our imports, which they do more often than not.  But, this is only a true benefit if the product does not require imported goods for its production. Not to mention, a weak dollar drives up the price of all end-user products, most of which line big-box store shelves.  The end result is reduced consumer spending.  In order to compensate for the fewer sales, retailers will often hike the prices of other products in an attempt to generate more revenue, which only contributes to the problem.  

If your business delivers goods or services, or if it depends upon utility costs to operate but your currency is losing value, then your overhead costs will increase.  In either scenario, you have only three choices; pass on the higher cost to the customer, absorb the higher cost and compensate by cutting quality, or take a financial loss. None of the above is favorable to business.  Clearly, the benefits of a cheaper currency are outweighed by the negatives.

A strong currency should be a priority for all governments.  Why?  Because every rich country under a floating exchange rate has prospered under a strong currency policy.  Between 1960 and 1990, the hottest currencies were the Japanese yen, the German mark, the Dutch guilder, and the Swiss franc.  Both the mark and franc started out at roughly $0.24CDN and climbed to $0.80 and near par, respectively.  In the sixties it took over 300 Yen to buy one U.S. dollar.  At its peak, it required only 88 yen to buy a dollar.  All four countries had low unemployment and prospered while their currency increased in value.

The 1990's belonged to the U.S. dollar as it soared against all currencies.  On January 21, 2002 the Loonie hit an all-time intraday low of $0.6175U.S.  During these 18 years, our economy did nothing.  We had high inflation, high interest rates, and above normal unemployment.  America, under a strong currency, boomed.  Its only major problem was the lack of skilled workers.  This was the period that gave birth to Silicon Valley.

From January 2002, the Loonie was the world’s best performer, only to close at an all-time high of $1.10U.S. in November 2007.  Between 2002 and 2007, Canada was amongst the most robust economies in the world.  Today, the hottest currencies are the Swiss franc and the U.S. dollar.  Guess what?  These two countries have the strongest economies.  

If history is about to repeat itself, Canada is in for below average growth. This should not be the case though because we have the best opportunities in the world.  Unfortunately, the Bank of Canada and Ottawa are intent on weakening us.  Sadly, they are going to succeed.  All the Bank of Canada must do is hike interest rates slightly and capital will flock here, improving our economy overnight.  Canada and the U.S. currently have identical trade deficits, our GDP growth is similar, and we have far less debt. We have far more resources, a better education system and a larger middle class. 

There is no reason why the Loonie should not be worth at least par.  Every day that it is not, is another day our dollar is undervalued against the Greenback. The longer our dollar continues to fall, the worse it will be for all Canadians.  A strong economy will only return when the dollar starts to rise and Ottawa rewards savers at the expense of the indebted.

Q3 GDP increased 5% in the U.S.  This is great news and indicates that the U.S. economy is taking the world by storm.  If this was the case, then why do interest rates fall under such good news?  Also, after falling 0.2% in the same quarter, why are wages not climbing either? Both interest rates and wages should be rising during a period of such robust growth.  

Let’s take a closer look at the GDP numbers.  First off, our neighbour’s love of defence and war spending continues to add 0.80 basis points (bps) to GDP.  However, the largest gain came from personal consumption (221bps), which is great news.   But the largest growth came from spending on services, which accounted for 115 basis points.  Of this amount, 15 bps was non-profit spending, while the remaining was divided between Healthcare spending and Financial Services/Insurance.  In short, 85% of the contribution to GDP from household spending came from Obamacare, rather than spending on tangible goods that create jobs such as TV’s and cars.  With this in mind, is the U.S. economy really taking off? 

Trade between China and the U.S. finished 2014 off with imports and exports declining 10% and 15%, respectively.  Overall, how can growth in an economy be legitimate if imports and exports declined? 

A dysfunctional American government does not help.  At $18.1t, their government debt is out-of-control.  If they ever want to tackle their liabilities, which appear doubtful, it will take generations to put their finances back in order.  Washington appears happy that they have given their corporations the highest taxes in the world.  It’s odd that they can’t figure out why so many companies have sheltered trillions of currency offshore. 

Shale oil has proven to be a boost to the American economy.  It has created jobs and less imported oil, yet it has had no influence of the country’s trade deficit.  We estimate that after 2018, America will have to increase oil imports.  America is into its 43^rd year of consecutive monthly trade deficits.  This is hardly a sign of a healthy economy.

Boeing and the farmer are the only two segments of the economy keeping the trade deficit from being a complete disaster.  Boeing is conducting robust business delivering new aircraft.  The company has a huge backlog that will keep the company busy well into the next decade.  Soon, Boeing will begin building a revamp version of the 737.  It is worth noting many parts of Boeing airplanes are made in Canada, benefiting mostly Ontario, which needs all the help it can get. 

The Baltic Dry Index, which tracks ocean shipping rates, is trading at its 25-year low.  This is indicative of a weak world trade.   The CRB Index is also sliding.  At today’s level, off 16% from a year ago, it means we have entered deflation.  The lower this index goes, the more damage deflation will do to the economy.  Deflation is a job killer and destroys wealth that is backed by debt (aka real-estate). 

We hate being the bearer of bad news but the U.S. economy is nowhere near as robust as their metrics lead us to believe, nor will it be able to pull the world economy from driving into the ditch.  We still need to eliminate the excesses of commodities, real-estate, and nearly every other good we created over the past two decades before new organic growth can take place.  We cannot see this taking place until 2018, at the earliest.