Just when you thought the Trudeau clan could not be anymore out of touch they continue to surprise.

They are not clueing into what is causing the housing shortage.  There is not a shortage of money, but the opposite.  The problem is there is a severe lack of tradespeople to build the one-million units needed to fill demand.  Plus, there is too much red tape to get the necessary permits.  For housing it can cost tens of thousands of dollars and take up to a year just to break ground. 

There are labor issues across the whole economy. We are also short of all medical professionals. As things now stand we can expect a tradesperson shortage for the next two years, but for the medical field at least until the end of this decade.  That is if governments create more school seats to train people starting in January. Making it it easier for foreign professionals and tradespeople to practice in Canada would also go a long way. But do not count on it under the current government. 

The Liberal solution is to raise taxes which has the opposite effect of their intention. Our banks are a prime example. They are responsible for writing the mortgages, but Trudeau has placed a special tax on excess profits.  This means there is less money to lend out and less dividend increases which hurt investors and pension funds. From an investment perspective, this tax alone is the reason for the bulk of losses by the big banks since they are writing down their mortgage portfolio as much as possible to avoid paying the tax. Their cashflow statements are strong and there will be large profit increases once they write up the value of their mortgage portfolio when the tax is eliminated with Trudeau.

Now they want to raise taxes on grocery stores because they are making money, albeit a small 3% profit margin.  Yet the grocery stores must pass on the rising costs of production, transportation, rising electricity costs, and now potentially higher taxes onto the consumer. Our politicians do not understand that not one business pays a cent of taxes because the expense is included in the price of the product. This results in an indirect tax on the consumer.

Over one trillion investment dollars has left our energy sector alone under Trudeau. Today it requires up to ten years just to get the permits to break ground for a major project. This is the longest wait time in the world.  As a result, nothing gets done and investment leaves to where it is wanted. A prime example is the Ring of Fire in Northern Ontario. It is full of metals needed for EV batteries but there is not even an all-season highway built to develop mines.  Given the Liberal climate agenda, one would think this would be a priority.

Canada’s ‘do nothing attitude’ is now destroying the country.  As we have mentioned numerous times in the past, Canada needs politicians who solve problems, not make them.  Talk is cheap, but very costly. This is what causes recessions and why Canada has a declining standard of living.

Unless it has to do with green, very little is reported in the Canadian media about energy in general.  Recent news means the energy sector is about to go under major changes that will last well into the next century. Most of the information for this editorial is from The Economist, Bloomberg Businessweek, and from my observations from travelling throughout Africa six times.

The big change that is taking place around the world is the discoveries of major finds of oil and natural gas (NG).  Most of these fields will be in service by decade end.  The new reserves mean oil and NG will remain the main source of global energy needs for the reminder of this century.  With recent discoveries it is estimated there is enough NG to last 450 years, 50 years longer than coal.  There are enough known oil reserves to last sometime into the next century.

The biggest changes are coming from South America and Africa.

• There has been a massive oil field discovered off the coast of Brazil.  If this field is developed then it will be possible that Brazil can supply most of South America with their needed daily oil for the next couple of decades.
• Mozambique recently reopened a gas field they closed because the local mafia was extorting from it. The company negotiated with the government and the mafia and met somewhere in the middle. This year another massive gas field has been discovered.  It will be put into production by 2028.
• Another huge NG field has been discovered in Tanzania, valued at between thirty and forty billion dollars.  Smaller fields have been found in Senegal and Mauritania.  Libya has recently signed contracts to develop two new oil fields as well.
• Total Energies believes Namibia is sitting on top of massive oil reserves.  The company claimed there was “11b barrels of oil and potentially gas too”.  Namibia has plenty of flat land so it could also be a big producer of solar and wind power which it could export to neighbouring countries.
• There is a supply of natural gas under the eastern Mediterranean Sea that is so large it can provide Egypt, Israel, Jordan, and a handful of other country’s energy security for decades to come.

It is estimated Africa has more NG than the Middle East which means not one African country will ever need Russian NG and oil.  There are also plenty of known metals throughout the continent which the world needs and wants. If the proper governments are formed Africa will become an economic powerhouse.  The continent remains too unstable for us to justify investing in, for now.

This is bad for Canada because it means serious competition. Under Trudeau, we are the only rich country in the world that refuses to promote their natural resources.  We still have a head start but it can very easily be eliminated within a decade. For the rest of this century the changes to the global economy are going to be fast, and Trudeau is not allowing us to prepare. 

For investment purposes, we will begin to reassess our energy sector next year.  If it continues to look like the Liberal Climate Cabal is on its way out, our share prices will continue to climb slowly and then take-off once they are gone. Investing in the energy sector is probably safe until 2028 if Trudeau remains in power, when many of the African fields are going into production.

If it appears Trudeau will be re-elected (which it doesn’t) we will have to direct investments outside of Canada in the next two years.  Our companies will begin losing highly skilled workers to other countries, and our cost of living and business will go sky high because we will not have a source of cheap energy.  We will quickly become noncompetitive in the world and our dollar will drop to $0.50US. This will cause prices of imports to climb, lowering our standard of living further.  A declining currency works like the Carbon tax; it starts at the top and works it way to the bottom with the consumer paying the full price.

The only real competition for oil and gas are nuclear, geothermic, and hydro.  There is an excellent chance that hydrogen will become popular in the next decade because its delivery costs will be in a free fall. But if Trudeau has his way and closes the energy sector, Canadian hydrogen will not materialize since our engineers and scientists will have left Canada for where they are needed. Solar and wind power will survive as a niche market, but their costs will be soaring in the years ahead.  Plus, in a solar society we will be dependent on China for our panels because they are the largest manufactures and can manipulate the market with their rare-earth mineral stockpiles.

Today is the time to prepare for the coming changes.  Hopefully there will be a push for an election when the House of Commons opens because Canada desperately needs fresh people in Ottawa that truly care about our future. Not one that “has our back” as they purposely force a decline in our standard of living and international reputation.  The next inline must understand that our future is based on cheap energy, which is oil and NG.  Thankfully, the poles show that the party in the lead does, and more importantly care for Canadians overall. Justin’s reign is the best example in Canada’s history of how politics can cripple a country.

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?