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

Few in the investment business believe the biggest threat to the global economy is deflation.  We share that belief and are confident it will begin within the next year. It will begin in the stock, housing, and bond markets. All three are at or near record highs.  This has never occurred before and if all three correct there will be a historic amount of wealth lost.

What will occur shortly after that? Unemployment will rise. Personal and commercial bankruptcies will also. Prices of consumer goods will drop due to less demand created from shrinking disposable incomes – which may occur no matter what due to rising taxes. And, more importantly, lending will tighten because there will be less income and savings to balance the amount of leverage in real-estate. Rising mortgage rates will exacerbate the situation.

When the asset deflation begins it is surprising how fast investors will step aside and wait for what they believe will be the bottom. Deflation can be slow moving at first but once it passes an unknown point the drop in prices will accelerate.  Bankruptcies then become more common as debt outstanding becomes greater than equity, which in turn drives prices even lower as people try and unload. 

Interest rates fell for 40 years pushing asset prices higher.  The most obvious example is in real-estate. When interest rates decline it allows for consumers to borrow more principal because interest consumes less of the mortgage payment.  This results in higher prices. This equity has turned to be the basis of our economy and the bulk of household wealth.  Unfortunately, interest rates will be going higher for years to come meaning leverage has run out of fuel from here on in. We can see a prime lending rate of 4% within 2 years.

Everyone believes that we will we soon experience record inflation. It has already occurred.  Food prices are at record highs. The cost of fuel is increasing.  Rents have never been higher (although they are now falling in many regions) and home prices are inflated to levels higher than any other country based on incomes. Like rents, prices have only one direction to go - that is down.

One of the best guides for inflation and deflation is the price of gold.  This year there has been 9 days of the price falling around $20 with one down $30.  Over the next 4 to 5 trading days the price would recover only to fall $20 in one day (on March 30^th it dropped almost $50). Investors should take this as a warning deflation is coming so be prepared.  I expect the price to fall to the $1,500 area.  If the price does not hold then $1,200 will be reached and indicate deflation.  A price of $1,500 will be a signal of slow growth, which would be a plus today.

Canada has one large weight on its shoulders that few countries have - a useless one-person government who has and will continue to make a mess of the country.  Over the past 6 years Justin has forced business to redirect over $600b of investment to outside our borders.  He has destroyed over 100,000 high paying jobs throughout the energy sector – one of Canada’s biggest industry and source of billions in tax dollars. Justin has turned Canada into the only country in the world that refuses to take advantage of its biggest assets – natural resources.  He is the laughingstock of the political world.

Canada can escape the worse of deflation if we get rid of Bill C-69.  This bill places so many restrictions and rules on developing major infrastructure that companies do a quick cost analysis and say, “see you later, we can do this far cheaper elsewhere.”  This alone has cost the government hundreds of billions of dollars in future tax revenue. Bill C-48 is another bill that deters investment. This one restricts tankers from much of the West Coast. Hypocritically, those same tankers can sail up and down the St. Lawrence River.   Both bills inhibit economic growth in Canada.

How does one prepare for deflation?  You want as little debt as possible.  This is because debt remains the same during a time when asset prices decline and wipes out equity. You also want your investments to be very liquid. An investment with low liquidity will fall in value further because there are larger buy-sell price spreads.   Investors should also build up a cash reserve (at least 30% of one’s portfolio).   If we are wrong, you still will win because you will have money in the bank and no debt.

“The market is often stupid, but you can’t focus on that.  Focus on the underlying value of dividends and earnings.” John C. Bogle

The latest craze most likely to end in tears for many are the SPAC (Special Purpose Acquisition Companies) and Crypto Currency.  Both are based on promotion rather than value with many professional athletes and celebrities hyping such investments (this alone is a warning).  It is baffling how so many people are risking their savings on such speulcation when one has a much better chance on betting red or black on a roulette table.

A SPAC is a company that raises capital through an initial public offering (IPO) for the purpose of acquiring an existing company. They have been around for years and can invest in whatever they want.  It can be a family business, a publicly listed company or partner with another fund. Many private companies will try to attract a SPAC buyout to bypass the hassle of the legal work needed to go public.

You must read the prospectus before buying any SPAC.  Some have a minimum investment timeframe of many years.  A SPAC may not have to invest the shareholder funds either. It can leave the cash in low interest money market funds until it is needed, which is around .25 of 1% today, all the while paying generous salaries to their executives.

An investor will lose up to 6 to 8% of their cash to management fees upon handing over their cash.  Plus, if the SPAC makes any money, they could end up taking up to 20% of the profits.  This is somewhat the same as how the Hedge Funds work. We rate SPACs one step above investing in crypto currencies - crazy.   

Whereas SPACs are valued in legit currencies and backed by legit assets, the 6600 cryptos in circulation are backed by nothing.   There is no regulated exchange to see what all the different crypto currencies are worth.  The crypto is awfully expensive to create and consumes so much electricity to mine that the carbon footprint is greater than Argentina.  There is also a fee to convert the coin to and from another currency.

A crypto investor in the U.S. invested on the notion that for every coin created, X amount of dollars would be put into a bank savings account as protection.  Someone demanded to see the paperwork of where the money was and not one dollar was found.  At least the SPAC must register with a Securities Agency. 

There is too much risk out there. Most assets today are valued about 40% above their long-term averages. Many commodities, tech stocks and most real-estate are trading in the stratosphere.  We are experiencing a global asset bubble and history says when this occurs the result is always the same; a destructive correction that can last years. It is the only way of cleaning out the system of excesses. 

Today you can purchase shares in blue chips which yield between 4 and 7%.  This yield increases if you qualify for the dividend tax credit. There are companies on the TSX that have raised their dividend for a minimum 10 consecutive years with many over 20. Bank of Montreal and the Bank of Nova Scotia have paid a dividend every year since 1828 and 1833, respectively.  Both banks increased the dividend majority of those years.  Share prices have always followed dividend increases overtime.

As our recommendations have proven, investing in companies that increase their dividends tend to outperform the market. The average return of our current recommendations has outperformed the TSX and the Dow Jones Index with an average 230% gain over 10 years and currently generates an average 9% dividend yield based on the purchase price.  

This is slow investing but certainly better than gambling hoping that one hits the jackpot, which always ends in tears for most.  The one reason why so few people control the bulk of the wealth is they mitigate as much risk as possible and seek out above average returns rather than betting.    

You work hard for your savings so why waste it on high priced promotion where only the promoter makes the profits?  When you think about it there are so many speculative investments available and so few true opportunities that it is next to impossible for the majority to ever make money.  It is scary because the chances of anyone over the age of 50 recovering after losing a large chunk of their savings has little chance of ever recovering financially.

People forget that zero interest rates are telling us something is wrong with the world economy.  Your sole job today is protecting your savings.