So what next? Some, like Roubini or Celente or Schiff, see double-dip recession, depression and deflation. Others, like the Bay Street McOnomists, see a 2010 with robust recovery and repair. It’s a minefield of confliction and confusion. How can average folks possibly know whether to buy or sell, invest or save, borrow or hunker?
Nobody can predict a terrorist attack in Chicago or an invasion of Iran. Spain or Greece might default on its debt. That’s a game-changer, and we’ll all just have to roll with it.
But the future is not completely unknown, at least the factors shaping it. Every person taking a mortgage, buying a share in Google, deciding not to invest or putting their home on the market is taking a risk. We risk losing money in assets that may decline. We risk outliving what we’ve got. We risk being unprepared.
That’s why forecasting is imprecise, sometimes slightly ridiculous, and essential.
So here goes.
Interest rates: Up in July. The jury is out on how much the first salvo will be – maybe a quarter, maybe a half. But that jump in the Bank of Canada’s overnight rate will be followed by a string of other increases, taking the chartered bank prime from 2.25% in January of 2010 to 4% or beyond in barely a year. Five-year mortgages will again be 7%.
Stock market: Sideways. Index fund and ETF investors should expect a volatile, wild ride going nowhere. Smart investors, in contrast – who hold well-correlated securities and sector funds – will do quite well. The broad market indexes will probably end up about where they started – no 50% climb like the once-in-a-generation opportunity of 2009. Those who can see what higher rates, rising energy prices and commodity values can bring, will be happy.
Unemployment: Tenacious. Our blight, and the enduring symbol of failure for politicians in Ottawa or Washington. Time will show that pumping $14 billion into the Canadian car industry was a bad idea, and just how much of the stimulus gravy was washed away without consequence. Far too many people who lost jobs in 2009 won’t be working soon in 2010. Many Boomers won’t work again.
Taxes: Up, silly. The HST comes into play in July for 16 million Canadians, increasing the price of damn near everything by seven or eight per cent. Despite the weasel words of politicians in BC and Ontario that the cost will be offset by more grants, subsidies and nicks, this will end up being a government tax grab, and inflationary. It’s the precursor of much more tax to come.
5/35: Done. Allowing people to buy homes with 95% leverage and mortgages that take an adult lifetime to repay may have seemed like a good idea at the time, but no longer. Combined with emergency post-crash mortgage rates this policy of giving government insurance for high-ratio, high-risk loans just encouraged a tsunami of home ownership by people who didn’t have money. That caused a bubble, and in 2009 alone increased the cost of housing for middle class Canada by more than 20%. If the finance minister has stones, this will soon be 10/30. Let’s see.
Oil: $100 in 2010. On its way to $200.
Housing: Pfffft. Enough words on this topic have already been launched on this blog, but the days of the rate-induced, delusional, debt-drenched housing boom are numbered. Oh, it might stagger on for a few months as buyers rush to beat the HST, the end of the 5/35 and the mortgage crunch, but the whole juggernaut is wholly unsustainable. This is not a stable place to have the bulk of your net worth.
Bonds: Down. As interest rates increase, bond yields will rise and bond prices will fall. Bigtime. The historic rally in fixed-income securities is over, and if you missed it, you were not paying attention. Too late now. If you own a bunch of long bonds, they will soon match your complexion.
America: Bummer. The year will be one of immense disappointment for our American friends. The housing market will not recover, but fall further – maybe 10% or even 15%. The Dow might well finish the year lower than where it begins. Obama’s Dems will probably lose a lot of ground in the midterms. States like Ohio, Michigan and Pennsylvania will swallow what’s left of their American pride and import jobs from China and India (it’s already started). They’ll get factories again, thanks to the cheap US dollar, but not owned by Americans. Unemployment will persist, credit will stay scarce and millions more families will be in negative equity. The US deficit will top $1.5 trillion, and none of this is good for Canada.
Dollar: Par or better. Likely by summer.
Public finances: Don`t ask. In a decade or two your kids will wonder you what the hell people were thinking when they let governments spend money on car companies that would fail, encouraged young couples to pile into debt at the worst moment and burned through hundreds of billions they didn’t have. Did you guys not realize, they`ll ask, it all had to be paid back? You will have no answer.
Gold: Lower, then higher.
Inflation: Higher, then lower.
Depression: Not even close. There’s no corporate or market crumble now large enough – not even the collapse of all derivativies – to turn 2010 into 1932. Governments are too invested economically and politically to allow that to happen, and the amount of global cooperation we’ve seen makes it all but impossible. That’s the good news. The bad news is this decade will be positively glacial compared to the last one. Think Japan.
Boomers: Pass the Cialis, dude. Nine million start turning 65 at the end of this year, just as the economy grows stony, real estate corrects, and tempus fugit. You will not believe what this does to the housing market, starting in 2012. Best prepare now.
Please accept my thanks for coming and spending time with me on this blog during 2009. It is a daily epiphany. — Garth
The decade that opened with Y2K fear and dot-com greed, now ends in confusion. In between there was Nine Eleven, stock and real estate bubbles, crash, collapse, bailouts and more bubbles. Incredibly, the stock market yielded nothing over ten years, putting a stake through the heart of index funds. In the US, real estate also made nothing in many cities. In Canada we’re about to understand why.
When the decade began the Boomers were thinking of Freedom 55. Screw that. Next year they start turning 65, with profound consequences. Not a day goes by that some noted company goes bankrupt, and the people I know who lost jobs months ago are still without. No normal yet. Or soon.
As the year and the decade fizzle Thursday night we launch into new time. But not a new age. Investors will still be led by greed and fear, and make as many mistakes as ever. This is why I ‘m a devout contrarian, and why my new book, Money Road is devoted to this cause.
Among its tenets:
- The focus of investing isn’t the present, but the future. Don’t be swayed by the hot and trendy. Most investors have no idea what they’re doing. The majority notice trends long after they’ve started, pile in late and fail to clue in as to when the party’s ending. Betting against the herd usually works.
- Diversification trumps buy-and-hold in the environment we’ll be in for the next decade. Most people think current conditions will last indefinitely instead of being a bridge to the next phase of the cycle.
- So, asset allocation’s critical. Divide what you have to invest among the three main asset classes, and don’t get blown off course by a hot stock tip or a market swoon. Recall how many people missed cashing in at the top of the tech boom in 1999-2000, or stampeded out at the bottom of the crash in 2008-9. Contrarians buy low and sell high. The rest buy high and sell low.
- Never invest in anything without knowing how you`re going to pay tax on the proceeds – as income, capital gains or dividends. This can seriously alter how much you get to keep. Tax-smart investing is not even on the radar of most Canadian families.
- Understand the economic and market cycles. Today timing is far more critical than in the past as we enter a period of slow growth and range-bound markets. Moments of maximum despair are usually those of greatest upward opportunity, while the times when society’s most confident and bullish are the days to reap profits and sit on the sidelines in cash.
- Work back from your goal. If you need $500,000 at age 60, and you’re starting from scratch twenty years earlier, then GICs and bonds won’t get you there. Find an asset allocation that does. Do not obsess about what little you have, but rather how much you will achieve. Remember that non-systemic risk is eliminated with 32 stocks.
- Make the maximum use of tax avoidance, tax deferral and tax minimization. Tax-deductible investment loans, a tax-deductible mortgage, RRSPs and RRIFs, strategies using the tax-free savings account (TFSA), meltdowns and registered education savings plans. Canada gives its citizens incredible chances to avoid being taxed.
- When it comes to both equities and real estate, abide by the Rule of 100. A hundred minus your age will give you the percentage of your total net worth a house should represent. Likewise, 100 minus your age should be the minimum equity share of your investible assets (net worth less your home). Houses can turn illiquid in a hurry. Just ask people in the great suburbs of Phoenix or Miami. If you’re a woman, make it 110.
- Learn and do as much as you can, but never risk your security by trying to do everything. Most investors don’t even come in contact with new bond offerings, superior ETF products or dividend issues. Today fee-based advisors will design a portfolio, build it, monitor it and worry about your returns and taxes for 1% of its value. Email me (garth@garth.ca) if you need help.
- When most investors think prices can only rise (the ’buy now or buy never’ mentality), there’s probably not enough left to keep prices rising. If 80% are bulls, the market’s overbought and will fall. Just remember how everyone said ‘it’s different this time’ when profitless dot-com companies were flying high. Of course it wasn’t different at all – bulls make money, bears make money, pigs get slaughtered. Conversely, when a minority of people believe the market will rise, prices are oversold and won’t stay cheap for long.
- Learn about indicators like the public short ratio. It measures the relationship between the number of short sales (that’s when a stock is borrowed from a broker and sold, in the hope of buying it back later at a cheaper price) made by average investors, compared to the shorts made by professional traders. The assumption is the little guy’s a lousy trader, so trading in reverse is a profitable move.
- Watch, study, observe. Do the opposite. And reap.
Garth's latest podcast is here.
1 bedroom, one bath. 500 sq ft. $1.9 million. Here.
Does an idiot with a syringe and exploding underwear tell us anything about the future?
Of course it does. Everything is a clue. So when Farouk Abdulmutallab spent 20 minutes in the bathroom of a Detroit-bound jetliner trying to light himself up we were all a little closer to the abyss. Without a doubt, another terrorist attack on US ‘homeland’ (everywhere else is less sacred) on Christmas Day would have brought 2010 in on a bed of chaos and market mayhem.
So, remember this. The odds are high the next guy might just pull it off. And the consequences will be memorable.
After Nine Eleven fears of a terrorism-induced economic meltdown were rampant, coming just months after the tech-heavy Nasdaq imploded and investors lost hundreds of billions. As a result, interest rates crashed, bringing a real estate bubble which ultimately precipitated more misery than Osama bin Laden even dreamed possible.
Today the US has not yet recovered, more indebted, weaker and vulnerable to systemic economic collapse than at any time in our lives. It’s fighting two major wars, and contemplating two more. Its currency under attack, its marquee industrial companies are hobbled and its banking system racked with more failures than ever before. There are over 7.5 million people out of work, or 17% of the workforce counting those who have given up. One in four families with a mortgage owe more money than their houses are worth.
But let’s not be too smug. Canada’s also swimming in red ink at all levels of government, with chronic unemployment and households which have never before been so in hock. Despite emergency interest rates, bailouts and endless deficits, we have serious and embedded economic problems. Export industries are crippled by the American malaise, massive numbers of our jobs are now in Chindia, seven in ten Canadians are pensionless, while six in ten have absolutely no retirement savings. The biggest population group will start hitting 65 next year, and there’s no way these Boomers will be solvent on $16,000 a year in CPP money.
The only bright spot is housing, which is a gasbag – a boom destined to end badly. You know why.
And this is why Farouk Abdulmutallab and his shorts matter. One failed trigger. There will be more.
If Nine Eleven didn’t scare you into preparing better for your own future, then maybe the global financial meltdown of 2008-9 did. I hope by looking over the edge into a financial collapse and a neo-depression you understood how important it will be to have sufficient capital stashed away for the years to come, how indebtedness is the worst possible strategy, and why you want as little exposure as possible to assets influenced by the vagaries of human emotion.
I can guarantee you if Farouk’s desire to sleep with the virgins had been realized, this blog would once again be brimming with squirrel recipes.
In case you doubt the past year has taught us nothing, come with me to Bowen Island, just a wee ferry ride off Vancouver. Sadly, not a virgin in sight.
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