Entries from August 2011 ↓

It’s babe weather where I am, so I’m forsaking this pathetic blog for a real long ride. Just in time, too.  Some days this site irritates the hell out of me. There are far too many people wanting to debate whether the USA is a fascist state, the merits of Austrian versus Keynesian economics or the future of fiat currency.

Frankly, I care not. Legions of people can waste their lives parsing stuff they can neither change nor influence, without me. It’s irrelevant. I’m more interested in what actually resonates with our daily lives, since most folks are walking mistakes. When we live  in dollars, why debate having a gold standard? When monetary policy means low rates low across half the world, who cares about Fed ownership? And when half of people have no savings or investments, do you expect them to care about a bank oligarchy?

I don’t.

What matters more than railing at the world is coping with it. Without a doubt, the last few years have increased the role of government and brought a new set of dangers. Cheap money has encouraged an unhealthy borrowing binge. Pro-house policies have backfired and made real estate unaffordable. Fear and greed have pushed money out of liquid investments and into granite counter tops.

It’s likely all the people you know – at work or in the family – are less diversified now than they ever have been before. More money in real estate. More debt. Fewer investments. No RRSP contributions. Little if any savings. Consuming all their cash flow.

This is one reason voters in BC just threw out the HST. Now they’ll go back to having two sales taxes, the PST and the GST, and businesses will no longer be able to deduct the provincial tax, perhaps adding to retail prices. But the outcome was obvious. Ask money-stressed people if they want to pay less tax, and stand back.

With the economy now growing at zero and perhaps about to reverse, there’ll be more consequences of the bad decisions your relatives have made. A few governments will probably be trashed, for example. As in the States, we may see the rise of right-wing reactionaries with a slew of simple solutions (put prisoners to work, slash spending, deport illegal immigrants, pass balanced budget laws). Maybe more anti-social, trash-The-Man events like the Vancouver riot or Toronto’s G20. Maybe just a nation of pissy people who discover they can’t have everything after all.

In fact, this sense of shattered entitlement may be what makes the doomers, conspirators, metalheads, deep thinkers and tin foilists keep it up. Instead of learning how to make this world work, they long for one that isn’t. They trash corporations, governments, banks and even the money supply, when all that energy should go into learning how to make out like a cheerleader inside your TFSA, or creating a tax-deductible mortgage.

That’s why I’m not writing anything today. I’ve had it.

Times may suck, but these are not the end of days. There will be no financial collapse, but at the same time, countless people who never saw trouble coming will fail. It’s one reason our real estate values are unsustainable, and the events to come will materially gut the net worth of many middle class households. Without sustained economic growth, income gains and employment, current debt loads will buckle families. Of course, they have no one to blame but themselves, and god knows the warnings have been shrill.

This is why this piteous blog’s about practicalities, not theorems. I’d rather devote my time to helping people swim than curse the water. Imperfect though the times may be, they’re still rife with opportunities for everyone to do better. It might be getting money out of an RRSP tax-free, how to buy a bond, picking ETFs or where to find income real estate. It ain’t analyzing Ron Paul or Ludwig von Mises.

So there. No words. Suck it up.

And when I get back, I’m writing about stuff that matters. Unless I don’t.

Let’s back up for a few minutes. The world’s getting complicated. Let me explain a few things in simple terms, which is wholly suitable for a guy who owns a Harley and a Hummer. After all, I measure success in rim size and decibels.

The big news on Friday, which might impact your RRSP, your TFSA and eventually your mortgage rate, will come out of a place called Jackson Hole. That’s in Wyoming, which is the least populated place in the US and whose state fish is the Cutthroat Trout. So where better for central bankers from around the world to gather?

The rock star performance will be given by Ben Bernanke, who is to America what Mark Carney is to Canada, but with facial hair – the universal sign of intellectual achievement and raw male magnetism. Everyone is waiting to see if he will use some of his awesome power to stimulate the economy, which currently sucks – over 9% unemployment and a whipped housing market.

Since the financial crisis of 2009, he’s done it twice. Called ‘quantitative easing’ (QE)  it involved printing a mess of money which was then used to buy back government bonds already sold to banks. That pumped those banks with billions, injected liquidity into the system, and was supposed to trickle down into loans and mortgages.

Instead, it mostly goosed stock markets since all that stimulus (plus low interest rates) helped companies make more money. So, investors loved it. But all the QE ran out a couple of months ago, and the economy still sucks. In fact now the US (and almost everyone) has more debt than they did before.

So will Bernanke use his Jackson Hole speech to announce QE3? If he does, then your equity mutual funds are about to romp. If he doesn’t, you’ll wish you had bonds.

Why would he commit more billions to a program with dubious results? Because the US is teetering on the verge of recession as it readies for a crucial year of political turmoil. If it looks like the Tea Party nutjobs will seriously challenge Obama in 2012, promising austerity measures, a spending attack and protectionism, then Canada is going to be whacked. Not that Bernanke cares about us, but he’s a student of the Great Depression. And it was nutjob policies then that turned a miserable time into an epic screw-up.

Why would he not do this? Because it costs hugely, and the US is already wallowing in debt. Because the results are nebulous. Because inflation there is almost 2%, so he doesn’t need to worry about deflation – even though house prices continue to collapse. And because he’s already promised to freeze interest rates at rock-bottom levels for the next two years – which is a huge amount of stimulus on its own.

The odds I put on QE3 are about 6-4 against. (By the way, that’s what happened.) This means stock markets will probably roil because too many people speculated that Ben the Beard would diddle once again. But I doubt if the disappointment will be long-lived. The last thing the Fed (the US central bank, which Bernanke runs) will do is stand back and let the economy shrink further – especially with that presidential contest looming.

So what does this mean to us, you and your house?

Not much, actually. (And to think you just read 550 words to get here.) The world is unfolding pretty much as I’ve been telling you to expect. No more QE means the US stumbles along at near-zero growth for months and months to come. Ditto for Canada, since our biggest customer is languid. Our economy will slow as well, exports will drop, jobs will be scarce and real estate will take the punch. It’s already happening, of course, as you know.

As stock markets stabilize on a parade of good corporate earnings, bonds will fall in price and yields rise. Mortgage rates will continue to edge higher here, even as they sit at 50-year lows in the US. The Bank of Canada may not be raising rates as soon as anticipated, but they’ll still be going up here prior to the Fed moving. And it wouldn’t surprise me to see Ottawa again tighten lending rules in its March budget, perhaps this time doing the right thing and eliminating the 5% down payment CMHC allows for mortgage insurance.

The greatest threat the US faces, as Bernanke well knows, is a population afraid to borrow and buy. Without consumption there will be no middle class. But in Canada the threat is a people addicted to debt, who’ve consumed beyond their means, saved squat and now embody risk.

So, to summarize, there’s no solution. You’re utterly on your own. Man up.

I’m going for a ride.