Recent things I’ve warned you about are cresting house prices, a double top for gold, not being diversified, and deflation. They’re all connected, of course. I hope you paid some heed.
This past week stock markets tanked, losing the most in three years. Gold fell an astonishing $100 on Friday, and shed 9.3% in two days. Silver crashed. Oil gave up more ground. Showings of properties in countless neighbourhoods all but vanished, as realtor phones went silent. Global growth is fading and political leaders are decrying a lack of leadership. But not theirs.
This is the scenario I painted for you a year ago – asset deflation amid price inflation. These are the days when your savings account gives you 1% and yet the cost of living is rising by 3.1%. Average wages and salaries haven’t increased a penny and the value of things we own is declining. Yet the price of food, energy and services marches higher. Assets will continue to fall. Soon you will have more sympathy for Americans, caught in the same squeeze, whose houses have given up 32% of their value in the past sixty months.
With deflation, money grows more valuable (the opposite of inflation). That means money substitutes, like gold, take a hit as investors move back into cash. Slowing growth brings less demand for commodities, like oil, and the prospect of lower profits, hurting stocks. People flock to the safety of bonds and paper money – driving bond prices up and yields down. Without a quick recovery (and there will be none), consumers get into the act, curtailing their borrowing and spending. That’s the death knell for housing.
All this should come as no surprise since it’s happened before – in the crisis of 2008. But unlike then, governments today are not able to prime the pump by dropping interest and mortgage rates. They’re already at emergency levels. Nor can we expect more billions and trillions to be spend on stimulus programs. The last ones created a public debt disaster.
One conclusion is that this winter may feel like that of 2008-9, but next year sure won’t feel like 2010. This time the economy could slide into a deflationary inflation that sucks net worth out of those who foolishly ignored this pathetic blog. Houses will fall in value as sales slide and buyers demand price cuts. Household income will fester. Gold investors will wonder what the hell got into them. Stocks will likely drift sideways in a range-bound market. Savers will get diddly – in fact, a negative return after inflation and taxes. Everything at Best Buy will be 30% cheaper. And people with lots of cash will make out like bandits.
Some people can see this already. Like Krista, 35, who wrote me this as a brutal week ended:
I lost my life savings in the tech crash (had invested 50% of every paycheque I’d earned since the age of 12); and a few years later lost about eight grand in an ill-advised mutual fund.
I have no debt. No house and no other non-cash assets or investments. I’m self-employed. No dependents. Over the last six months I’ve grossed about $70K and have handed it over to the Orange brigade and their erroneously dubbed ‘high interest’ account. Largely because I can’t see how investing in a broken system is going to yield anything but more disappointment.
Clearly, doing what we’re told – investing for retirement and living within our means – has not worked for me.
I’m at a loss. My daily rate is now less than what I charged 10 years ago and the cost of everything has gone up. Each year I consume less and less, yet have less and less to show for it.
This is the lament of people who succumb to greed (tech stocks) and then fear (orange guy). When that doesn’t work, they blame others (“a broken system”). That pattern has been repeated lately, as we’ve collectively binged on real estate (greed) while plowing money into savings accounts and gold (fear). The outcome will be the same – loss of wealth and a diminished future.
Finally, I’ve said on this reb blog there can be widespread loss at the same time lots of people do quite well. And I’ve told you how. There is no silver bullet – no one asset you can buy which will soar when all others sink. Real estate won’t save you, nor stock-fat mutual funds or a garage full of silver bars.
The salvation for what lies ahead – years of uneven and halting markets, falling asset values, narrowing household budgets and a retirement crisis – is to own a lot of things, in small amounts, at the same time.
Some months a few will rise while others fall. In fearful times bonds will go up and equities down. When news is better, the reverse. You need exposure to disparate countries, many markets, multiple asset classes. REITs, preferreds, small caps, precious metals, public and private bonds, emergers, commodities and more. Cash and real estate included.
Diversification and balance aren’t sexy. Until days like these.
Now they rock.
Interesting conversations this week, as stocks, oil, commodities and gold plunged. A few of the people I talked to are salivating at the prospect of buying assets cheap, so they can ride them back up. But most people are freaked. No wonder. When guys like F warn this could turn into 2008 all over again (he’s wrong), it gets people hyper.
And this is when two brain things happen.
Actually, besides pecking away at this pathetic blog lately, and calming people down, I’ve been doing a lot of thinking about brain stuff. Most of us suck as investors. We sell on days like these, yet buy stuff when it’s never been more expensive. People take growth for granted and melt when things stumble. Like lust, greed makes us aggressive, reckless and prickish. But fear turns us into irrational morons. There must be rules we can follow to avoid the disasters and losses both bring.
That’s what the new book is about. It’s the investment advice which actually changes everything. More on that soon.
Back to the two brain things that explain at least half of the comments on this site. The first mistake people make (always, always) is to assume that what’s happening how will happen in the future. So, delusional people in Vancouver think house prices will rise forever, until God buys them out. Reason and experience tell us this is wacko talk. That market’s ripe for a correction which will shock most people. But try to say that on the Seabus or the Skytrain. You’ll be wedgied.
This mistake also leads investors to think that falling stock markets (or oil, or copper, or bond yields) will continue to fall into the future. That convinces them small losses will inevitably get bigger. That hard times will turn into desperate ones. That dark forces (automated trading or government manipulation) guarantee tomorrow will be like today, only worse.
This is called recency. It makes us ignore reason. So we chase profits and flee losses. We buy high and sell low.
The second mistake comes when, like over the past few months, things go down. Instead of seeing it as inevitable, temporary, or an opportunity, most people flip out. They succumb to fear in a far different way than to greed. Fear’s worse.
Apparently there’s research to prove people are twice as motivated to avoid a loss than they are to make a gain. This explains why, when inflation is 3% and you are taxed on interest, that Canadians hold tens of billions in GICs and savings accounts paying 1% or (at best) 2%. They know this makes no sense. They know they’re falling behind. They know they’ll likely run out of money if they continue. But fears makes them migrate into the orange guy’s shorts.
This is called loss aversion. It’s why we’re headed for a mother of a retirement crisis. And, of course, women are most at risk.
The combination of these two biases is fatal for investors. It helps explain why 70% of us own a house, why people sell mutual funds or stocks when they hit bottom, why we enter bidding wars for real estate, sit on dead money in equity or savings and why we ignore the greatest risk of all, which is running out of money. It explains why so many 30-somethings are screwed right now and why house-heavy Boomers are a demographic time bomb.
If only people could break out of their mental cages and do the rational thing, the outcome would be vastly better.
And that brings me to Jazz. She did.
Some days ago I printed Jasmine’s letter – a 50ish woman with a house in Mississauga, a failure-to-launch kid and a don’t-hassle-me-woman husband. Here it is again.
Dear Garth: I can’t tell you how riveted I’ve been to your blog since I happened on it by accident (thankfully). I’ve been combing through your blog entries and your book, as fast as I can looking for a similar situation to mine. So far without luck.
House purchased 18years ago for 260K. If sold today, likely 650K. We have a 300K HELOC with 140K outstanding with non-investments and, truth be told, were renos, and we pay interest only at prime. The whole Purpose was to invest, however we were so paranoid about trusting someone with our money, we never got started. Yes, I know, stupid. Three kids 21,14,&10 (with oldest son failure to launch)
I would sell in a heartbeat however hubby afraid of renting (unheard of) and kids displaced. Husband’s income 90k , I’m a stay at home mom. My husband wants me to present him a case study. Can you help me win? Regards, Jasmine
And I did. Sell the house, retire the debt, harvest the gain and invest half a million in income-producing stuff. My advice:
“If the whole amount were invested in a collection of bank preferred shares (but you should have more diversification) – with fixed dividend payments and proven market stability – you’d have an income of about $2,200 a month. Add in what you now shell out for property tax, insurance, maintenance and HELOC repayments, and you can probably rent a better house, and still have $500,000 in liquid wealth.
If a recession arrives, shedding jobs and opportunities, if the local real estate market turns illiquid or a mess of confused Boomers like you realize they need income more than they need a house, you dodged that bullet. Remember, the last time properties plopped in the GTA it took 15 years for them to recover. And you’re not 30 anymore. Houses are not retirement plans. At some point, almost everybody needs to cash out. You can wait until you have no choice, and risk being vultched. Or you can deal now, and find a greater fool.
One more thing. Rent a smaller house. Launch the kid.”
Last night I got this:
Dear Garth: Just wanted to thank you for the “save” you’ve provided for my family situation. As a result of you posting my “case study”, my husband reluctantly agreed to sell the house.
I’m happy (thrilled) to say we sold in 5 days from listing and close December 14th. My husband is now out of sorts as I now must decide which investment vehicles to put the money. And the onus is on me to make the most out of it. We sold at 98% of listing.
He still gets annoyed when he finds me on your blog reading every morning as he doesn’t think the economy will get as bad as I do (and he’s with a big automotive parts corporation).
P.S. We are launching the kid!
Praise be. Two more souls saved. And one pissed-off child. My work here is done.
