“I work at Canadian Tire,” she posted on a Toronto-area Facebook page, “and on Monday we are getting 20,000 price changes. It’s because of the falling dollar.. not worth a thing anymore.”
For the record, our currency lost another half cent yesterday, and is solidly in the 71-cent range. The dollar fell 16% against the American greenback last year and has given up almost a third of its value in the past five. It now sits just 14%, or ten cents, above its record low, achieved in 2002.
But this isn’t about the dollar. Neither you nor I can do anything about it – other than ensuring a US$ component to your investment portfolio (I’ve long suggested 20%), and that you’re prepared for the fallout that may be coming your way. Like twenty thousand price increases at the local Canadian Tire store. Or six-dollar cauliflower. Or $5.99 for half pint of blueberries. Or a heart-crushing 25% increase in the price of a Harley.
Sure, the big news as this week began was the stock market, not the price of batteries. But what equity prices do is a lot less consequential to most people’s lives. History shows that whatever markets do on the first trading day is no predictor of the year itself. (However, 72% of the time, the year as a whole ends up taking its cue from January results.)
The thing about stocks, bonds, preferreds, funds and other liquid assets is that they fluctuate dramatically over the course of twelve months. Worrying about one day’s trades, or a week’s losses, or even a month-long correction, is pointless. Unless you’re an stones-of-steel day-trader, who cares? Build a balanced and globally-diversified portfolio, then ignore it. When you need the money years later to retire or buy a Hooters franchise, it’ll be there. Worrying about another 2008, or 1987 or 1932 is a waste – because it ain’t coming.
What’s far more likely, and worthy of sweating about, is a personal finance crisis. The slumping dollar and bloating consumer prices is a part of that. As oil and commodity prices stay weak and the economy slides, the loonie will probably lose more altitude. This comes at a bad time, when household debt’s hit a fresh record and people have been loading up on new mortgages. Carrying that debt is costly and the savings rate has cratered. So, when lettuce costs three bucks, people spend less because they have less. It hurts everyone.
Meanwhile, America ended the era of cheap money on December 16th. Inevitably (even if the Bank of Canada holds rates steady or cuts again), this will filter through into higher five-year mortgage rates. Additionally, if the loonie does freefall, you can count on the central bank eventually supporting it with higher interest rates across the board.
But that’s conjecture. Here are some facts.
We have a mama of an oil problem and the Socialist Republik of Albertistan is pooched. We also have a manufacturing mess (in Ontariowe). The output from Canada’s factories has shrunk for the fifth consecutive month. In fact, the numbers suck – at a record low – showing 2015 ended on a weak note, after spending six months in recession. The entire sector is, officially, in contraction.
Remember what I told you about oil creep? Well, there ya go. All that pipe and wire, those electronic controls, fittings, software and other valuables the nation’s hungriest sector (oil sands) voraciously consumed are now unneeded. Along with the people making them. In the latest period of measurement, which was October, output, employment and orders all shriveled. The reason? “Subdued business confidence as resulting in lower spending levels and delays to new projects.”
Of course Canada is not alone. Manufacturing has contracted in the US (due mostly to an inflated dollar), in China (which triggered the emotional selloff Monday) and also in Britain – but it grew robustly in Europe. The difference with us, however, is that idle factories are but one element of a toxic mix of misery. Unlike the States we have declining employment (theirs is growing), we’re massively whacked by commodity prices (they benefit), we have mushrooming debt (US borrowing is lower), our buck is flaccid (theirs is not), we elected a tax-and-spend government (their deficit is falling) and a beater house in Toronto or Vancouver now costs a million bucks (the median house price in America is $219,600).
If the forecasters are correct, 2016 will be the second consecutive year of Canadian economic growth in the 1% range. This is only the third time it’s happened in the last 60 years. Despite what it’ll do to the dollar, there’s now a 40% chance the Bank of Canada will reduce its rate by half – a truly desperate move.
These things, not what the Dow or the Nikkei did yesterday, are what frosty little beavers should keep their eyes on. This is why Calgary matters – it’s a harbinger. So when 7,000 fewer houses find buyers in a single year (a 26% plunge), it is meaningful. This is no time to be leveraged up to your pits, to have all of your net worth sitting in a single asset, to have a portfolio drenched in maple or – in a land where the top marginal rate is now 54% – not to be serious about tax avoidance.
I’d also be hoarding Canadian Tire money. You never know.