In my home town yesterday people lined the street in droves, wearing every tacky thing in their wardrobe – so long as it was crimson or had a maple leaf. Dogs sported red bandanas. The tourist horses sprouted little flags from their halters and harnesses. Down the main street a few old cars carried old politicians, the MP included. Then a band. And the cake. This year it was about ten feet square, hauled by a Jeep and covered in chocolate hockey players. The proud baker walked behind, her pony tail flipping. A thousand people marched with her to the park, where it met its Waterloo.
While we celebrated Canada Day, the world spun. The people in Greece has a crappy time. The prime minister there flip-flopped. First he sent a letter to the Euro gods says his country would accept a deal like the one he’d walked away from. Then he gave a speech condemning it and asking people to vote it down on Sunday. Meanwhile the economy disintegrated hourly.
American stock markets shot higher, now that it seems more certain Greece will blink. More importantly, the numbers just keep improving for the US economy. A private jobs report showed companies boosted their payrolls in June by 237,000 workers, the most in six months. This comes after 280,000 more positions were created in May. And when the official government report comes out Thursday it’s expected to show 233,000 new hires.
This is the longest, strongest run for job creation in decades. It also came with news Wednesday that manufacturing expanded again in June, which demonstrates the internal strength of the American economy. Global demand may still be weak and the high US dollar is a barrier to exports, but it doesn’t matter. Consumers are happy with more jobs and higher incomes. They’re buying cars, houses, iPhones and dishwashers. Only the fruitloop doomers still insist the government’s lying and America’s in trouble. Americans disagree.
All this is remarkable for two reasons. Oil prices have collapsed (there was a huge drop on Wednesday), decimating the US shale fracking industry. And the Fed is about to raise interest rates for the first time in a decade. Both of those are negatives for the market, and corporate profits. But certainly not enough to dent a market that added almost 50% in just three years.
Yesterday I moaned a little about the situation here. US household debt is falling steadily, and here it bloats a little more each month. Our economy shrank for the last four months, and theirs expanded. The Fed will raise rates at least once this year, maybe twice, while the Bank of Canada head says our economy would have croaked without his recent cut. Canadians love houses. Americans own more stocks. Home ownership here is at a record high. There it’s at a 30-year low.
None of this I say to dis Canada. I adored the parade. The cake. The patriotism. I was beyond proud to sit in the House of Commons for nine years. I love my country.
But we’re probably going in the wrong direction, and the reward for that will be years of a subpar economy. This week’s oil tanking, plus raging wild fires in the western provinces, the mounting drought in BC, recessionary GDP stats and a 79-cent dollars are all sapping strength. The contrast with the US is stark. A few years ago our currency was worth more than the greenback, our arrogance was on display in Vancouver and you could buy a nice, distressed house in Phoenix for 70% off. My, how the tables have turned.
Well, this pathetic blog doesn’t run the country, so we have to deal with the hand dealt. Soon we’ll be swallowed up in a federal election campaign, the consequences of which could be dire. If you think the world looks askance at us now, just wait.
So, what to do?
For starters, the growth portion of your balanced and globally-diversified portfolio should be twice as weighted outside of Canada as within. These days about 17% Canadian, 21% US and 18% international is about right. And while having roughly a fifth of the assets in US$ is always a good idea, you can buy exchange-traded funds that give you American exposure but are purchased in loonies.
As for the fixed-income part – the safe stuff – put half in rate reset preferreds (paying 5% these days, with a big tax credit), and the other half in bonds. If you don’t understand why you should have bonds, revisit what took place Monday. When equities swoon (it happens), bonds usually go in the other direction. They stabilize and anchor a portfolio, tamping down volatility as well as your emotions. Just make sure you have the right kind.
Of course, given what may lie ahead politically, you should also flesh out your tax shelters. Today, for example, a couple can have more than $80,000 contributed to their TFSAs, but only a small fraction of people do. Make sure you’re among them. If you can’t afford higher mortgage payments, lock in now. But if you have money to invest, and the confidence to do so, then grow it until the mortgage renews, then make a big payment. If you don’t own real estate, wait. If you do, and all of your net worth’s in there, get out. If you work in the oil patch, find new work. But not as a realtor.
Despite the above, I say again, it’s a hell of a country.
My Canada Day was great. Far better than the MP’s.
If the crazy Greeks did anything wrong, it was to borrow like they’d never have to pay it back. Kinda like us. Oops.
While stocks improved on Tuesday and the lefties leading euro’s G-spot started wavering, things got a bit worse here in Canuckistan, on the very eve of our glorious 148th birthday. In fact, probably a lot worse. Turns out we’re more like the Greeks than, say, the Germans – whose leader told Athens yesterday to piss off. Hey, nobody ever said leadership was pretty.
So last month we added a whole lot more mortgage debt, because loans were cheap and we’re not. The latest numbers show mortgage debt increased 5.5% in the last year, and Canadian households now owe $1.835 trillion, which is 1,835 times a billion. That’s an amazing amount of money for a country with only 12.4 million households. By the way, 70% of all debt is housing debt – mortgages. Talk about a nation of one-trick ponies.
This lack of diversification should alarm you, unless you’re part of the problem and think it’s reasonable to have a house, a mortgage and no liquid assets. The condo economy Canada has created over the last six years is, in its own way, as dangerous as the one they forged in Ireland, or Spain – where real estate bubbles burst and no recovery ensued.
In fact, did you catch the latest econo news? We are already reaping what we sowed. At the same time families plunged into new debt and houses in our bubble markets inflated further, the overall economy was contracting. The eggheads call it ‘negative growth.’
This is amazing given the fact interest rates have been in the ditch for years, the government has forked over billions on tax credits, infrastructure programs and giveaways, and collectively we’ve borrowed and spent hundreds of billions of dollars buying houses from each other and building enough condos to blot the sky. Meanwhile the US economy has shot into recovery mode while our dollar has faded – the perfect scenario when we send the vast majority of our exports south.
And still we’re negative. Economists were not expecting April would be yet another month of declines, nor that we’d all suddenly be talking about the possibility of a Canadian recession. This was the fifth losing month in the last six, suggesting the oil price shock may have given us more to regret than just socialists. Speaking of Alberta, wildfires there (did I mention climate change?) have caused some additional oil patch shutdowns, which may mean bad numbers lie ahead for the next few months.
So, we have a disconnect. The Bank of Canada said the economy should grow a feeble 1.8% in 2015, but so far we’ve shrunk 0.6%. Soon we might actually be told that the recession started in the spring, just about the time detached houses in the GTA averaged $1.4 million for the first time, and ditto for YVR digs at $2.2 million. This would also be during a period of record-low mortgage rates and robust borrowing.
Does this mean rates will fall further? Will the Bank of Canada panic again, as it did in January, and drop its key rate just as the Americans are preparing to raise theirs? Wouldn’t another rate cut torpedo the dollar by signaling we’re in trouble, desperate for another debt fix?
Some people think so. But where does Stephen Poloz, the guy in charge of our central bank, stand on the issue?
Well, he ain’t saying. But he sure isn’t talking up Canada on the world stage. During a presentation at the Bank for International Settlements a couple of days ago he compared our nation to a dying patient, and excessive debt to a post-surgical complication.
“If the doctor says you need surgery to avoid death, the side effects usually don’t deter you, you just go ahead and manage them somehow. Other issues must be subordinate and I think of them as side effects.” But in the bank’s own words, our household debt is a ticking time bomb, a “key financial system vulnerability.” And it begs the Greek question: how can you possibly continue to borrow your way back to prosperity?
Poloz had this zinger, too, admitting that he knows what his policies are doing to the real estate market: “When we cut rates to stabilize the economy we don’t picture some heavily indebted household going out and adding to their debt pile, rather we picture a household with no debt at all deciding finally to buy a house and taking out a mortgage.”
So, there you go. Our policymakers are intentionally encouraging people to borrow money and buy houses at their most bloated levels in history, using cheap money which will surely reset higher for all the decades of those mortgages. That’s bad enough. But it isn’t working. Sure, houses are now unaffordable and people are sautéed in loans, but the economy is also shrinking.
By the way, that same international banking body Poloz was addressing doesn’t agree with him. Cheap money is no fix, it says. It just makes stuff worse. “They in part have contributed to it by fuelling costly financial booms and busts. The result is too much debt, too little growth and excessively low interest rates. In short, low rates beget lower rates.”
Calling Canada a “small, advanced economy”, the BIS said our rates have already been too low for too long – creating a giant gasbag of a credit bubble that “far exceeds historic standards, paving the way for widespread pain once the central banks inevitably launch a new tightening cycle.”
I hope you get the picture. The economy’s shrinking. Jobs will be lost. Yet all your idiot cousin and the people at work want to do is buy houses. So they borrow. Because money is cheap. The guy in charge of rates says we’d be dead without the last cut. So he might cut again.
Too much debt. Too little growth. Nuts in power.
Our flag should have a pita in the middle of it.