October 22

DOG SOLDIER modified

Al Jazeera, of all outfits, called me Wednesday afternoon from New York to comment on lax security in the Canadian Parliament. That turned into a theme after the gunfire. “Ottawa Attacks Shatter Canadian Innocence,” read Bloomberg’s headline. I guess we’re playing with the big boys now, in the same week that six of our old jets deploy against ISIS.

Financial markets can handle a lot of stuff, but not surprises. The TSX lost a few points on news a soldier had been shot at Ottawa’s War Memorial. It lost a lot more on reports of bullets in the Centre Block. Then, on claims of multiple shootings (the cops at first said three), plus the Quebec ramming days ago that killed another soldier, things hit the fan. Just a day after adding more than 200 points, the market shed 235.

That was not all that was worth fretting about. Oil crashed more than 2% on Wednesday, and a sad prediction of this pathetic blog last month – that crude would hit $80 a barrel – was realized. This is a big story for Canada. It’s a manifestation of the trends I’ve been yammering about for some time – less demand and more supply is exactly what deflation means. Next comes lower prices, less investment and lost jobs.

Calgary, Edmonton and Fort Mac have intense times ahead. I hope your daughter didn’t just buy a Cowtown condo from poser cowboy Brad Lamb.

The Bank of Canada jumped into all of this, citing the oil plunge as a likely reason interest rates now won’t be rising too fast in this country. No good news there, as the fedsters also said they’re worried about hormonal housing markets in Vancouver, Calgary and Toronto. The real estate bloat, of course, has been caused by absurdly low rates. What a dilemma we’re walking into.

And did I mention the dollar is at eighty-eight?

So, there you have it. Terrorist attack on Parliament. Oil price crisis. Deflating economy. Unaffordable houses. At least Doug Ford is losing.

For the last two years I’ve been suggesting your exposure to Canadian assets – whether that’s ETFs owning the Toronto stock market, or a house in North Van – be contained. Don’t fall victim to home country bias and have a portfolio full of maple assets. Incredibly, 70% of all Canadian investors with equities have only Canadian companies. Not only are they undiversified, but they’ve now hitched their wagon to the wrong star.

Meanwhile, today – and the poor, dead soldier on ceremonial duty – should count for something. We’re in harm’s way, which is unavoidable when you face up to evil. This is one more thing you need to factor into your personal strategy, and I will address that in coming days.

By the way, I turned Al Jazeera down. No interest on my part in talking about the guys who failed to keep a dude with a gun from the front door of Parliament. I know many of the guards, and have walked through those brass doors beneath the Peace Tower hundreds of times, smiling at them. That is a public building, through which rivers of tourists flow daily. In recent times security has been beefed up, and vehicles prevented from cruising past ambling MPs. Gone are the days I could park my bike beside the PM’s black SUV tank, and so irritate his Mountie driver.

But there’s certainly more security to come. The two aging guards at the front door will likely be given guns. That will sadden me.

Godspeed Cpl. Cirillo.

Darwin

SELFIE modified

Let’s irritate the millennials more. It’s fun. They’re so cute and defenceless. Like baby skunks.

Almost nine million people born yesterday (between 1981 and 2000) which is roughly equal to the number of wrinkly Boomers. Incredibly, half of the M-people still live with their parents, and about a million of them who could work, don’t. Six years ago, the number living at home was just a third. Go figure.

Millennials account for about 20% of all income earned in Canada, while the Boomers, many of whom are now at the end of their piteous careers, constitute 30% and their kids (Gen X) who are in mid-career, represent 46% of all earnings. Of course, this last group – saddled with houses, kids, dogs and SUVs – also spend hugely.

Well, so what?

Hmm. This is an ugly demographic mix for the little skunks. I hope their moms are teaching them to forage, and hide their nuts.

Our social system – much of the economy, in fact – is based on working people supporting old wheezers. Today there are four-and-a-half workers for every senior. So, the Boomers never have to worry about their CPP or OAS or health care. But when the average 25-year-old millennial is 65, there will be just two people with a job for every retiree. Oops.

This is because our population’s aging quickly. Like Japan’s. Within twenty years a quarter of the nation will be collecting OAS – that’s $4,000,000,000 a year (four billion) in pogey. CPP payments add another six billion, but that program should still be self-funding two decades from now. Forty years out, I’m not so sure.

The implications should be obvious, but aren’t to most millennials, 70% of whom have smart phones but no savings. For starters, real estate is demographically doomed. With an aging population in financially strapped times, demand and prices are destined to fall. Survey after survey of Boomers (most of whom are in denial) already show between a third and half understand they’ll have to downsize their property in order to raise cash for living expenses.

That only makes sense. Over 70% don’t have defined-benefit corporate pensions, and have saved a quarter of what will be needed to survive 25 years without working. They’re house-rich and financial asset-poor, not to mention unbalanced, non-diversified and potentially illiquid. The big need in the years to come will be income, not enough garage for two minivans.

So, the current millennial fixation for real estate, as we ridiculed yesterday, is beyond dumb. These kids are buying into a mindset which will facilitate a giant transfer of wealth from them to their parents. The wrinklies end up with the cash. The kids get the debt – pledged against assets likely to fall in value as rates inevitably rise. Double screwed.

Second, the whole system of social transfers could be threatened by the time the millennials are lining up for metal hips and plastic hearts. Today, when there are twice as many taxpayers and half the dependents that will exist in forty years, we already have a persistent federal operating deficit, and an accumulated government debt (the feds, provinces and cities) of $4.1 trillion. That’s about $245,000 for each of us. And these are the good old days. Every year more than $60 billion in taxes goes to pay interest in this debt – so imagine what happens when rates drift higher over the decades ahead.

So, yes, the millennials would be fools to expect their lives to unfold as carbon copies of their parents’. No profligate hippiedom, no finding-myself-in-Europe, no sha-na-nah for them. This is Darwin, baby. And you’d best know that now.

Some months ago I gave you a Millennial Portfolio. It was met with thunderous neglect. So let’s try again.

First, the investment vehicle of choice for all the kids should be the TFSA. Forget RRSPs for now, because they’ll end up being tax bombs you deeply regret in a few decades, when taxation rates are inevitably higher. You may not get a break for making a TFSA contribution, but you’ll pay nothing on the growth or any withdrawal.

Second, these savings accounts are not for savings. Get out of the bank or the orange marmalade outfit and into a place where you can hold a bunch of low-cost ETFs – exchange-traded funds. Divide your money into five piles and buy a fund holding the TSX 60, another containing the S&P 500, one with a basket or preferreds, one comprised of a bundle of REITs and the last containing a good mix of bonds. Now you have balance, diversity and liquidity.

If you start with five grand and add that much in a year, securing just a 6% annual return (assuming a slow-growth world), in thirty years the balance will be $494,000, of which almost $300,000 would be tax-free growth. That’s half a million in taxless wealth, all for contributing $100 a week.

Or, you could buy a condo for $400,000, with a $390,000 mortgage, pay twice the amount per month that a renter does, and end up losing all your equity. In a vaguely deflating world populated with annoying and condescending old people who won’t give you money even though you’re special, why would you?

Ask your phone. There’s an app for that.