Strong & free

FLATBED modified

Sit down. Somewhere in the world it’s sundown. So pour a scotch. This is thick.

While everything will turn out okay in the long run (I have no doubt), it now seems certain we’re entering a period of confusion (unless you read this pathetic blog daily) and volatility. As you know, the Chinese stock market laid another egg, despite the fact they’ve done everything there but shoot people who are selling. That robbed the commodity market for technical reasons (money being pulled out to cover margin loans) and economic ones (a slower China means less demand for copper and oil).

  • So, on Monday crude prices cratered a little more, and at $47 it’s likely on the way to a new cyclical low. The bottom was $45 back in January, and one year ago a barrel was worth $101. Canadian crude is way sicker – at the $30 mark. The normal discount for the oil sands stuff has widened dramatically, which is about the worst news possible for Alberta.
  • The Canadian dollar is sitting at 76 cents US, on its way to 74, analysts say. This is because of oil, natch, but also because while there’s a 50% chance our central bank will cut rates again, there’s a 100% chance the US will raise them. Goodbye, loonie.
  • Even gold can’t catch a break, which matters because mining and refining is a giant industry in Canada. The latest forecast for the yellow stuff is down to just $800 an ounce – a 27% dive from the current level, and 58% lower than four years ago.
  • And then there’s the Dipper factor. Yikes. A Globe/Nanos poll just published found 47% of people think a federal NDP government would be positive for the economy as opposed to 31% for the Cons and 41% for the Libs. But while citizens of the Socialist Republic of Canuckistan might embrace Muclair, just like the collective known as Alberta did with Rachel Notley, currency markets want none of it. Down she goes again
  • All this has the Toronto stock market bleeding. The composite index is barely above 14,000 now, giving investors a 6.75% loss year/year and a decline of 2.7% so far in 2015. (In contrast, the S&P is up 6.6% in the last 12 months.) Hard hit, as you might imagine, are energy and miners, with even financials slagging. Why? Read the four bullet points above. Commodities. Currency. Rates. Regime change.
  • Jobs numbers are due out after the coming long weekend, and are expected to be ugly. Canada lost 6,400 positions in the last period, and since then the economy has continued to weaken. We’ve had five months of negative growth and the mother of all trade deficits. So it’s a fair bet the unemployment rate of 6.8% will be heading higher now that oil is testing its recent lows.

Now every time I chronicle what’s happening to our economy, some redneck dork from Airdrie calls me a traitor. But this is the world in which Canadians find themselves, so it’s wise to adapt. As I’ve told you, a profound home country bias has persuaded 70% of all investors to keep 100% of their assets in maple – which is also the overwhelming bias of most bank-owned brokerages (someday I’ll tell you why). What a stinker that’s turned out to be.

Of course, investors with a nicely-diversified (40% safe stuff, 60% growth stuff) and globally-diversified portfolio (15-20% Canadian, the rest US and international) need not fret a lot. Sure, monthly valuations will bounce around, but you have exposure to lot of markets that are inflating, protection from rising rates and even a special anti-NDP secret sauce.

But that’s a minority of us. Most people have most of their net worth in a single asset, sadly. With a soggy labour market, a pop in inflation thanks to a tanking dollar, and the certainty of rising long-term fixed mortgage rates, the next year or three will not be the sunshine and ponies they expected.

There you go. Personally I think we should have stayed with puppies.


SCARY modified

Sarah is 36, lives on the coast, and is confused. Scared, even.

“As a woman in a terrifying investment world, living in a ridiculous city I am finding that I need to educate myself in how to deal with the money that I have. I’m starting to look at my choices and am overwhelmed with confusion on where I am going with finances,” she writes me. “I know that now is the time to get things sorted. I’ve approached my bank twice and have not felt properly guided or any more knowledgeable. Unfortunately my parents are entirely financially illiterate, actually I would say 99% of those in my life have that problem.”

Sarah may not be totally cognizant of the reasons, but she sure gets the vibes. It’s a time of change. As usual, that brings danger and opportunity. Old beliefs break down. Conventional wisdom’s proven wrong. What looked safe, isn’t. A hallmark of changing times is when everyone looks back and says together, ‘how did I not see that coming?’

One of the biggest changes in 2015 will be the beginning of the end of cheap money. For almost a decade now it has fueled asset bubbles that have come to look normal. Beater houses in the shadow of a Toronto sewage treatment planning selling for a million. Stock markets recording record highs month after month. Household debt bloating even as the economy and jobs shrink. Detached properties in urban YVR averaging over $2 million.

Just as Sarah becomes aware she needs to manage her savings, the landscape is shifting. As the cost of money rises over the next few years, amid economic torpor, logic tells us the bubbles cannot last. Those who peddle cheap debt or a one-asset strategy (like the people at the bank) will end as merchants of failure.

So, how will this unfold?

Here’s what we know. The US central bank’s chair, Janet Yellen, has said as clearly as she’s allowed that rates will rise this year. A big deal. It’s been ten years since this happened. No wonder she has telegraphed it so often and so clearly, because so many just don’t want to believe it.

When will this ascent begin? The Fed has its next rate-review meeting this week, on Tuesday and Wednesday, and while there’s an outside change the trigger could be pulled then, it’s doubtful. Here’s why:


This is the schedule of Fed meetings remaining in 2015. You will note only two end in media conferences (September 17 and December 16) and the release of an economic statement. Given the global significance of this rate increase, and the impact it’ll have on at least the next five years, it’s hard to imagine it will be made without a full explanation and briefing. That makes the third week in September the likely go-date.

(Remember what a higher Fed rate will do to our already-pummelled currency, after the Bank of Canada moved in the opposite direction earlier this month. This event will happen just five weeks prior to the scheduled Canadian federal election. Would you, as prime minister, want to spend a month explaining the currency collapse? Or would you call the election for the week after Labour Day? Be ready.)

We also know this: a few days ago there was a Fed leak, which made public the projections for the US economy and rate increases that had been prepared for Yellen by her bureaucrats. There is no guarantee this will come to pass, but it paints a likely scenario of what to expect:


Hmm. What does this tell us? First, US central bankers expect slow-growth and low-inflation with to dominate for the next half-decade. Not great news for Canada, since we flog 80% of our stuff to Americans. Second, these guys are expecting one rate increase this year (a quarter point), then a jump of almost 1% next year, another 1% (almost) in 2017, and for rates to be 3% higher by 2020 – five years hence. Meanwhile you can expect that the bond market will follow a similar path, on both sides of the border. Plus the Bank of Canada has aped Fed rate decisions 97% of the time over the past 25 years, so we assume similar.

Bottom line: a five-year mortgage on a crap Vancouver Special secured at 2.4% in 2015 could easily face renewal  north of 5%. So if house prices are perfectly (negatively) correlated to interest rates – as we have seen proven since 2009 – it means Canadian real estate has only one direction in which to travel. Meanwhile the oil price collapse, fallout from tumbling commodity prices in general, poor job prospects and the debt orgy among your colleagues and relatives are engendering economic fear. This is what sea change is made of.

So Sarah can (a) ignore it and buy a condo, (b) go to the bank and be sold a dangerous Canadian equity fund and a market-linked GIC, (c) huddle in cash and make nothing or (d) embrace a balanced and diversified approach. Not too many eggs in any basket. Not too much exposure to Canada. Defensive and offensive. Global. Rational.

She’s right. It is scary. If the little hairs on the back of your neck aren’t stiff, you’re not paying attention. But you soon will.