Storm warning

Days before the debt ceiling tiger turned into a pussy, US doomer Jim Rickards said the coming economic and financial crash was going to be “fast, unavoidable and bloody.” Billions of people would be devastated. But, he said, there are ways to profit from the collapse. Get a free newsletter describing the strategy. Only $79.

Of course Rickards rushed to social media following the little banking tempest as Silicon Valley keeled over. All banks would suffer runs, he said, crushing families ruinously. Financial institutions that might have taken years to collapse in the past now can be wiped away in hours. It’s a disaster. But there was a surefire path to riches…

Now the guy is onto digital currencies. The transformation of money from paper with pictures printed on it to electronic entries is virtually complete in society, of course. (How much folding currency is in your wallet right now?) But the professional scaremongers have joined the conspiracy nuts in telling you this is one big step by “the authorities” in the planned subjugation of society by the WEF, the UN, the OECD or ACDC. Whatever. The point is to terrify you. Then collect your seventy-nine bucks.

The big news is the US borrowing crisis was solved Saturday night. No surprise. Both sides had telegraphed a default would not be allowed to happen and America would not run out of cash. Congress now has a couple of days to ratify the deal. And it will.

American markets are closed for Memorial Day on Monday so global trading will be thin. However, look for equities to advance now that this risk has been dispatched. Bond yields should drop once trading resumes. (Canada five-year debt coursed higher last week, supporting a mortgage rate increase.) All in all, it should be a decent week for your portfolio. Nice. We could use less drama.

However, the debt thing was not solved in Washington over the weekend, Just kicked down the road two years, until after the next presidential election (which Trump will not win). Both sides caved a little. Nothing of great consequence was changed. The borrowing continues. America now owes well over $31 trillion, and climbing.

Let’s compare that with us.

Our current federal debt is $1.2 trillion. Ontario owes half a trillion. BC about a hundred billion. Alberta eighty billion. Quebec $207 billion… Well, you get the picture.

During Covid Ottawa ran a deficit of $327 billion – a staggering one-year shortfall (eight times larger than Harper’s credit crisis gap). That fell to $90 billion the next year, rose to $95.6 billion in fiscal 2021-2 and has just clocked in at $41.3 billion.

So that’s more than half a trillion in under four years – equaling the accumulated debt for the previous century and a half. Here’s the most concerning part: last year during the post-pandemic economic boom federal revenues were up a healthy $34 billion (more taxes collected) and spending was down $30 billion (pandemic payments ended) and still we ran a deficit almost as large as during the economic collapse of 2009 when the carmakers died and Wall Street banks toppled.

In short, we’re now trapped in a framework of government spending which means budgets will never be balanced and taxes must continue to rise, with interest costs exploding higher. For example, in the twelve months just passed we spent $10.4 billion of your tax dollars on interest on the trillion-dollar debt (which is now $41 billion higher).

That was a one-year increase in interest of 42%. That compares with mortgage debt that swelled 28% for families. Every year that interest rates remain at current levels, an increasing amount goes out the door to pay bondholders, many of them institutions or international entities.

How much is ten billion? It’s ten times a thousand times a million. It’s half the cost of maintaining the Canadian Forces annually. It’s a third of all the OAS pogey that goes to seniors. It’s almost half the annual tab for the kiddie welfare sent to families every month. And without it the deficit would shrink by a quarter.

In short, governments in America, Canada and its provinces cannot live within their means. There’s no pandemic now, nor are we directly fighting a war, building a national railroad, seaway, nor do we have a single operational submarine most days of the week. Increasingly the role of government has been to send money to people in exchange for their votes, financing the shortfall with new debt. Now we can look ahead and see where that road leads. Yes, to more interest payments and taxation.

So, fill your RRSP, your company’s shared-contribution pension plan, your TFSA, your kid’s RESP and that new FHSA. Every tax shelter should be stuffed. Share income with your squeeze through pension-splitting or a spousal loan or registered retirement plan. Cherish that residential tax exemption, plus the break on portfolio capital gains and dividends.

Rickards is right. A storm’s coming. But not that kind. There. Just saved you $79.

About the picture: “Hi Garth,” writes Lidia, “this is Sammy a happy, forever hungry lab in beautiful Squamish!”

To be in touch or send a picture of your beast – [email protected].



DOUG  By Guest Blogger Doug Rowat

Do you recall the egg wager in Cool Hand Luke?

To refresh, Luke Jackson (Paul Newman) is challenged to eat 50 hardboiled eggs in an hour. It’s one of the most famous movie scenes ever, and needless to say, it’s the most talked about egg scene ever. I even studied it in university.

Decades later, I’m still studying eggs as they might be the most talked about component of the current inflation crisis.

Egg future contracts usually hover around a buck or two per dozen eggs; however, late last year, they skyrocketed to more than 5 bucks per dozen. Eggs effectively became the poster child for food inflation.

But, as I argued in a blog post last October, I believed that US inflation had peaked and that one of its most stubborn components—food inflation—would eventually start to ease as well.

With 10 consecutive months of moderating headline CPI—including six consecutive months since my post—it appears that I was right. And that stubborn food inflation? Well, it’s finally showing signs of cracking (see what I did there?).

Back to eggs.

Last year, several things converged to make it much more costly for consumers to buy eggs. First, a deadly avian flu killed millions of hens. According to the USDA, by December 2022 there were only about 308 million egg-laying hens in the US, down from approximately 328 million in December 2021. Second, inflated feed and fuel costs also significantly contributed to egg-price increases. Fortunately, the avian flu is passing (the number of egg-laying hens has slowly risen, sitting at about 314 million currently) and feed and fuel costs have sharply declined. As a result, egg prices have plunged:

An eggs-ellent inflation trend: egg prices plummet

Source: Trading Economics. US$ per dozen eggs.

Granted the avian flu was a problem specific to the egg business, but the inflated input and fuel costs were universal to the entire agricultural industry. For example, the more than doubling of the NYMEX natural gas price in the first half of 2022 was particularly significant as natural gas is a primary feedstock component of fertilizer. However, natural gas prices have now dropped 72% over the past year. Simply put, the cost of growing food is moderating rapidly.

Food, and specifically the food-at-home component, has been one of the most persistently elevated areas of inflation. If you can believe it, food-at-home inflation two years ago sat at less than 1% y-o-y (see chart below). But at its peak in 2022, food-at-home inflation hit a mind-boggling 13.5% y-o-y and remained at double-digits for the majority of the year. To give a sense of food-at-home’s outsized impact on overall inflation, recall that headline CPI never once rose above 10%, even at its peak.

But, finally, we’re seeing progress. Food-at-home inflation has dropped sharply and has now, for the first time in nearly two years, dipped below overall food inflation levels (see chart below). It’s not a certainty, but I think food inflation will come down yet again in May and contribute to another positive headline CPI reading (the May CPI data will be released June 13th).

US food inflation was stubborn, but it’s finally moderating (y/y % chg)

Source: US Bureau of Labor Statistics, Turner Investments

Eventually, inflation data will no longer positively impact equity markets as investors will, at some point, assume that the Fed has successfully dealt with the crisis, even if inflation doesn’t decline exactly to its 2% target. However, I don’t think we’re there yet. I think that the inflation data will continue to be a market catalyst at least throughout the summer, perhaps even into the fall.

Am I confident in my forecast?

Was Cool Hand Luke confident he could eat 50 eggs in an hour?

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.