All you need

A comment here yesterday caught my eye. Out riding with six of his buddies, a few miles south of the bunker, a blog dog said the bikers talked real estate when they stopped for kidney repair. All were bullish on housing, he added. All are in the property development business. All expected good times to roll. And none had heard of me.

I was shocked.

When I recovered and remembered my name, I was reminded of how most of our friends, neighbours and family members today have little understanding of the new world we’ve entered. For example, they think interest rates go either up or down, when right now both are happening at the same time.

Short-term rates are rising, while long-term rates are falling. This is called a flattening of the yield curve, which sounds about as sexy as Saskatchewan. But it actually means people with variable rate mortgages are in a vice, while five-year money gets cheaper. It also means investors who followed my urgings this past spring and summer to load up on bonds have done well for themselves.

How can rates move in two directions at once? Because on the short end the Bank of Canada is trying to cool off excessive borrowing (that it created with emergency rates), stabilize the dollar and counter the inflationary impact of the HST. But at the long end, investors who stampeded into bonds from wonky stocks bid prices higher and thereby forced yields lower – meaning 10-year government issues, for example, are yielding squat.

The bond market is telling us something important: expect deflation.

But most people don’t understand that, either. Especially not hard Harley-riding, testosterone-drenched real estate developer vigilantes. Most folks think we have an economic recovery, albeit a damn slow one, which will lead us straight back to 2007.

But this is not going to happen. Just as there will be no double dip recession. The reason for both is simple – we have actually not yet come out of the first recession. And how could we? Real estate sales are sliding and prices eroding as buyers fade away. Nobody I’ve heard of has started up a new auto parts or furniture manufacturing plant anywhere in Canada in the last two years. Salaries have flatlined while household debt has swelled. As I showed you yesterday, America – our big trading partner and economic sugar daddy – is on its knees. And the unemployment rate in Canada and the US has barely budged since we fell off a cliff in early 2009.

How is this recovery? Economic growth in both countries is basically equal to the inflation rate – meaning no growth at all. Most importantly, there are now a whole mess of people – millions of them – who have not worked in almost two years. Many of them never will. Count among them a lot of post-50 Boomers, and especially people of all ages in construction and manufacturing whose jobs may be gone for a generation. This is called structural unemployment – two words you will never hear a federal politician utter.

So on a day when the Bank of Canada raises its rate again, and people mutter, ‘what is that dude on?’, it all makes sense. Rates are rising and falling because we have inflation and deflation. And that simply means you must protect yourself against both.

This is why the people who hoard gold, worship houses, day trade or stuff the orange guy’s shorts are all at peril in their own way. There is no one strategy right now that will protect against opposites, and the greatest risk for the bulk of the population remains running out of money.

So there are but four things to concentrate on: Asset allocation, diversification, tax avoidance and liquidity.

That’s it. Nothing more. All you need to know about investing in a world without a compass.

If you bikers in the back would stop muttering and scratching your privates, I might explain more this week.