Entries from December 2019 ↓

The stampede

The common wisdom on The Street is Trump’s a cinch in November. Confidence that the growth-at-all-costs president will win in the coming election is part of the reason investors think markets will melt up in the next few months.

After all, it’s the economy, stupid. Unemployment’s at a 50-year low. Corps are making big bucks. Stocks at record levels. Consumer confidence and spending are strong. Residential real estate is stable. Wages are up. The trade war with China is easing. Inflation’s running cool. Interest rates have come down again.

So, how could Trump lose? Even if he is a paleo?

But wait. What’s the thundering sound? Hey, it’s a stampede of Millennials!

Some people think moisters and women will punt the president, causing him to lose by up to ten million votes. As a research paper called ‘The Ok Boomer Decade’ spelled out this week there’s already evidence a sweeping move to the left is taking place among the under-40 crowd. The numbers are actually stunning. In the 2018 mid-term elections 68% of 18-to-24 year olds voted Democratic. The result was almost identical for those aged 25 to 29, and stayed at 59% among the 30-to-39 cohort. Republicans only regained the edge among voters over 50. Boomers.

The pendulum is shifting, we’re told. This new decade will see a relentless move left as the largest demographic (Millennials) turns desires and entitlement into votes. Surveys show people under 30 don’t fear socialism, want bigger government, increased social program spending and are willing to live with seriously higher taxes to get it. Taxes on others, of course. Like the Boomers, the rich, homeowners and corporations. It’s why Elizabeth Warren and Bernie Sanders have been embraced. This is what AOC is all about. And MMT – modern monetary theory.

So the 2020s may bring war on inequality. The 99% chasing the 1%, using government to level the field. It’s already emerging in Canada, as you know. BC’s socialist government and its tax war on real estate is a good example. Trudeau’s slashing of TFSA contributions, the attack on small business financing and the new uber-tax bracket hitting incomes over $200,000 also fit the pattern.

Those drifting left, doubting capitalism, feeling shut out of the housing market, hating the gig economy and struggling to form families don’t care much about federal government deficits or balanced budgets. No wonder poor Andrew Scheer’s message went fallow. In the world of MMT believers, the government tells the central bank to print enough money to achieve social justice – universal health care and education, a debt jubilee, state-built affordable housing and a guaranteed annual income. Since the debt is owed to the people, it’s not bad. Why repay it?

Now layer Greta on top of inequality, social justice and elastic monetary policy, and the shift left continues. People under 30 believe overwhelmingly in the reality of climate change and are happy to use the term ‘emergency’ to describe it. More justification for a tax attack on those lifestyles which they feel contributed to the crisis. Carbon-emitting cars and planes, over-sized houses, excessive consumption and the hoarding of assets. Don’t be surprised in the decade ahead to see capital gains taxes on Canadian real estate, a top tax bracket touching 60%, a wealth or inheritance tax and carbon taxes far above current levels. Poor Alberta.

Now, none of this is overnight stuff. Trump may well snuff the lefty Dems in eleven months. The Canadian Cons may wisely go centrist and topple Trudeau. Boomers are not a washed-up asset class yet.

But we’re not blind, either. A year ago MMT was just a worn, discredited, far-out economic theory espoused by people who keep ferns. Now it’s at the heart of a US presidential race. Greta is a cult hero to millions. Every incident of extreme weather fuels a movement. The political polarization of the developed world is coming down to divisions of age, class, even gender. In democracies, when a majority feels put down, delayed, disenfranchised or pissed, radical things can happen. There are now more Mills than Boomers, an imbalance which grows daily.

So if Trump fails in November, this will be why. If he wins, it could be a generation’s last huzzah. His kind will be gone.

What to do in terms of your own life? You assets?

Tune in next year. I’m taking tomorrow off to work on the bunker.


The security blanket

In a day or two you’ll get the Greater Fool FFPs (Fearless Foolish Predictions) for 2020. Here’s a preview. One of them will be a market melt-up, for at least the first few months of the year. No recession. No shocks. Except Trump, maybe.

How best to take advantage of economic growth, rising asset values with stable inflation and interest rates?

The TFSA, silly. It’s the gift that keeps on giving. Your security blanket – but only if you know the correct strategy. Sadly, 80% of all tax-free moolah in Canada remains in GICs and HISAs meaning most folks will miss this opportunity. Don’t let that include you.

Come Thursday you’ll be able to stuff another six grand into your plan for the year. This brings the accumulated TFSA total contribution room (since it was invented) to $69,500. For a couple that totals $139,000. Add in two adult children, and it becomes even more – potentially over $275,000 for a household. All growing free of tax. And unlike RRSPs, no tax when redeemed.

There are some awesome advantages of the TFSA.

Like, flexibility. Money can come out, then be replaced the next year. No such luck with an RRSP where room is used up and never replaced. For example, this coming week everybody over 18 (or 19 in certain backward provinces) has the ability to put in all missed contribution room from past years + replace all the money withdrawn in 2019 or earlier + this year’s $6,000. So there’s no excuse for having a non-registered investment account, for example, when TFSA room is sitting idle and unfilled. Move it.

The fact TFSA withdrawals are not counted as income and all the growth in the account remains untaxed makes these perfect for retirement planning. Imagine a couple turning their current $139,000 TFSAs into $700,000 in twenty-five years, then drawing out annual cash flow of about $45,000 at the same time they collect average CPP and OAS. That would give an income of almost $80,000, sans tax. For life. No clawback of the government pogey.

Growth is key. TFSAs should always be packed with growthy stuff like ETFs mirroring the S&P, Dow, TSX, Nasdaq or emerging markets. Over the past decades an average return of 7% has been a reasonable expectation for a balanced portfolio, so a 25-year-old contributing $110 a week to a TFSA (and doing no other investing her entire life) could reasonably expect to end up with $1.26 million, a million of which was taxless growth. That would throw off an income of more than $85,000 a year – plus social benefits and the proceeds of whatever crappy corporate mutual fund-based RRSP she was given. How’s that a bad outcome?

If you thought spouses were just handy for a wide range of emotional and domestic services, good news! The TFSA can also help you income-split. Higher-income earners can gift money to their partners to invest in a tax-free account with no attribution back to them (unlike with a non-registered account). The lower-income (or no-income, stay-at-home) spouse can still qualify for spousal tax credits while earning great tax-free returns. Ditto for adult children. Gift them money for their TFSAs. No attribution. But, technically, it becomes their money so you have to be nice.

Speaking of kids, TFSA withdrawals are never taxed and never considered income – unlike what can happen with an RESP, where a portion of the funds attracts tax. So having your offspring open tax-free accounts and keeping them funded for educational costs makes good sense. If they don’t go on to uni, no problem.

Retired and over 71? Then RRSPs must be converted into RRIFs – even if you don’t need the dough. Why not use registered retirement income fund money to fund your annual TFSA contribution, or that of your spouse (or both)? That way you exact a little meaningful revenge with the forced cash flow earning returns Bill Morneau will never see or touch?

Remember this, too: declare your spouse the ‘successor holder’ of your TFSA, not the beneficiary. That way your plan becomes theirs when you croak. Seamless. TFSAs do not enjoy the same exempt status as RRSPs so foreign dividends may attract withholding tax. Plus, don’t overcontribute, or the CRA will send you a nasty letter and demand ransom. Of course, contributions in kind are okay – you don’t need actual cash to fill the plan each year.

So, in summary: if you do nothing else, do this. Open a plan. Fill it. Invest the money, don’t save it. Never spend it. Never miss a year. And don’t be coming to this pathetic blog in 30 years, moaning about poverty. I won’t care.