Economy, Energy Housing…

1) US Economy

Sometimes the best way to assess the status of a complex system is to put it in context of yesterday’s predictions; have yesterday’s expectations come to pass? The Trump effect is over 100 days old. CNN has become the new soap opera de jour. Whitehouse press conferences have shockingly become the new Reality TV Show, except with real world implications. Here’s a bit of humor in that vein with Melissa McCarthy playing Shawn Spicer (US Press Secretary) in a Saturday Night Live parody.

…On a more serious tone, click here to view the January 19thvideo of a Globe and Mail symposium with a four-person panel of some of my favorite Canadian Pundit discussing what to expect economically from the Trump Victory. The panelists are prominent chief economists and business columnists. (It’s about 70 minutes in length but well worth the watch.)

2) Houses

A triumvirate of uses, make their value difficult to assess in the best of times;

  1. We need houses for shelter,
  2. They provide a store of wealth, and
  3. They can be used to speculate and gamble.

Toronto, Vancouver and recently Victoria have fallen into this last category. So much has changed in 3 years. What is driving prices? Foreign Money? Low interest rates? Will it last? Will the bubble break, or will politicians manage a soft landing for prices?

The housing industry is also a huge income driver of the economy, and has been the only pillar propping up an otherwise soft Canadian economy. Money is spent and consequently earned in construction, renovations, legal services, commissions, furniture, appliances, insurance, transfer taxes…etc. The hope is that maintaining a low Canadian exchange rate will jumpstart the manufacturing and export sectors, as we wait anxiously for oil prices to return to a higher level.

Click here to view a formative article by TD Asset Management.

3) Energy

The oil battle rages between excess supply in North American and offsetting production limits of OPEC, Mexico, and Russia. The cure for low prices is, low prices, but how long will it take for the energy market to find a new higher equilibrium, or has it found one? Indications are that most US shale oil companies have a breakeven price below $40 and can undermine the impact of OPEC. Last March the price hit a low of $27 USD, it since recovered to the low $50 USD range. Will prices continue to climb before the global economy reaches therenewable energy threshold, or will Alberta, like Saudi Arabia be left with unharvested resources trapped in the ground permanently? Indications are that a wholesale shift to renewables is still two economic cycles away, but making predictions is hard, (especially about the future).

With every oil well, there are extra products captured, (Natural Gas, propane, butane, etc.). Although these are bonus outputs, some companies’ focus strictly in search of this energy. So, thus the question, “will natural gas replace coal as a source of electrical power generation and if so when,” is as yet unanswered.

Here is a BNN video interview with Rafi Tahmazian the Fund Manager of Canoe’s Energy Equity fund with a view of challenges facing the Canadian Energy market in the last 6 months.

4) Cannabis Legalization

Is there money to be made buying pot? If you do, then let me suggest you buy large amounts and sell it in much smaller parcels – just be ready to run if you see the cops!

Ok so, that applies to being a high school pot dealer, which is still a criminal offence and so unadvisable. As far as the medical marijuana stocks are concerned, I seem to get asked weekly if they represent an opportunity to get rich. Will it be like becoming Charles Bronfman (who started Seagrams) in 1933 when the US ended prohibition? Maybe, or for those in need of and clearer answer…definitely, maybe!

Choosing which company will survive, let alone dominate in this fledgling business is a little like guessing which kernel of popcorn will pop next. Be aware that even the biggest of these new companies aren’t expected to make profit until 2018 or beyond. To receive $1 of profit will cost you $300 in stock price (very expensive). These companies will either need to take on more debt, or dilute existing shareholders equity by issuing more stocks to gain the economies of scale required to become and remain profitable.

Buying and selling stocks requires a considerable amount of time, skill and nerve, (at a minimum learn to read, P&L statements, income statements, balance sheets, and then read Warren Buffet’s book, “A Guild to the Intelligent Investors”); anything less and you’ll likely have better odds on Red at the Roulette table in Vegas – at least there, they’ll give you free drinks. Remember every time you make a trade, there is someone on the other end doing the opposite. The buyer and seller can’t both win. So, ask yourself if you know something the other person doesn’t? or vice versa? Only one of you will be right.

Here’s a recent article from last weekend’s Globe about buying into the industry of Marijuana stocks.

5) Tipping Point and Polarization Between Social Democracy Liberalization and National Populism

Brexit, Trump Whitehouse, the approaching Frexit, Greece bailouts version 3.0, Ital-leave. The forces of Populism have been pushing back against 80 years of International trade and liberalization. Seems like the world has reached a political inflection point, if not a full-on change of direction in the last 6 months.

Can we get through this as a planet? Should we even hope to think collectively as a planet. The good news on this front is the internet. There is no putting the Genie back in the bottle. The proliferation of information is here to stay, and I believe is the gateway to a better planet.

I hope and pray that the recent Dutch election is a precursor to more sanity in the political arenas of the democratic world. The mere fact Canadian’s know about the Dutch elections is a testament to how Global we’ve all become; there lies the hope! I am reminded of the saying, “the more things change…” One could argue humanity is defined by nothing more than the struggle itself. My prediction is for more struggle as society continues down the road of evolution, revolution and solution. Stay tuned for the outcome of the approaching French election.

6) Regulation and Changes to the Canadian Financial Industry

As many clients have learned, the financial business is becoming more transparent and more regulated. In June, decisions are expected about changes to advisors’ compensation models. Historically advisors were paid by a combination of commissions and trailer fees. It looks like these will be banned and replaced with a Fee For Service compensation (FCL series funds). This has the potential to lowers the cost for clients; FCL service charges on Non-registered accounts are tax deductible. This change, however, will make joining the industry difficult for young advisors, all at a time when the baby boomer advisors are looking to retire.


Making Predictions is Hard – an Update about the Energy Market

“Making predictions is hard…especially about the future”; one of my favourite expression from the late Yogi Berra.

Today is one such day.   As I’ve indicated to a great many clients recently, opportunity is at hand.  Borrowing further from baseball Lexicon; the key to hitting one out of the park, is to wait for the “fat pitch”, and as you read this, a fat pitch might be metaphorically approaching us from the mound, (or in this case, from next Tuesday’s OPEC meeting in Vienna).

A brief, and Current History of Oil, (some context);

Back in March of 2014 I read an article about the diminishing global oil storage capacity. Oil was so plentiful that countries and companies were resorting to storing oil in giant subterranean salt cavern and ocean-going oil tankers sitting off shore as the world’s storage tanks were within eight months of reaching full capacity. Oil demand was about 95 million barrels/day, supply about 96.5 million barrels/day and growing – there was no place to put the stuff!

At that point it was common knowledge that the Saudis were increasing the production of oil to “buy back market share” lost to the Russians and the US wildcat drillers. Back then hundreds of US companies were opening up previously unrecoverable reserves under the continental plains that run from North Dakota to Texas with new fracking technology and had been able to double US domestic oil production. In a few short years the US had gone from being a net importer to a net exporter of oil.

US Laws enacted during the 1973’ Oil Crisis, were changed in 2015 to enable companies to hold crude oil, (unrefined) in the hulls of ships anchored in US harbours. It was previously illegal to “export unrefined oil”; holding oil in a ship’s hull at port was deemed an export and hence illegal.

Until 2014, the Saudis, having the lowest cost oil reserves in the world, operated as the swing producer to the world. By changing oil production rates they could and did moderate and maintain the high price of oil.  In early 2014 they abandoned this responsibility and effectively rendered the OPEC Oil Cartel toothless. Albertans watched in awe as the price fell from $114 to $27 US by Feb 2016.

PredictionsTo use another famous Yogi Berra quote, “it was deja vu… all over again” – at least for the Albertans. Many of us remember Alberta house prices plummeting in the 80’s.  Alberta oil, aside from being discounted due to its thick and high sulfur content, had the added problem of inaccessibility to global markets– they are a land-locked producer of a global commodity.  By 2014, TransCanada Pipeline had spent six years petitioning the US for permission to build a trans-border portion of a pipeline connecting Canadian production to the refining hub of North America in Cushing Oklahoma.  Understandably, the last thing the US needed was more oil, so the permission was delayed and in 2015 finally denied by Obama’s Presidential Veto. The Canadian response was to transport more oil by train – a more costly and environmentally riskier option.

The Russians, on the other hand, though not part of OPEC, produced 10% of global oil, were impugned with countervailing trade embargos and had assets frozen by the West for invading the Crimean and covertly intervening in the Ukraine. Since wealth and trade are inseparably linked, Russia responded by increasing oil production and exports in exchange for foreign currency and goods, thereby mitigating financial hardship and political instability at home, further compounding the glut….

Turn forward the pages to next Tuesday, (Nov 30th), when OPEC has scheduled a meeting to fine-tune the logistics of which countries will limit production and by how much.  Furthermore, news media has reported that Russians are onside and will add to production limits, (though this could prove to be false).

The Opportunity:

Oil prices are at $48/bbl today. Thursday, Friday and Monday are US holidays. If an agreement is reached between all parties on Tuesday, supply and demand will reach equilibrium and oil prices will increase.  Oil companies have spent the last year reducing staff, cutting capital investment, and parring their dividends.  The best companies are profitable at $30/bbl. Indications are that Trump will overturn Obama’s pipeline Veto within the 1st semester (24 months), further lowering Canadian production cost and increasing accessibility. Oil could find a new equilibrium between $60 and $70/bbl in the next 24 months, increasing Canadian company profits and increasing dividends. One thing is for sure – it’s gonna be interesting to watch.

The Risk:

If no agreements are reached, the equilibrium date would be pushed back.  Prices of oil and oil stocks will soften in the short run, possibly by as much as 20%.  This strategy is not for those with a low tolerance to risk or those with a short time horizon.

There are two prevailing facts that minimizes the downside to a “no agreement” outcome;

1)      Global oil demand is growing at 1 million bbl/day, (approx 1% of 95 million bbl/day). So in one year’s time, (or less) demand will meet supply anyway, and prices will start to rise. Although there is a growing economy for renewable energy, the demand for oil according to the International Energy Agency, will increase by 25% by the year 2040.  The world is not done with oil!

2)      There is a 4 to 5 % natural yearly drop-off or attrition in oil production from existing wells. Production rates falls naturally without doing anything.  This is best illustrated with a milkshake metaphor; when you get down to the bottom of a milk-shake you have to move the straw around through the ice residue to get that last bit of shake. Similarly, in the oil business every hole has to be moved and re-drilled in order to maintain a given flow rate. Just to stay at the current production capacity, companies have to re-invest capital and labour.  When oil prices are low and profits non-existing, there is no capital to maintain the existing production, and workers are laid off, which is a supply diminishing factor in the industry  – this reminds me of the saying, “the cure for low prices are low prices”.

So, where do we go from here?

This is where you come in; if you’d like me to shift some of your portfolio to take advantage of this, I’ll need an email from you, I need a paper trail of our conversation. I recommend and allocation of between 5 and 10% of the Canoe Financial Energy Class fund. Although not without its bumps and gyrations, it is the best in its class (5 star Morningstar rating). It is run out of Calgary by Rafi Tahmazian with a deep understanding of the energy business and a frequent face on BNN. It comes in an F series which is low cost, service fees are transparent, and you can transfer into and out of the fund at no cost, (many of you have owned this funds in the past). As a hedge, the fund is diversified and has a small but growing investment in renewable energy companies.  Here is a link to fact sheet on the fund.

And Now for Something Completely Different: A Morning After Commentary

Most, if not all adult Canadians, have been fixated on election campaigns and results down south. Wasn’t that something? True to form, the Americans never cease to entertain us Canucks. Who’d have thunk – “President Trump” is a thing; even with his small hands!

In the absence of overly expected financial market mayhem, I find my mind wandering to thoughts of new John Oliver episodes; and marvel at the overwhelming calm of the financial markets at the opening bell this morning.


I think the only clear takeaway from this whole ordeal has been to confirm the markets like certainty and abhor uncertainty. Now that Trump has emerged with a decisive victory, nothing happened. Which coincidentally reminds me of a Monty Python skit, “The Adventures of Ralph Mellish.”

All silliness aside, the question on everyone’s mind is “what’s next?” The short answer is “The Donald” has a blank cheque and clear mandate to implement some of his outlandish election promises;

  • build a Great Wall of Mexico,
  • erect trade tariffs,
  • jail Hillary Clinton,
  • abrogate the WTO & NAFTA,
  • label China as a “currency manipulator”,
  • lower corporate taxes, *
  • institute infrastructure spending.
  • oh yeah and finally, Make America great again!

Not only did he win the presidency, which is a clear sign the voting public has turned overwhelmingly against the “Establishment”, but the GOP has a majority in the Senate and the House of Representatives. Which means among other things, Trump will have a minimum unobstructed two years window to appoint Judges to the Supreme Court and thus influence the interpretation of US laws for the long term.

Trade: this is where we join all Non-Americans and get a little anxious. However I remind you, we Canadians are not without a “trump” card. We have two strong suits (pun intended);

1) Everyone likes a Canadian – including The Donald.

2) We got oil – and one of his top priorities is to move the US away from a dependence on Non-North-American Oil.

The full implementation of isolationist policies is possible but won’t come without foreign trade retaliation and the resulting hardship of job losses to those who voted him in. So not the most likely scenario. In fact, history has shown only a fraction of election promises get implemented due to the checks and balances structure of the US system. I expect much of the election rhetoric to be watered down in its final draft.

Marijuana: this could be a real winner, at least for the stoners in California, Massachusetts, and Nevada as they join the stoners in Colorado and Washington. (watch for the share price of potato chip companies to rise)

Foreign Policy: this is the scariest one. I just hope there are good people in the key roles to smooth over Donald’s inflammatory tongue and aggressiveness. Time will tell on this one!


Making Sense of the Nonsense we call, Economics…

Today I share a fantastic 20 min animation on how the economy works. It was created by Ray Dalio the Co-Founder and Chief Investment Officer of Bridgewater Associates who runs the world’s largest hedge fund. Aside from being ask to speak to the forum of world central bankers, his company is credited with having more research resources than the US Central Bank and has created the following Video for the benefit of the world.

It explains economic events that brought Hitler to power, the Great Depression, the Global Financial Crisis (GFC), why life is good in northern Europe, bad in southern Europe, and how the global economy will perform for the foreseeable future. It explains the importance of the most critical factors in the economy: Productivity, Spending, Money and Credit. Like gravity, economics applies to Communists, Capitalist, Fascists, and everything in between. The video is praised by the likes of Bill Gates and Paul Volker.

Money SqueezeMy take away from watching it was that global growth, due to excess capacity, lower productivity, and ageing populations, has been, and will be slow for the long term. So to avoid outright deflation, (a vicious spiral of deferred spending), and due to political gridlock, central banks have been left with the job of stimulating their economies by lowering interest rates and printing money, (Monetary Policy). There are two ways to stimulate growth;

1) Monetary policy, (reducing interest rates and outright printing money) and,

2) Fiscal policy (infrastructure spending through tax hikes or issuance of debt),

Expansionary monetary policy makes it easier to make money and or reduces the cost of debt, which is good for anyone with money/assets, (you & I), and highly indebted people and governments that risk being crippled by high-interest rates. When governments rely solely on monetary policy, as the US has for 8 years, they help the rich get richer by inflating the price of assets but do so at the risk of creating asset bubbles. The effectiveness of additional printing cycles diminishes with each iteration. Super rich people don’t spend all the money they gain from rising asset prices; buying a new fridge for a billionaire doesn’t get much of the wealth gained back into the economy. This might help explain why house prices, stock prices and bond prices are inflating so much.

So the key to fixing the economy going forward is trickier, and consequently, I expect to see future government policies based more on fiscal policy, (borrow, tax & spend). This requires a consensus at the federal Gov’t level. Fixing bridges, highways, building new water treatment plants, and giving tax breaks is a better way to redistribute the wealth, and key to keeping the money circulating in the economy at this point in the cycle. Get ready for a retirement in which the government takes more from the old/rich people and gives to the young/poor. I sense the days of Robin Hood will return. One person’s pay cheque is the source of another person’s income, (when this money is spent). We’ve seen this redistribution recently with the changes coming to the CPP; it is a necessary evil to repair a post-crisis economy.

So what’s likely to happen next?

Possible Negatives:

  • Continued global government fiscal gridlock forcing the use of more monetary policy – continued asset price inflation interspersed with periods of volatility.
  • The rise of protectionism – inefficient for economies, reducing the global living standard, insulating local firms from global competition, with the goal of saving local Jobs.
  • The long-term dismantling of the Euro zone. Northern Europe’s constituents, like Germany, are against paying higher taxes in order to continue bailing out southern European countries’ indulgences,

Possible Positives:

  • Governments overcome their impasses, and implement fiscal spending programs, slowing growing their way out of the fallout we’ve seen from the GFC, now 8 yrs and counting.
  • China’s growth rate stabilizes and their economy successfully transition from an export driven economy to the world’s biggest service and consumer driven economy. (China has 300 cities with populations over a million, the US has 30, and Canada has 3)
  • Long term; new technology improves our lifestyle at a constantly faster pace, (e.g., use of quantum physics to make the internet 100% secure from hackers, introduction of driver-less cars, battery/solar powered cars, falling cost of renewable resources). Here’s an article about the recent discovery of efficiently turning CO2 into ethanol, reducing global warming while increasing the supply of affordable energy.
  • Short term, global oil production caps are adhered to by OPEC and Russia, curtailing oil surpluses while global oil demand continues to rise at about 1% per year. This would underpin a rise in the price of oil, (good for Canada’s GDP).

Where is the opportunity?

  • The economy is in the latter innings of the cycle highlighted by slowing growth and heightened volatility. There is opportunity from unexpected events like Brexit, which present buying opportunities for risk-sensitive fund managers. Unfortunately that particular event was short lived and didn’t depress asset prices low enough to foster a wholesale buying opportunity. It’s never been more important to be patient and invest carefully. To use a cliché: best to win by not losing.
  • Strategies that incorporate downside protection at the expense of upside gains are vital in this environment; stock picking and patience will pay dividends for portfolio managers with depth of resources and scale. Global investing provides a larger investment opportunity set with potential for lower volatility and higher returns.
  • The US elections will not overly impact the long-term market direction, as the check and balance system of the US places limits on presidential power; the USA is still one of the best markets in the world – in spite of which weirdo becomes President!
  • From what I read, the US will increase their interest rates by ¼% per year, (very slowly) until they experience strong and sustained core inflation, (at or even above 2%), and the Bank of Canada might even lower our interest rate in the short term….So we could see the Canadian Dollar could fall to around 70 cents, and eventually climb to about $0.80, on the back of rising oil prices due to rising global demand. Here’s a good link to a recent story in the G&M about the state of global oil prices:—tsx-oil-stocks-are-not-yet-buys/article32172213/
  • Long-term: A greater percentage of retirees, (Baby Boomers), will warm up to the merits or necessities of selling their family home and renting, especially if house prices continue to sky rocket and if they still have a mortgage. The following is an article I’ve picked from a Globe and Mail article:
  • Interest rates will have a slower return to “normal” (5 years), and normal is now 2% lower than where it was 15 years ago. Neutral Interest rates will eventually be 3 % instead of 5%. Need a new mortgage? Ask me about a Manulife One Mortgage- the only mortgage that enables you to skip payments, not make any, or make huge payments, without penalties.

The two phrases, “may you living in interesting times”, and Mark Twain’s quote, “history doesn’t repeat itself, it rhymes”, best summarizes the current state of the financial world. As crazy as things are, I am forced to ask, when have they not been Crazy?

See the big picture, & don’t major in the minors,


3 Concepts to Help Organize Your Finances

BudgetsNapoleon was said to be a genius and was credited for many of today’s common institutions, and many revolutionary concepts in his day. One of the things that made him supreme in my mind was his reputation as an organizer. According to historical accounts he never slept the night before a battle. He was up all night writing out orders by candlelight for every possible contingency in a battle that had yet to unfold. He knew that in the fog of battle, time was important and little details could make the difference between victory and defeat. In today’s world, one of the biggest battles people face is how to make ends meet financially.

Rarely are household financial courses offered in high school. If our parents didn’t have a good grasp of finances, then all too often we were destined to repeat their mistakes. Many people have become resigned to a life of quiet desperation. Part of the issue is financial literacy. There is a language of finance, and it takes a bit to learn what is meant by certain terms. Concepts however are even more important in mastering personal finances. There are a few basic concept which if understood and applied can make the difference between financial victory and defeat in your own households.

Assets vs Goods

The first concept, though not necessarily the most important, would be to understand the difference between an asset and a “good”. In this day of rampant consumerism, it is not uncommon for people to regale us about the triumphs of a day’s shopping and emphasizing the “great deal” they got. Highlighting their virtues and shopping acumen in the process. One thing to keep in mind, however, is that goods depreciate (diminish in value over time), while assets will hold their value or even increase in value.

Matching Assets with Debt
I remember a business case in University in which the professor explained how a business went bankrupt, (the same could apply to a person), when they financed a short term asset with a long term Debt. Why does that matter, I recall asking. The professor illustrated the answer by using an absurd example. He explained that by miss-matching debts and assets, it would be the same as the person who bought a Big Mac using a credit card and financed it over several months… all traces of the Big Mac would be long gone, yet the interest payments would be still felt for days and even months to come. So he said it’s ok to use debt to buy assets, but make sure the asset with a short lifespan are paid for with short term debts, and conversely assets with a long life span are financed with long term debt; don`t use a credit card (short term debt) to finance a house (long term asset).

In 14 years as a financial planner, I would say this is the most important tool people can use to ensure their financial success. I have learned 3 different approaches to budgeting. 1) the detailed budget, 2) the vague budget, and 3) the No-budget-what-so-ever method. When I meet with clients for the first time, I am surprised when I meet one that has a budget and brings it to our first meeting. Clients often say that they run one in their head.

I recount to clients a concept I first learned from a radio show on CBC in which the guest said, ‘financial independence is extremely simple: just live on less that you make’. I frequently chant the following phase to myself when making a purchasing decision that involves increasing my debt level. The saying goes: ‘When your outgo exceeds your income, your upkeep will be your downfall’. According to Google its origin is attributed to Bill Earle.

Many people don’t budget because it takes time, its tedious, its gets outdated in a short period due to changes in our lives, and sometimes it causes ‘marital dis-harmony’. I’ve been told that money is the biggest cause of divorce in North America. Be that as it may, it’s still the single most important step to financial security. Instead of budgeting every month, I will create an annual cash-flow projection once a year or if things are looking tight. It helps me understand where our family spends money, how much money we, (net of taxes), bring in and when. It’s like a series of budgets all linked together. It has a beginning balance, income and expenses for each month, and an ending balance that becomes the beginning balance for the next month. I’ve attached a copy and you should be able to modify it to reflect the particulars of your life. The reason I use this for budgeting is due to its flexibility… in my world I have house insurance due in July and extra bonus income sporadically throughout the year, so it’s nice to know if buying Christmas presents in December will hurt when house insurance is due in July.. I hope this helps

Click the arrow to download the Sample Budget excel document.

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