Aug 042020
 

Past and future predictions

Last year I predicted rough waters for 2020’s economy, and suggested 4 investments to protect against uncertainty.

From November 2019

From a November 2019 blog post

How did those suggestions work out so far?

  • National real estate prices are +7% from last year.
  • Year to date my silver stocks (WPM.TO) is +79%.
  • Major telco stocks are down by about -3%.
  • XCB.TO, an ETF that tracks corporate bonds, is +8%.

An equal weighted basket of my picks would have earned a 23% return year to date. Not bad. 😀 Most index funds have only produced single digit returns during the same time.

What about for 2021?

Here are my top investment picks for the next 6 to 18 months.

  • North American real estate
  • Gold and silver
  • Large cap U.S. technology stocks

The rest of today’s post will attempt to unpack my reasons for choosing these investments. 🙂

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Jun 082020
 

The stock market is not the economy

The global economy is not doing well so far this year. Pacific Investment Management Co (PIMCO) believes the “forced closure of businesses across the United States and surge in unemployment will cause U.S. growth to contract by 30% in the second quarter of 2020.” The U.S. unemployment rate rose to a high of 14.7% in April. The recent protests, civil unrest, and calls to defund police forces have only made the future of the country more uncertain.

Yet the North American stock market rallied 11% over the last month. The S&P 500 just broke above the 200-day moving average, signally a bullish trend. The Nasdaq is at an all time high. Why did this happen? Aren’t markets suppose to hate uncertainty? Well the answer is because of fiscal and monetary stimulus. 🙂 Central banks are so afraid of deflation they are doing whatever it takes to keep the economy moving.

Both the U.S. and Canadian governments are giving away billions of dollars. More than 7.8 million Canadians have applied for the CERB government assistance program which pays $2,000 a month. That’s literally 40% of all employed people in the country. The Bank of Canada has engaged in QE, buying up Canadian mortgage assets. In the United States, the Federal Reserve is now sitting on over $7 trillion of financial assets. This has never been done before.

Since I had some extra cash lying around I decided to buy some more stocks. I picked up 800 shares of Canadian Western Bank (CWB.TO), a financial stock that pays a 4.5% annual dividend. I also added 700 more shares to my Suncor (SU.TO) position. This adds about $37,500 worth of new stocks into my investment portfolio. 🙂 I believe the worst part of 2020 is over and the markets should be higher by the end of this year.

 

A debt fueled economic system

Canadian household debt as a percentage of GDP has been steadily climbing over the past 20 years, rising from 58% in 2000 to 99% in 2019. But according to CMHC, we could see that figure go as high as 130% by the third quarter of this year. That’s a massive jump in a short amount of time.

Financial ETFs saw $123 million in net inflows in May. U.S. mortgage applications are up 62% and approaching all-time highs. More debt means more credit which leads to higher asset prices. As Robert Kiyosaki would say – the rich hold assets and the poor have debt. This has always been the case so it’s not surprising. What’s new however is the speed at which the wealth gap is accelerating.

Under normal market conditions a downturn would hurt rich households the most because the stock market is disproportionally held by the wealthy. This is the market’s natural way to rebalance when things get out of hand. Those who speculate in asset bubbles rightfully get burned if they take on too much risk. But thanks to government intervention the opposite is happening today, – and the rich are actually getting richer.

We may see a second wave of the virus coming in the fall or winter, but that probably won’t have any lasting impact on the stock market. 🙂 Don’t fight the Fed. Much like losing your feet to a bear trap, if you bet against the financial markets long term you will be defeated. 😎 This is why I continue to buy stocks and bonds even if things appear to be bleak and uncertain.

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Random Useless Fact:

There are about 600 billionaires in the U.S. and only 44 in Canada.

May 252020
 

What is driving Canadian FIRE?

Everyone is affected by the FIRE economy in one way or another. FIRE is an acronym that stands for Finance, Insurance, and Real Estate. Together, these 4 industries are growing over five times faster than the general economy and represent about 1/5th of Canada’s total economic output. FIRE is especially important in BC. Although it employs just 6% of the province’s workforce, it generates 24% of the province’s GDP.

Other industries such as manufacturing and mining produce things of intrinsic value so their growth tends to be linear. But FIRE industries can scale more quickly. Finance and insurance products often involve derivatives, annuities, and other intangible products. Banks and credit unions can literally increase the credit supply through fractional reserve banking – essentially creating money without actually producing anything material. The real estate industry can unlock value from existing land assets with re-zoning and densification. These advantages inherent in the FIRE economy allow for faster expansion and exponential growth.

Another tailwind for FIRE is population growth. Our charismatic leader wants to welcome 341,000 new immigrants into Canada in 2020, more than from previous years. All of those people will need homes. Many will require a mortgage and insurance – further expanding the FIRE industries.

 

How to invest in the FIRE sectors

FIRE should continue to outgrow the general economy in the future. The most direct way to capture some of this growth is by working in one of these fields. I have some friends who work in finance and real estate. They are all making a decent living. 🙂 If you are just starting school or considering a career change, this can be something to think about. But for the rest of us, investing in FIRE businesses that pay dividends should pay off well in the long run.

 

How safe is playing with FIRE?

The risk of investing in the FIRE economy is a slowdown in these industries. However policy makers won’t let that happen easily. Instead of allowing markets to naturally go up and down, government officials have proven through their actions that they intend to accommodate perpetual economic growth. A real estate crash could drag down all other industries. No governing body wants to be responsible for a housing lead economic recession, or worse.

Continue reading »

May 112020
 

Why inflation matters

U.S. government bonds in 1990 were paying investors 8% a year. That sounds amazing! Especially for a low risk investment. 🙂 But not everyone was buying them. Why? Because investment returns don’t tell the whole story. The inflation rate that year was 5.4%. That means the real rate of return on those bonds was only 2.6%. Stashing $100 under a mattress would have lost $5.40 in value during 1990. As Ray Dalio says, “cash is trash.”

 

Obtaining a mortgage from an unconventional lender

Earlier this year I bought a rental property and took on a new mortgage at 2.44% fixed interest rate for 5 years. After asking around different banks I decided to use monoline lender MCAP. They deal with broker channels and often have lower rates than the big banks. 🙂

negative interest rate mortgage

Since this is an investment property the interest on the mortgage is tax deductible. My marginal tax rate is about 30%. So my effective interest rate after tax adjustment is 1.71%. But this is the nominal rate. To get the full picture we have to subtract the inflation rate. Last year Canada’s official inflation rate was 2.25%. So my real mortgage rate equals the nominal rate (1.71%) minus the inflation rate (2.25%) which comes to -0.54%.

So I’m effectively paying a negative interest rate. I’m earning 54 basis points to borrow money. Woot! 😀 Personal finance author Robert Kiyosaki says smart people use debt to get rich. He’s right. I’m growing my net worth by literally having this mortgage.

The historical average inflation rate in Canada has been about 2% annually. Let’s assume it will continue to average 2% for the foreseeable future.

This is bad for my mortgage lender. The asset they are holding (my mortgage) will slowly lose value over time. Fortunately for them the 2.44% interest rate they charge me is still higher than the expected inflation rate.

 

Continue reading »

Apr 272020
 

Building an Asset Column

There were three events that greatly impacted my financial life. This is part two of three, where I will be writing about asset columns. The main idea is to buy income producing assets that generate perennial money over time.

I first came across this concept when reading the 1997 book Rich Dad Poor Dad, by Robert Kiyosaki. The book primarily focuses on real estate. But stocks and bonds can also be included in an asset column. 🙂

 

The book that changed my outlook on money

I picked up Rich Dad Poor Dad when I was 17 after a friend suggested it to me. Many of the concepts Robert discussed in the book such as taxes, inflation, and hard assets were completely new to me. But what fascinated me the most was the idea of financial independence. And also how to build wealth through investing in assets.

This was the first time I witnessed concrete examples of how to take actional steps to create a “column” of financial assets. A properly constructed asset column should grow by itself over time.

From learning about compound interest earlier that year I already knew how to make time work for me. And now thanks to Robert’s book, I learned how to get money to work for me. The two concepts combined lead to a breakthrough moment in my financial education. 😀 It completely changed my perspective about money.

Accumulate all the assets

Before I had thought of money as something people earn and spend in order to live. The idea of retiring early or becoming a multi-millionaire had never occured to me. But after reading the book, I began to see money from a completely different angle – one that involves assets and liabilities. I learned money isn’t only good for spending. It’s also good for generating more money. The poor and the middle class work for money. But the rich have money work for them. Robert explains how to multiply your investment returns with a fancy strategy call leverage. 😉

I learned that the rich buy assets first. Then use the income generated from their asset column to buy wants and luxuries. Their lifestyle is funded by money working for them. Meanwhile the poor and middle class tend to buy luxuries first and don’t have much in terms of assets. So their lifestyle is funded by their own “sweat, blood, and children’s inheritance.”

 

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