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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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.

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May 122016
 

Bar Stool Economics

Capitalism in the United States is in serious disrepute. The Bush tax cuts have been said to give the top 0.1% of Americans an average of $520,000. That is over 400 times the average tax cut received by middle-class households. Many people are upset at how tax cut policies seem to disproportionately benefit the upper class. If anything, shouldn’t tax breaks help the poorest people? 😕 Well to understand how the tax system works let’s take a look at bar stool economics.

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The origins of this parable have been attributed to Professor T.Davies from the University of South Dakota and R. Kamerschen from the University of Georgia. The following is a modified version of the original.

Suppose 5 friends go out for drinks and the total bill comes to $100. If they paid their bill the same way we pay our taxes, in proportion to income, then it would go something like this:

  • The first 2 men, the poorest, pay nothing.
  • The 3rd man pays $4.
  • The 4th man pays $19.
  • And the 5th man, the richest, pays $77

The 5 men are happy with this payment arrangement so that is what they decided to do. 🙂 Then one day, drinks at the bar were on sale, and the total bill for the 5 gentlemen came to $80. To make it fair the men still wanted to pay their bill the same way taxes are paid. So the bartender reduced each man’s bill by roughly the same amount based on their economic status. The first 2 men were unaffected because they simply continued to drink for free. The remaining 3 patrons split the $20 in savings, and paid the following amounts:

  • The 3rd man paid $2 instead of $4 (50% savings)
  • The 4th man paid $14 instead of $19 (26% savings)
  • And the 5th man paid $64 instead of $77 (17% savings)

Each of the paying 3 men spend less for their drinks than before. And the first 2 men continued to drink for free. But once outside the bar, the men began to compare their savings. “I only got $2 out of the $20 in savings,” complained the 3rd man. “Don’t look at me,” replied the 4th man. He pointed to the 5th man and said, “he received the majority of the $20 savings. The wealthy get all the breaks.”

“Wait a minute,” yelled the first two poorest men who didn’t pay. “We didn’t get any savings at all. *harumph* The system always exploits poor people like us.”

Similar to wine tasting, the discount for the men can be seen as good or bad depending on their mental frame of reference. The first 4 men ganged up on the 5th man and patronized him for being too greedy. Then they went to a Bernie Sanders rally without inviting their rich friend. 😛 Feeling betrayed and ostracized the 5th man didn’t show up to the bar the following night. The 4 remaining men decided to drink without him anyway. But when it came time to pay they discovered an unpleasant surprise. They didn’t have enough money between all of them for even half of the bill. 🙁 It appears they were in a bill pickle. 😀

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May 282015
 

Economics is the only profession where you can gain great eminence without ever being right. Remember earlier this year when just about everyone anticipated higher interest rates, but then the Bank of Canada slashed rates instead? If mainstream economic predictions were right interest rates would be a lot higher by now, our wages would have grown to keep up with the cost of living, and Vancouver real estate would become more affordable. But that is clearly not the world we live in today. Nobody has a crystal ball to see into the future. If they did, the only people winning the lottery would be fortune tellers. It’s funny how the same people who laugh at fortune tellers take economists seriously. 😛 Okay, enough bashing on economists. They are actually good and respectable professionals. And we need them to make weather forecasters look good. 😛 Sorry.

Economics is complicated, but it doesn’t have to be hard. One way to understand the current situation we’re in is to read more history, and fewer forecasts. If we’re going to buy a specific stock we can look at its historical chart and determine what events caused it to move higher or lower. Reading stories or biographies of famous investors like George Soros, Peter Lynch, or Benjamin Graham can give a sense of how the smart minds think about situations and prepare us for when history repeats itself.

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Financial markets have a very safe way of predicting the future. They cause it. 😀 But don’t count on anyone to tell us when and how the next recession is going to happen. My Apple shares are up 50% over the last year, some bulls believe it still has room to rise. But bearish pundits think the stock market could correct at any moment. Some think the Canadian real estate market will remain elevated, while others below the bubble will burst so it’s better to rent than to buy right now. At the end of the day all of those are just peoples’ opinions. They’re only right until they’re wrong.

There will always be conflicting forecasts. Markets can rise and fall, but not do both at the same time. There are two sides to the same coin. When advocates of one side are right the other side loses. But there’s actually a third side to the coin that not everyone knows about; the edge! That’s where we want to be. We want to straddle the edge so we can take advantage of both sides, be it bullish or bearish, and spread out our financial risk. We can’t predict the future but we can sure prepare for it. 🙂

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Random Useless Fact

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Feb 062015
 

How Money is Created

For a country’s GDP to grow there needs to be economic expansion, which means people must earn and spend more money. But in order for additional money to exist somebody has to create it first. That’s where you and I come in. 🙂 Money is created whenever we borrow money from a bank. When we take out a $1,000 loan, for example, $1,000 of bank credit is instantly created which we can cash out and spend, which adds $1,000 into the existing currency supply in the economy. This $1,000 did not exist in the world yesterday, but it does now because we created the money by borrowing it into existence. This increases the country’s nominal economic output. Nice. 🙂  Most of the world’s money today is created this way. Even though we are now $1,000 in debt, the nation overall is better off because our extra spending just becomes income for other people.

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The opposite phenomenon can also happen. If we pay off our $1,000 loan then that money would cease to circulate in the economy and be destroyed forever through debt cancellation. This is deflationary and is what every Central Banker in the world wants to avoid. 😕

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