Oct 262015
 

What a Liberal Government Means for Canadian Investors ?

Last week the charismatic Justin Trudeau lead the Liberals to win the 2015 federal election. I’m sure his good looks has nothing to do his popularity and success. 😛

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Justin pledged to make meaningful policy changes to the country that could benefit millions. But will his commitments help you? The jury is still out on the long-term effects, but here’s a TL;DR summary of what Trudeau’s government means for Canadian personal finance and investors in the short term.

The new Liberal majority government will…
HelpHinder
  • spenders
  • low-income seniors
  • stock market investors
  • students
  • most middle-class workers
  • savers
  • high-income households
  • single-income nuclear families

These are only generalizations. The rest of this post will explain individual policies that could affect your pocket book. Keep in mind that just because politicians promised something during their campaign, it doesn’t mean they will always follow through. Any of these policy changes below could be altered or cut completely going forward.

Borrowing To Invest. ? Going back into Deficit. 

According to the federal finance department, Canada’s government had a $1.9 billion surplus in the 2014-2015 fiscal year. 🙂 But the new Liberal government under Trudeau plans to run a $10 billion deficit for each of the next 3 years, before balancing the budget again in 2019.

Going into more debt as a way to expand economic output isn’t necessarily a bad idea. $10 billion is peanuts relative to our $1,827 billion/year economy (0.6%.) Also, our national debt to GDP ratio is quite low by international standards, which means we can borrow money at ridiculously low costs. New 10 year Canadian government bonds are currently yielding 1.5% in annual interest.

After factoring in inflation, there might actually be no real cost to tax-payers, lol. 🙂 Craig Alexander, the Vice President at the C.D. Howe Institute, said that despite digging deeper into debt, the debt to GDP ratio of Canada is still going to decrease over the next three years because our GDP is expected to increase as well. 😀

About a third of the new spending will go towards much-needed public transportation and infrastructure development and repairs. This means building more roads, highways, bridges, etc. This should improve the country’s productivity because gridlock and urban densification are causing major problems right now in large cities such as Toronto, Montreal, and parts of Vancouver. The other two-third of public spending is planned for social housing, seniors centers, and clean energy projects like solar and wind farms.

Due to more deficits and fiscal stimulus the Bank of Canada will be less likely to further cut interest rates for the time being.

What this means for you: Invest your money. Historically the S&P/TSX Composite performed well during times of deficit spending. Below is a graph I put together using stock market returns and government budget information courtesy of the CBC. During the two decades from 1995 to 2014 there have been 9 years where the government ran a deficit budget. And the stock market had positive returns in 8 out of those 9 years.

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Economic stimulus increases employment and grows the economy so people and businesses feel more optimistic about their investments which tend to be bullish for the financial markets. 🙂 In particular I would consider investing in stocks or sectors that have exposure to financials, cannabis, industrial goods, construction, utilities, preferred shares, and green technology (solar panels, wind, etc.)

Goodbye annual $10,000 TFSA contribution limit ?

The Tax-Free Savings Account annual contribution limit will revert back to $5,500 and increase in $500 increments based on inflation. This will make it harder for Canadians to save and won’t benefit the middle class. There’s a rumor that the TFSA only helps the rich get richer. But that’s baloney! The TFSA actually helps anyone who wants to save get richer. Here’s a table courtesy of the National Post which shows that many low and middle-income families still managed to max out their TFSA contribution rooms in 2013 when the limit was still $5,500.

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Jul 162015
 

Earlier this year a Vancouver house with a $5 million assessed value was put on the market for $6 million. Guess how much it ended up selling for? Hint, it’s in the upscale Shaughnessy neighbourhood. 🙂

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After 12 days and multiple bids from 10 prospective buyers the 78 year old home was sold for $8 million, lol. Welcome to Vancouver. You’re welcome to buy a house here, as long as you’re willing to pay $2 million over the asking price. 😛

Our hot real estate market is about to get even more extreme because yesterday morning the Bank of Canada announced another 0.25% rate cut. Holy pumpernickel! Now it will be even harder to raise rates in the future without pricking the bubble. 📌

The Effects of the Rate Cut ✂

The overnight lending rate was lowered to 0.5% in an attempt to boost capital expenditure and drive companies to spend more on hiring and manufacturing. However this will also unintentionally persuade already heavily indebted consumers to take on even more debt.

The problem with monetary policy is that it affects the entire country even though places like Vancouver really don’t need any further easing of credit. A better solution would have been to address the faltering economy in some parts of Canada, like Alberta, using targeted fiscal policy instead of a blanket rate cut. But that’s just my personal opinion.

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Feb 182015
 

The government of B.C. just tabled another balanced budget. Finance Minister Mike de Jong’s latest budget projects a surplus of $284 million for 2015-2016. 🙂 This means B.C.’s $63 billion public debt is slowly being paid down. B.C. may be the only province in Canada to avoid falling into deficit amid plunging oil prices. But there’s something else that the finance minister didn’t tell us. How did this surplus happen exactly?

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In order for any government to have a surplus it must take in more money than it spends. Government revenue comes mostly from tax payers. In the past I have blogged about how money in the economy is generally created by people borrowing from private banks. So I believe a major reason the B.C. government is able to balance its books is because consumers in B.C. are going further into debt. We’re essentially shifting the debt burden from the government to the private sector.

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Oct 062013
 

The US government is partially shut down. About 800,000 U.S. government workers have been off the job for almost a week now because Congress failed to pass a key funding bill.

This has happened 17 times in the past before, the last time was in 1995 when the government shutdown lasted for 3 weeks. 800K is less than 1% of the total US work force so it won’t affect the overall economy much 😐 If the shutdown only lasts for 2 or 3 weeks, there’s nothing to worry about unless you’re one of those people who are directly impacted. So what does this mean for Canadians? Not a whole lot 🙂 The impact of the shutdown to our economy up here is measured only in the decimal points.

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However, here is what we need to know.

  • Our Loonie will probably rise in the short term. An exchange strategist with Nomura Securities in New York speculates U.S. capital could flow into Canadian treasury bills as investors look for a safe place to hold their cash. So if you’re thinking about shopping cross border I suggest visiting the US now, instead of waiting because it will probably get more expensive to buy US dollars over the next couple of weeks.
  • The US stock markets will be volatile going forward since the federal government isn’t releasing important economic data that investors need in order to make an informed decision. Expect our TSX to hit some choppy waters as well.
  • Exporters beware. Canadian businesses with contracts with US companies or the US government might experience complications. So if you run an export business be prepared for the possibility of delayed payments or slower business from US customers.
  • US National parks and many other tourist attractions are closed so if you were planning to visit the National Zoo in Washington, now’s not the time.

The bigger issue right now is can Congress agree on a budget before October 17th so they can raise the debt ceiling. If the debt ceiling isn’t raised then the US government will have to default on its debts. This could create a $600 billion hit to the US economy. National GDP could fall 4% which would quite literally put the US back into another recession, which will significantly impede Canada’s growth as well.

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Random Useless Fact: Some animals can detect sound at a higher frequency than humans allowing them to hear noises we can’t.

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