Aug 012016

Stock Markets Reach Record Highs… Again¬†

Both the Dow Jones and the S&P 500 indexes have climbed to all time highs in late July. ūüôā But corporate earnings have been stagnant and economic growth remains weak. Restaurant sales have slowed. The U.S. economy only grew a disappointing 1.2% in the second quarter, well below expectations. ūüėē

So what’s producing¬†so much excitement in the stock market? In short, I believe it’s largely caused by¬†Negative Interest Rate Policies (NIRP). For example, in Europe the benchmark lending rate is negative 0.4%. Usually the bond issuer pays interest to the investor. But with negative rates, the investor pays the issuer.¬†Currently about 1/3rd of the world’s government bonds are producing negative yields. Investors can’t get rich by holding these securities¬†anymore. So in this kind of¬†environment bonds really hold people down.?

As a result of NIRP, more investment capital has moved from the bond market to relatively stable stocks. These tend to be companies that operate gas pipelines, railways, utilities, telecommunication services, and other infrastructure that are recession resistant. Last year I wrote about how to easily make $75 of annual income without using any of my own savings by using leverage to buy shares of TransCanada Corp (TRP.)


I purchased TRP stocks for $42 per share. I mentioned at the time that analysts had an average price target of $57.50 per share. This doesn’t always happen, but sure enough TRP is trading at roughly $60 per share today. ūüėÄ So not only am I making $75 a year in dividends, but I’ve also made $1,800 in unclaimed capital gains so far. ūüėČ

In normal circumstances this kind of price movement in a large cap, blue-chip company wouldn’t happen. But due to a lack of viable investment alternatives, an influx of additional buyers¬†has pushed up TRP and many other relatively safe stocks.

Increasing Valuations and Risk

Unfortunately, NIRP produces asset bubbles and may cause the markets to behave precariously. The chief executive of DoubleLine Capital, who oversees more than $100 billion in assets, recently said¬†that many asset classes look frothy and his firm continues to hold gold, which has also climbed¬†due¬†to¬†NIRP. ¬†At the end of July gold reached $1,350 per ounce, the highest monthly close in years!¬†Stock investors have entered a ‚Äúworld of uber complacency,‚ÄĚ said¬†Jeffrey to the¬†media.¬†“The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong. Continue reading »

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. ūüôā 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. ūüôā¬†¬†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.


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. ūüėē

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Oct 132014

The trickle down effect

It has been said that if we cut taxes for the rich and help profitable businesses make even more money then the economic benefits would trickle down from the top to the rest of us. But for many in the working class this has simply not been the case. ūüôĀ


14-10-household-income-us treading water The top 1% have never been wealthier, but the rest of us still face many financial roadblocks. Both consumers and governments of all levels are still carrying a lot of debt. However real incomes in the U.S. have been slowly declining since 2008. Up here in Canada our debt-to-income ratio is near an all time high.

We often receive conflicting¬†messages from policy makers. The Canadian Central Bank is keeping rates low to encourage consumers to spend and stimulate the economy. But at the same time it says that rising consumer debt is a major risk¬†in this country. That’s right,¬†patronize consumers for their debilitating debts when¬†the Central Bank is responsible for¬†creating the cheap money in the first place. Sound logic,¬†Mr. Poloz. ūüėõ

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