Mar 242016
 

Gradual Change

According to the U.S. government, the country only grew 1% in Q4 of 2015. But that’s still better than Canada. Our GDP up here only increased 0.8%.  It doesn’t feel like the economy in either country is going to pick up any time soon. Personally I don’t mind slowing down or even contraction. Slow economic times is a natural part of the market cycle because it helps with the price discovery mechanism and prevents bubbles from becoming too big. But of course politicians want to encourage more growth all the time which means investors have to be smarter and more cautious about where to deploy capital.

One concern that affects everyone in the world is an aging global population. Japan is leading the charge on this one. Many Japanese couples grow fruit trees and live to a ripe old age. According to the World Bank, Japan has the oldest demographic with 26% of its population being age 65 or older. We all know what happened in Japan for the last 20 years. It’s GDP is basically unchanged from 1995 to 2015. Same goes for Japan’s stock market. Any money thrown into the Nikkei 225 index 20 years ago would have produced virtually no gains as of now. The couch potato method of index investing doesn’t always work for everyone.

The percentage of Canadians who are 65 or older is about 17% today. In the U.S. it’s about 15% of the population. We are still a long way off from Japan’s 26%, but it’s worth noting that 17% of Japan’s population was 65 years or older in the late 1990s.

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I would continue to invest in large, profitable companies. But high quality stocks have been bid up so much that there isn’t much room for them to go higher in the short term based on fundamentals. This is why I look at alternative places to invest as well.

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Oct 102015
 

New Purchase: Royal Bank of Canada Stock

September has historically been a bad month for the stock market, and this year was no exception. This is why I didn’t invest aggressively last month. However now that it’s October, I decided to get back into buying more equities. 🙂

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So after looking through my watch list of different companies, I’ve decided to invest in shares of Royal Bank of Canada. 😀 I usually don’t keep disposable cash lying around so last week I borrowed $4,000 from my TD margin account and transferred the money into my TFSA to buy 55 Royal Bank shares (RY.TO) at $71.30 each.

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I know purchasing about $4K worth of stocks with no money down sounds a bit risky, but I think I’ve made the right decision here. 😀 The stock pays me a 4.43% dividend yield, which happens to be more than the 4.25% interest I’m being charged for the margin loan. As long as I plan to hold the stock until my retirement and can service the cost of the loan, then I don’t see any downsides to financing this entire purchase with debt. 🙂

Royal Bank Stock Analysis

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After doing some research and analysis on this company here are some reason why I chose to buy this stock.

  • It can print currency. Due to fractional-reserve banking, all chartered banks can create new money through lending. This license to manipulate the money supply in the market has many unique advantages.
  • Safety and stability. RBC is currently the largest company in the country, worth $106 billion by market capitalization. An economy of scale offers RY a competitive edge against smaller rivals. Even if Canadian banks run into solvency problems in the far future, the CMHC or other Crown corporations will probably step in to bail them out. In the U.S. the government’s TARP program in 2008 transferred $431 billion to struggling U.S. banks.
  • Growing profits. Royal Bank continues to deliver earnings growth year after year. According to stock analysts the estimated earnings in 2017 will be around $7.35 per share, which would make RBC 19% more profitable than last year’s actual earnings.15-10-royal-bank-stock-earnings-growth
  • Attractive valuation, relative to historical averages. The P/E ratio is used to determine how much investors are willing to pay for a stock. A high ratio signals that buyers are willing to pay a premium for the shares. But lately the trailing P/E ratio of Royal Bank (Blue line below) is at the lowest it’s been in years! This P/E compression won’t last forever so right now looks like a good time to start accumulating a position.15-10-ry-royal-bank-price-to-earnings-ratio-historical
  • Growing dividends. According to its investor’s relations, RY has increased dividends by more than 400% since the year 2000. It increased dividends almost every year, except during the financial crisis period.
  • Protection against rising interest rates. RBC holds about $463 billion in net loans. If it can charge even 0.25% more interest on average, then that’s an additional $1.16 billion of revenue every year, minus loan lost provisions. A rising interest rate environment benefits all banks. The more interest homeowners pay for their existing mortgages over the next 25 years, the more money Royal Bank can make from those loans. 🙂
  • Potential split soon. The stock tends to split 2:1 when each share reaches around $80 to $90. The most recent split was in 2006, and then in 2000 before that. The share price is currently around $74 today. Stocks splits create more demand since each share becomes more affordable to own for new investors.

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Jan 232015
 

Today’s post is about something of interest to a lot of people. 😀 Earlier this week the Bank of Canada surprised just about everyone with an interest rate cut from 1.00% to 0.75%. The Canadian dollar dropped to the lowest it’s been in years. Over 20 economists were surveyed prior to the Bank’s bomb shell reveal and not a single one of them expected the news, lol. Maybe economists are just there to make weather forecasters look good. 😛

Even our country’s most prolific real estate blogger, Garth Turner, was taken by surprise. Just last week a commentator on his site named BlackDog pointed to a report which predicted this week’s interest rate cut, and Mr. Turner promptly replied to dismiss the report. Not even a best-selling Canadian author of 14 books on economic trends saw this announcement coming. It just goes to show how difficult it is to read the minds of central bankers. 😕

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The Rate Cut is good for:

  • Debtors who have variable rate mortgages, lines of credits, car loans, student loans, or other types of floating rate debts. Every $100,000 of debt one has will translate to about $20 a month of LESS interest one has to pay. 🙂
  • Investors in the stock market. Lower cost of borrowing is a type of monetary stimulus that has the same effect of printing money. The U.S. stock market has gained 100% over the last 6 years since it began it’s Q.E. programs.
  • Existing bond holders. Lower coupons on new bonds mean existing bonds are worth more.
  • Industries like manufacturing, exports, hospitality, tourism, companies with primarily $USD revenue, or any other businesses that benefits from a lower Canadian Loonie.
  • People who have debt in general. Lowering interest rates is inflationary which diminishes the value of one’s debt.
  • Home owners. Rate cuts drive real estate prices higher.

The Rate Cut is bad for:

  • Savers. High interest savings accounts are looking less attractive with the threat of inflation.
  • Consumers. Canadians import a lot of food and staple items from the U.S., which will cost more for us with a lower $CAD.
  • Cross border shoppers. Trips to the U.S. will become more expensive.
  • People living on a fixed income, like pensioners.
  • Retailers who’s suppliers are from outside of Canada

Thank you Stephen Poloz for this rate cut. 🙂 I appreciate your continuing support to prop up the already inflated housing market in Vancouver and increasing my home’s value. You’ve successfully penalized all the savers and risk adverse members of the investing community by lowering the returns on their GICs and term deposits. You have instead rewarded the speculators and heavily leveraged investors, such as myself, by leaving more money in our pockets, 😀 and encouraging even more borrowing activity! 🙂 Hurray for cheaper financing and more incentive to use debt because that’s exactly what Canadians need more of right now. I applaud your push for higher inflation with this rate cut. The 2% CPI in 2014 just wasn’t high enough. I’m sure making it even more expensive to live in this country is exactly what consumers want, especially when more people are out of work now than a month ago. 😛

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Jan 142015
 

The basic concept of debt is simple. It’s when someone borrows money from another person. But once we start looking at different forms of debt such as sovereign debt, treasury bonds, mortgage-backed securities, demand loans, etc, it can start to sound like a different language to many of us. 😕

Even the money in your wallet right now is just another form of debt. It may not be your debt but if you trace back that money to its initial point of creation you’d discover who’s debt it belongs to. 😉

Year of the Debt

It has come to my attention that there is a lot of misinformation and confusion about the topic of debt on the internet. That’s why I’m making the proclamation that 2015 will be the year of the debt. I dedicate this year to write more about debt and its impact on our lives. I have even created a new section on the blog that’s all about debt.

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Most consumers are told that being in debt will hold them back from spending, investing, and living the life they want. But this is not entirely true.

Canadians now have more debt than ever before yet our average household net worth continues to reach record highs. So debt and wealth doesn’t have to be contradictory. In fact, often times debt can increase our financial well-being.Alberta has the highest household debt of any province, but they also have the highest household incomes. 🙂

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Oct 072014
 

Difficult to Refinance

You know the credit market is tight when the former Chair of the Federal Reserve can’t even refinance his mortgage. 😛 If that’s of interest to you, you’re not a loan. 😀 Ben Bernanke graduated with a Bachelor of Arts in economics in 1975 from Harvard University. He later received his Ph.D. in economics at The Massachusetts Institute of Technology (MIT.) Bernanke once even taught as a professor at Princeton University. He was also the chairman of the Department of Economics there from 1996 to 2002. But perhaps he is most notably known as serving 2 full terms as chairman of the central bank of the United States. He had control over the monetary policy of the world’s largest reserve currency. In other words he was arguably the most powerful and financially influential person on the planet.

So imagine everyone’s surprise when his request to refinance his mortgage was denied. 😯 As the Chair of the FOMC his salary was nearly $200,000 a year. However since he no longer has an impressive W-2 (T4 slip in Canada) he does not meet the requirements anymore of someone with a “stable income.” Nevermind he now makes $200,000 each time he presents a speech. Or that he currently has a $1 million book contract. Or that his net worth is over $2 million. All the bank sees is a person who was working over the last 11 years, and is now unemployed. The metrics by which financial institutions decide who to give loans to is flawed to say the least. Anyway the balance on Ben Bernanke’s mortgage back in 2011 was $672,000. It was a 30 year fixed-rate loan at 4.25% interest rate.

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Many financial news sites have already discussed this story. However hardly anyone is talking about the most important question. Does it seem strange that a multi millionaire, who has always made a lot of money, still have a $672,000 mortgage at age 61???

Perhaps it shouldn’t. 🙂

The reason why Ben Bernanke likes to stay in debt

My investment strategy has always been to follow what the top 1% of the richest are doing with their money. Ben Bernanke’s behaviour of using leverage is perfectly in line with other like minded individuals.

Here’s why it makes sense to take on debt, even when he could pay off his mortgage at any time if he wanted to. It’s because interest rates are at rock bottom. 🙂 He printed a lot of money during his position of power that insured rates will continue to stay low for years to come. Every dollar that the Fed creates out of thin air becomes a dollar of DEBT that the United States people have to bear. The only reason the economy is still holding itself together is because the cost to service debt (the interest rate) is low. Rates have been so low for so long that people and government alike have become addicted to cheap money. With a record amount of debt the country simply can’t afford the cost of those debts to increase any time soon.

Ben Bernanke bought his house on Capital Hill in 2004. Today his home has appreciated in value by $126,468, and the stock market has gone up by nearly 100%. This means by using the bank’s money to buy a property he was able to free up his own savings to invest in the profitable stock market.

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Plus, by flooding the banks with so much money, Ben Bernanke made sure that the U.S. will have positive inflation. Most people don’t like inflation because it eats away at the value of their savings. But this same reason is precisely why it helps those who have debt. Inflation in the U.S. is currently at 2% a year. This means 2% of Ben’s mortgage balance of $672,000 will be paid off automatically by this time next year. That’s $13,400 of real wealth gain, created passively and discreetly thanks to the monetary policy that he purposefully designed, which is an environment of low interest rates with modest inflation. Inflation is created to help the U.S. government pay down its massive $17.8 Trillion national debt. However it benefits personal debts as well.

Printing money also has the effect of propping up the financial markets because: a.) it creates more financial transactions and activities. And b.) the market needs to build in future inflationary pressure. And using leverage in a rising stock market can multiply the returns! Furthermore. borrowing money to invest means the interest that one pays on the loan is tax deductible. 🙂

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If Ben had paid for his house in cash (used no debt) then he probably couldn’t have bought one nearly as expensive. A smaller, cheaper home would not have appreciated as much as his actual, larger home did. So he would have missed out on part of that $126,468 tax free gain from his appreciating residence. Not to mention all the stock market gains he would have missed out on too.

In other words Ben has brilliantly engineered the financial system to reward those who use leverage and debt to build up their financial assets. His successor to the Fed, Janet Yellen, is most likely going to continue the monetary policy that Ben had put in place. So far Yellen has done nothing but print even more money on top of the balance sheet that Ben left behind.

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