Get Out Of Debt, Don't Invest In Canada
December 1st, 2020 | JH
Home country bias is a phenomenon in which people tend to invest in companies that are headquartered in the country in which they live. Americans tend to invest in America. Brits tend to invest in Great Britain. Canadians tend to invest in Canada. People are comfortable with what they know and so they gravitate to their home country when making investment decisions.
Canadians with investment portfolios (stocks, Bonds, GIC’s) tend to invest roughly 60% of their holdings in the Canadian market. This is despite the fact that Canada only makes up about 3% of the worldwide financial market. Investment advisors lament that Canadians have such a strong home country bias, because it’s giving them warped portfolios that are too heavily weighted in one tiny region.
This is changing.
Justin Trudeau’s ideology is destroying Canada’s investment climate and Liberal mismanagement is ruining our economy. Most countries can survive a term or two of bad government, but in 2015 the changing nature of the Canadian electorate revealed itself to be catastrophic and beyond the pale. Canada has always been a centre-left country, but the last time we veered far left (1980-1984) we hit a tipping point that required 20 years of austere correction. In 2015 we did it ourselves again.
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Investors in Canada have slowly and quietly started rearranging their investment portfolios. People are buying less and less Canadian holdings and more and more American/International. Some brave souls see Canada’s decline as a good long-term opportunity to buy low now and potentially sell high in the future, but they are increasingly in the minority. Canadians are dumping Canada and looking abroad for investment opportunities.
It’s unlikely to get better.
The Trudeau Liberals have an aggressive anti-economy, woke ideology that is focused on things like Modern Monetary Theory (printing money/deficit spending) and green technology (utopian thinking). While other countries around the world are focused on building the 21st century, Canada can be summarized by a masked Justin Trudeau, looking around narcissistically for camera coverage before kneeling to a woke mob in order to signal his own white self-loathing as a form of progressive status-seeking.
We are an absurd, unserious and ridiculous country and it’s every conservative’s duty to prepare themselves for the worst. Part of this preparation should be investing their surplus dollars into investment vehicles like mutual funds and ETFs that hold investments in foreign stock and bonds. With an emphasis on “foreign”.
Nobody can predict the future, but certain cause and effect principles are usually likely. Because Canada has a government that is hostile to economic development, is ideologically woke, and is printing and spending massive amounts of money we don’t have… we are likely to see certain outcomes.
Our deficit continues to make our fiscal situation worse. Just like with individual people, the bigger the debt, the bigger the risk. Consequently, investors will demand higher returns for money borrowed. This will lead to higher borrowing costs which makes it more expensive for governments to run deficits.
But wait! Trudeau is harkening back (or forward) to a new way of running deficits. They are simply printing the money and the Bank of Canada is buying the bonds automatically. Free money, right?
The problem with printing the money is that our balance sheet still becomes riskier nonetheless and the bond market will take that into account, which will lead to demands for higher costs to borrow anyway. Apart from the open bond market, the Bank of Canada can buy the bonds, but the increase in money supply will continue. When you have more of something it becomes worth less. In other words,the more money that we print in order to spend, the less the currency it’s purchased with is worth.
As our currency declines in value, the cost of everything we import goes up. It will cost more to buy things in our own currency. The inflation rate will rise. As the inflation rate rises, the interest rates will rise shortly thereafter. Consequently, the cost of borrowing becomes more expensive. The deficits spiral higher. Eventually severe austerity is imposed and the economy gets crushed. The whole thing is a long, gross and frustrating process…a process older Canadians have already lived through.
This process isn’t completely linear and it takes years, or decades, to unfold. The last time Canada went through this it started in the early 1970s and didn’t resolve until the early 2000s. The future doesn’t exactly repeat the past, but the next step will likely be inflation.
Some people think that due to demographics and technology inflation will never be a problem again. They point to the example of Japan as proof that deficit spending doesn’t lead to inflation. They may be right, but there are some differences that are notable.
Japan has a declining population. Every year there are roughly 500,000 fewer Japanese people than the year before. This suppresses inflation. Canada is growing at just under 1% a year and with our policy of mass immigration, our growth is likely to continue over the next ten years. Japan’s economy is wildly different, and their geopolitics is nothing like ours. There are simply too many variables to draw conclusions for Canada on the basis of Japan.
Nevertheless, people point to Harper’s massive deficit spending from 2008-2014 and the lack of inflation that came with it as evidence for MMT. We’ll see. There’s a big difference between a little and a lot. A dash of salt on your fries isn’t the same as five tablespoons. Economics can manifest in weird and wonderful ways, but it’s simply unlikely that certain fundamentals are not timeless to some degree.
"Justin Trudeau’s ideology is destroying Canada’s investment climate..."
Canada is a second-rate country with third rate leaders. Our currency isn’t going to make its own rules the same way a world reserve currency like the US dollar can. It’s likely that our currency will decline, leading to inflation, leading to higher interest rates, leading to economic recession, leading to higher deficits, leading to fiscal austerity, leading to economic malaise.
So, what’s an average person to do?
If you agree with this general analysis of the future, I would suggest doing a few things.
1. Get out of debt
This is never a bad idea regardless of what the future may hold. If I’m right and we are in for a repeat of the past, then getting out of debt is crucial. Canada has one of the biggest real estate bubbles of all time happening right now. If inflation takes off, then housing prices will go even higher. When the interest rates start rising thereafter, people will be in big trouble.
Anyone who has parents or grandparents who were around in the early 80’s is likely to have heard stories about mortgage rates reaching 17%, 18% even 20%. People were buying homes and doing almost nothing but paying interest on the principal. My parents said the first year they paid their mortgage was so bad, that they figured they only really paid off the front door of the house… the rest went to interest.
People have gotten so used to interest rates being below 3% over the past five years, that many people couldn’t handle interest rates much above that because they’ve borrowed too much.
Get out of debt. Even if interest rates stay lower for the foreseeable future, getting out of debt is never a mistake.
2. Don’t invest in Canada
Canada’s economy is likely to be fairly dour for the foreseeable future. Unless something crazy happens that drives a commodity boom, we’re going to flounder and trail the globe as we have in the recent past. With woke political leaders and a tepid business culture, Canada is not the place to be putting any investment money.
Buy US ETFs, Stocks or Mutual Funds. Buy foreign/international stuff. All these big broad index-based funds have outperformed Canada in the recent past and they’re likely to continue to do so in the future.
Many people have lost their life savings by investing too heavily in Canadian energy stocks. Canadian tech stocks always fail… Nortel, Blackberry, Shopify (soon). That basically leaves financials. The big banks are a fairly safe bet, but why risk it?
Canada is not business friendly and the government is actively working against smart practical business enterprise. Whether it’s COVID-19 hysteria including business shutdowns or climate insanity with heavily subsidized green tech and a self-destructive hostility towards resource development,Canada is demonstrably a joke and not worth risking your money in.
The other bonus here is that if Canada’s currency does begin to devalue and your investments are in US or international funds, then the value of that investment will go up as the currency goes down. If we get back to a 62-cent dollar, then those investments you made with a 75-cent dollar will have appreciated 18% even if the investment itself stays the same.
3. Keep your resume ready and prepare to be flexible
Canada has a high unemployment rate, and the Liberals are hell bent on bringing in hundreds of thousands of new immigrants every year in the near term. They’re doing this while overseeing an economic decline and implementing policies of economic harm. Your employment is at risk whether you know it or not.
Do not get comfortable.
I’ve seen too many people get blindsided by lay-offs and bankruptcy. Despite reading stories about unemployment and a bad economy, people seem to think that it can’t happen to them…until it does. I have friends who are unemployed and trying to stay afloat after having grown too accustomed to easy six figure jobs. The CERB and the EI are papering over problems right now, but dark days are looming.
Keep your resume up to date. Keep your eyes open for fallback opportunities. Think about starting a side hustle. Save a cash nest egg to provide a cushion in case of an employment surprise.
There’s a meme going around social media about how awful 2020 is and how glad everyone will be when 2020 ends. It’s gotten to the point where people seem to actually think the year itself has something to do with our situation. It’s as though they believe that when the clock strikes midnight on New Year’s Eve, everything is going to be magically better.
2021 is going to unravel as the natural consequence of events preceding from 2020. Canada is the worst performing country of the OECD nations and running $343 billion deficits isn’t going to keep the wolf at the door forever.
Get ready, be prepared and hang on tight.
© 2020 Poletical