Bill’s Blog | Oct 13, 2022
I listen daily to analysts worldwide in multiple financial disciplines and geopolitical experts globally and try to dissect the critical stuff to help you make better financial decisions and prepare you. So, what can we expect in the fourth quarter of 2022? In today’s Blog, I will cover five key issues affecting all of us and conclude with action steps you may want to consider. So let us get started.
One: Rising Interest Rates
Central Bankers have given us a clear message: rates will continue to rise, and you will experience financial pain until something breaks. So, for example, Britain had to do a colossal intervention (QE) of 65 billion pounds to bail out the pensions system two weekends ago. Why? When Central Bankers kept interest rates at historic lows for 14 years, they pushed pension managers to go way out into risker investments and leverage to maintain the 7 to 8% returns needed to maintain the pension. So guess what happens with greater risk (it is a two-edged sword)? You create a financial crisis when investments go wrong due to rising interest rates, unsustainable inflation, energy crisis and a slowing economy. Britain is in serious trouble, and again they continue to do interventions all this week! But this is not an isolated problem; many countries face similar problems.
Back at home here in Canada, our Central Bank head, Tim Macklem, recently told Canadians in a speech that interest rates will continue to rise, which will reverse the overheated housing market and cause pain for highly leveraged Canadians (paraphrase). My words: You cannot double interest rates in less than six months and not expect a severe crisis and deleveraging of Debt and assets depreciating. I have warned for years that Debt is not your friend and not to buy highly overvalued things like much of the Canadian real estate market that was late in the real estate cycle. So, let us talk about Canadian real estate.
Two: More Pain in Canadian Real Estate
The housing market is a big deal in Canada and makes up about 20% of our national GDP (twice that of the USA). Unfortunately, we ended the housing market bull run in February 2022 after a 22-year historic run. The average real estate cycle of 18 to 20 years was extended due to the 4000-year low-interest rates and created a massive real estate bubble. As a result, housing prices became so overvalued in many markets that average Canadians could no longer afford to buy a home. Tens of thousands of Canadians got caught up in the buying frenzy over the last few years, and many will be in big trouble once they try to refinance in the coming months or years. Currently, variable rates are over 4% and Fixed 5% plus, but you also have to add the 3% rule to qualify. Sadly, I see a repeat of history similar to the early 1980’s when 100 thousands of Canadians lost their homes.
Locally, in the Fraser Valley, home prices are already down 400K on average or 25%. Also, home sales are at the lowest in over 20 years. We will see more interest rate hikes which will further put downward pressure on home prices and sales in the coming months and, most likely, years. A psychological battle is going on in both the minds of the seller and buyer. Sellers falsely believe prices will return to the highs soon, so many are taking their houses off the market and waiting for better days. I and many others have warned for years that it will not be pretty when this housing bubble bursts in Canada. Buyers are also cautious and would be right to believe pricing will continue to decline. The same phenomenon unfolds in Canada’s two biggest markets, Vancouver and Toronto, and sales are at a 40-year low. Each market has many factors (supply & demand). Still, when prices become unaffordable for the average person or family, the trend will push prices lower in a rising interest rate environment! I will share a bit of strategy in real estate in my action steps at the end.
Three: Extreme Volatility will Persist in the Fourth Quarter and Pushing Markets Down.
Like in the housing market, the stock and bond markets have been in an unsustainable bubble, and I see further downside. Why? The global economy is interconnected (though breaking down) and in a growing recession based on many factors and indicators. Again, I hate to be a bearer of bad news, but DEBT matters when currencies and indexes collapse in significant markets with rising interest rates. The story is not solely of the Emerging Markets (they hold 14 trillion in US debt and may become a big problem) but the largest economies in the world (Japan, EU, China, Britain, etc.). Look what has happened to the currencies of these mammoth economies; they have been in free fall this year due to the Fed policy and the strong US dollar. These policies have turned the bull market of the last 13 years into a growling bear market, as seen below.
Year-to-date, multiple segments of the financial markets are down substantially and continue to fall:
- TSX: -13%
- S&P 500 (large caps): -25%
- NASDAQ (tech stocks): -33%
- Russell 2000 (small caps): -25%
- Bonds (using TLT ETF as a proxy): -30%
- Bitcoin: -59%
- Real estate (using IYR ETF as a proxy): -32%
- Gold: -7%
I keep thinking, what is the next shoe to drop? Will we see another Lehman Brothers moment unravelling like the Great Financial Crises of 2008? Close to 14 years later, Credit Suisse and Deutsche Bank, two of the world’s largest banks, suffer from distressed valuations, and the banks’ credit default insurance levels are approaching degrees not seen since 2008. You can add dozens of other EU banks and countries with unsustainable debts with over 100% debt to GDP. When I do my “Straight Talk on Debt” seminar, I state, “Debt really does not matter until the day you cannot repay it. Then it does matter!” Whether sovereign debt, corporate or personal debt, we all have a debt ceiling. We again see the debt cycle repeat, excess and then implosion; this time, it will not be different.
Four: Stable Energy and Food Pring do Matter
Low fuel and food prices are the two most important factors to any country and economy that impact social stability. Please send this message to every MP and MLA who does not understand this unequivocal truth. It baffles me how so many so-called leaders do not understand this simple fact. Protests, riots and revolutions happen when fuel and food prices become unaffordable. (Please note I am not for violence or revolution, but simply stating another historical fact and one being played out in many countries today). People lose it when they cannot afford to feed their families, heat their homes, or fill their gas tanks to go to work. Sadly, we are getting close to a breaking point for many people. Alexander De Croo, the Prime Minister of Belgium, said in an interview last week that there is great concern about civil unrest breaking out across Europe due to the dramatic surge in energy prices and their impact on the average European.
Hypocritical virtue signalling (not based on science or reality) by many politicians these days do not cut it. Billionaires and globalist politicians have kept warning (for decades) that we will all die in less than a few years while they fly in their private jets, drive their multiple luxury cars, and live in mansions (of course, none of this creates any pollution). It is just you and I that are the problem! At least, that is how they see it. If you have not figured it out yet, many Canadians and families are near a breaking point.
Canada plays such a small factor 1.5% of being a polluter in the world that we are barely a rounding factor. Also, our energy patch has the best record in the world for environmental practices and sustainability; but why have so many politicians/environmentalists demonized our Canadian energy? Our country could be a superpower in energy globally, rid our country of unsustainable Debt, provide a high-quality lifestyle for all Canadians and add high-paying jobs for tens of thousands.
Recently, the head of Germany pleaded with our Prime Minister to help them with their severe energy crisis (self-made by extremely unrealistic energy policies over the last decade-plus). Unfortunately, Mr. Trudeau said NO to a supposed friend and political ally needing help, all for virtue signalling and hurting the Canadian economy! Instead, Germany has gone back to burning coal in massive quantities and creating immense pollution (40% more pollution than natural gas), shutting down factors because they cannot afford fuel costs. As a result, the German people are told to take cold showers this winter and burn firewood and not kidding!
Let’s talk fuel tax here in Canada. The average added tax across Canada at the fuel pump is .55 cents per litre. In BC, it is far more, .80 cents per litre, and we are paying almost a dollar more than our Alberta neighbours at the pump. The extreme price difference is insanity! BC doubled down, and we have two carbon taxes in the Lower Mainland. Many BC families drive the popular Chrysler Grand Caravan with a 75L tank; this TAX adds $60 per fill-up. These taxes have proven to do nothing to improve the environment in any meaningful way, and that is not me just saying that, but this comes from the experts! By the way, Trudeau and his so-called NDP coalition are unhappy that you are not suffering enough and are raising carbon tax, income tax, and CPP on Jan 1, 2023. Are you done with his sunny ways yet? Stats come directly from the Canadian Taxpayers Federation.
I do not need to discuss food price inflation and its impact on every Canadian. However, we all know it is far more than 10%, think 20 to 30% or more in many items. I have said for over a decade we need leadership that cares and serves the people, not personal agendas or egos! Nothing will change unless we have intelligent and compassionate leaders who understand the real issues, take meaningful action, and have realistic plans. I hope Canadians wake up to this fact.
Five, the Growing War Threats & the Weather Cycle.
I warned last year, as did many cycle experts that war was a real threat. What concerns me is the growing escalation and rhetoric in the Russia/Ukraine war; the longer it goes on, the greater the risk of spilling into neighbouring countries and Putin’s recent nuclear threats are terrifying. The two great wars of the 20th century started regionally and quickly became global as countries chose sides. Unfortunately, we are witnessing the same phenomenon play out once again. Also, the sanctions are meaningless other than driving up energy costs globally and causing a food crisis. Putin has made more money due to the sanctions to fund his war, as there are many willing buyers in the east and south.
Then, there is extreme tension between the apocalyptic Iran regime and their proxies (not the vast majority of the Iranian people, who are sick of their corrupt and warmongering leaders) and Israel. The Iranian government is bent on creating nuclear weapons to destroy Israel as a nation and the USA. The Iranian leaders have stated this publically hundreds of times. I sense a potential war may come soon. Israel will not allow Iran to attack them with nuclear weapons, as the Iranian government is very close to having sufficient enriched uranium and rockets to deliver them.
If this was not enough, China is potentially getting close to doing a full-out invasion of Taiwan and daily doing war exercises and intimidation to the small island nation. Who knows if they will invade soon or in a few years, but the Chinese communist party has stated it will happen.
Lastly, we see a weather cycle called the Gleissberg Cycle (every 80 to 90 years), and it last happened in the Great Depression (the Great Dust Bowl years). Also, over 1100 scientists and climate professionals recently signed a “World Climate Declaration,” stating that there’s no climate emergency. These experts state the UN and climate doomsayers are using broken climate models not based on science and fear-mongering. Many other climate and weather cycle experts would agree but have been afraid to speak out.
Action Steps for Fourth Quarter:
- Cut out unnecessary spending.
- Create a reasonable budget.
- Build up savings.
- Become defensive in your wealth management or ensure you have someone who knows how to deal with extreme volatility and proper diversification (not all in the stock market). A passively managed fund or lack of skillset to manage money will not cut it as this crisis unfolds.
- If you have too much Debt, consider selling stuff. Do not add more Debt, as the financial crisis is just starting. In 2022, the global markets have already lost 46 Trillion in value which is massive (stocks, bonds and Crypto).
- As stated, the Canadian real estate market has been one of the most overvalued in the world. For those who are patient in the next few years, there will be some fantastic deals (sadly, at the expense of people who jumped into a housing bubble and overpaid for homes and will lose them). For those who need to sell, sooner will be better in most cases (seek professional guidance if needed), as I see further downside in the coming months and years. Make sure you have a well-thought-out plan, as most of the rental market is overpriced, and supply is limited. If you planned to downsize and pay cash, this would be optimal; however, expect your asset/home to drop significantly in many markets. Consider creating cash flow through your new property by renting to a trusted family member or friend. People will have to learn how to support each other and work together, which I see as a very positive long-term trend.
- Building up sizable cash or equivalent as part of your financial plan gives you flexibility and dry powder when opportunities come in the future.
- Expect more extreme weather/storms, and it is best to have some emergency food and energy backup (candles, generator, heaters, extra batteries, flashlights—work towards having at least three months of critical supplies, medicines and supplements. Three to six months of dog, cat or other pet supplies are also vital. Having a garden is also a great idea, and small livestock if you can.
- If stagnation plays out as many financial experts are forecasting (slowing economy, high inflation, the third shoe to drop will be growing unemployment which I expect in the next year or so. Plan accordingly. Make yourself indispensable to your employer and focus on creating a secondary income if necessary. Income and cash are kings in economically troubled times.
- Finally, I do not share these things to create fear but to help people be aware, prepare and create a personal plan to get their financial house in order. Please keep it simple. What are the top three things you need to do to be in a better financial situation and then take action? I encourage business owners and individuals to have a plan and work it out in the coming months.
Well, there you have it, the fourth quarter forecast and what I see in the near-term future. If you have found this helpful, please pass it along to family and friends.
Best regards,
Bill Westmacott, Owner
fivefoldfinancial.ca