Bill’s Blog | January 20, 2022
January’s stock market performance is often a harbinger or forecaster for the remainder of the year on what to expect. Unfortunately, we started the year off with massive volatility, which is not a good sign. So, as I warned clients and readers repeatedly last year, the risks in many asset classes are growing and extreme. The probability of a large market event increases, but it also may not happen in 2022. Debt levels are unprecedented for most Nations, corporations, and individuals, and raging inflation and the supply chain crisis exasperate economic stability. A lot of the outcome hinges on Central bank actions in 2022.
On top of it, the government policies like lockdowns do not work, nor does the one shoe fit all covid policy, except to destroy businesses, people’s careers and promote divisiveness. If these things bother you as they do me, you may want to reach out to your MLA and MP, as I have several times. These policies have also created an enormous wealth gap between the ultra-wealthy and the average working-class Canadian. These and many other factors are increasing the instability and economic uncertainty. If you want to learn more about risk and counterparty risks to your wealth, please consider taking my Wealth Foundation Series course. So let us look at a few of the pertinent risks to your wealth in 2022 and what you can do about them.
Business Risks: I chatted with a good friend last week who is a very successful business owner. Over the last year, the severe inflation has dramatically increased all of his supply costs, robbing his bottom line of almost 40% of his profits. He also mentioned that a recent government policy with no industry consolation would cost his company up to $600,000 in additional costs.
Not only are business owners facing raging price increases, but the supply chain crisis has further impacted companies trying to provide quality service to clients. In addition, there are employee shortages, and people will ask for higher wages with the severe inflation. As a result, it is increasingly becoming far more complicated and stressful being a business owner.
Solution: Business owners, Unions, and Associations need to send a clear message to politicians who are exasperating the marketplace. Silence, in this case, is not golden. These policies further undermine business stability, profitability, further closures and risks millions of jobs across our Nation. We have a health crisis, so politicians have decided to fire 10’s thousands of outstanding health care workers. We have a severe supply chain issue, so let’s attack the trucking industry and make things worse for all Canadians. Let’s restrict travel and make it so complicated that it deeply impacts the air, hospitality and the entire tourism industry. If this were not serious, one would consider laughing at our so-called leaders’ complete and utter stupidity! Yes, I am mad as a Canadian and business owner, and so should you be.
Stock Market Risk: For the last 13 years, the stock market has become addicted to non-stop monetary stimulus in the tens of trillions of dollars. The consequence is the stock markets have inflated into the highest overvaluations in market history. A healthy US stock market should equal 70% of the GDP (The Warren Buffet Indicator). Instead, we are now over 215% stock market value compared to the USA GDP, which has never happened to this extreme before. The downside risks are enormous, and I strongly recommend you take this seriously if you value your portfolio.
Solutions: I am not suggesting being 100% out of the market. A basket of diverse commodities do very well in a high inflation period, as long as we don’t go into a sustained recession. Quality value stocks with dividends can be another safer place in distorted markets. Possibly looking at undervalued Emerging Markets is another possibility. Also, make sure whoever manages your wealth knows what they are doing, understands the risks and adjusts accordingly.
I have recommended active portfolio management over passive funds, especially in this current environment. You want someone driving the bus in a storm and not in cruise control. Hedging strategies are critical when there are extreme market conditions. Does your advisor offer hedging strategies? Just so you are aware, you do not receive this kind of expertise in vanilla envelope mutual funds or ETFs. Please reach out to me if you need guidance and education on this topic. Remember, there are no hero medals if you lose 30, 50 or 80% of your portfolio wealth!
Real Estate and Morgage Rate Risks: Many real estate experts and commentators, including myself, for years have been pounding the table, warning, we have a dire housing market crisis in Canada. Many Canadians have the bulk of their wealth in this one basket and consider it crucial to their retirement strategy. But, what happens if we have a severe housing market correction or crash to your plan? The risk is real!
Politicians endlessly talk about the housing affordability crisis but never provide real solutions. The irony is, for decades, politicians (federal, provincial and municipal) have put policies in place to create the crisis along with central bank incentives. But, boy, do municipal governments of all strip love the massive tax increases when housing goes up 20 to 30% per year. Please look at your tax assessment this year! Walla, another tax grab, without a Council quote. Plus, don’t be surprised if they vote in a few more percent increase just for the fun of it! Sorry if I sound cynical, or I might be realistic about what continues to happen. You decide.
Plus, the 300 or 500K price increase in your home in the last couple of years means nothing unless you sell and realize the gain. The additional risk is interest rate hikes for those who still have a mortgage. You may have maxed yourself out to purchase your dream home along with other debts. What happens when interest rates double? Can you afford the payment when interest rates are 4 to 6% or higher? An essential question you need to ask yourself and do the math.
Solutions: Please do not think I do not like real estate; in fact, quite the opposite but NOT at these price levels. Yes, there may be a few deals left in all of Canada, and I hope you find them. But, yes, buying or selling a home is a significant decision, and it needs to be well thought out and think through all the possible risks:
- Consider getting professional financial guidance (a trusted accountant or seasoned wealth advisor) before you make the decision. Ask them if you have missed any possible risks. Most realtors are not the right person at this stage (too biased) but can be outstanding after you have made a well-thought-out decision to buy or sell.
- Consider locking in longer-term 5 to 10 years while rates are still historically low. I strongly sense this decade will continue to be very unstable.
- You will need to reach out to a mortgage broker, lender or bank to understand your options. Make sure you get at least a couple of different viewpoints to ensure you make the best decision for your housing future.
Considerable caution: there can be massive penalties if you try to break the mortgage early. Financial institutions can switch from a reasonable three-month payment penalty to 20 to 30K penalties or more as real estate risk increases. If you need help with your mortgage, I have referral agreements with two banks in Canada with a broad range of solutions.
Remember, the more you educate yourself on critical financial matters, the likelihood of making a severe mistake decreases. So increase your financial IQ in 2022.
All the best,
Bill Westmacott, Owner