do splendidly in the future, lots of people wonder how to protect themselves now."
For those who misinterpret things, get their money in the wrongplaces and take their advice from realtors, doomers or idiot BILs, thiswill be a tough winter. No 2008, but scary enough. We’re now paying backthe years we just borrowed from the future. Always a bUtch.
But there’s a way to slide through. How to do that in a moment.
There are four immediate problems for Canadians.
- Jobs. Pay attention to this Friday morning’s news. In the second quarter, we added 109,000. In third quarter, only 16,500. Soon we’re expected to match the US, where job growth is zero.
- The deficit. The monthly shortfall in Ottawa between revenues and expenditures has tripled, thanks to a plunge in corporate taxes and sales taxes – both economic harbingers.
- Oil. Just posted its biggest decline since the crisis of 2008, off 17%. Demand’s being erased along with growth in China, the US and Germany. As I detailed on the weekend, other commodity prices are following suit, which is sinking Canadian growth.
- The dollar. I told you last week the 10% fall in the value of our currency is wildly inflationary as the cost of imports (especially food) rises. Traders are selling dollars to buy greenbacks to offset equity losses, while investors globally huddle into the safety of the US currency.
These are some of the reasons the Canadian stock market – heavilyoverweight in commodities, energy and mining – has declined the betterpart of 15% from its 2011 high. As you might expect, it’s taken thevalue of the largest 60 companies down with it. The ETF known as XIUreflects this well. Here’s its performance over the last three months:
As for commodities, gold is as good a barometer as any. After soaringon the expectation of inflation, endless government stimulus and aplunge in the value of the US dollar, the big boys (hedge funds,institutional traders) took their profits and left the little guys (whoread this blog) holding the bag. As it becomes clear deflation, globalslowdown and a flight into American dollars and bonds are in the future,here is what’s happened to gold in 90 days:
It seems a decent bet that commodity prices will stay soft formonths, until we get past issues like defaulting Greeks, the USelection, European austerity and whatever the hell the Chinese aredoing. And while contrarian investors buying resource stocks, forexample, at cheap prices will do splendidly in the future, lots ofpeople wonder how to protect themselves now.
After all, sticking your fortune in the orange guy’s shorts is hardlya solution, when interest doesn’t even match inflation, and you stillhave to pay tax on 100% of the return. So, are there relatively safeassets that may provide a better return without losing capital?
Here are a few suggestions.
Real estate investment trusts,which hold commercial properties (office towers and shopping malls forexample), or multi-unit urban residential complexes. They allowinvestors to participate in the cash flow these properties throw off.This income is not correlated with the inevitable correction inresidential housing, nor are REITs correlated with the stock market. Infact, REITs last year jumped about 20% in value and paid a 5% incomestream. You can see from the chart below (using the exchange-traded fundXRE) that not only has the income continued over the last three months,but (after a temporary 8% decline) investors still have all theiroriginal money.
Bonds,both government and corporate. A year ago I urged you to add a bondcomponent to your portfolio, to mitigate against possible stock marketdrops. Hope you did. In general, bonds are negatively correlated withequities, so when people jump off stocks they stream into the safety ofbonds. That sends yields lower and prices higher. Your bonds become morevaluable, giving you a capital gain, proving that fixed income is notjust for collecting interest. Below, to illustrate is theexchange-traded fund XGB, tracking the safest bonds (government-issued)for the last three months. No losses here.
Preferred shares.These are preferential shares issued by many large companies, which actlike bonds. Fixed dividend payments mean you always know the income tobe received, and it comes in the form of dividends, so taxes areminimal. Those dividends have to be paid before common stockshareholders receive theirs, and as the chart below shows, preferredshave shown virtually no volatility during the current market mayhem.These are Scotiabank preferreds, which dropped only 0.8% in the Augustslaughter, then rebounded. Meanwhile investors continued to collecttheir 5% income stream and pay half the tax a GIC generates.
These assets mentioned above are not for everyone. No one investmentstrategy suits us all. But I hope you see in these few examplesinvesting does not mean just stocks, gold, houses or GICs, as theconstant comments to this pathetic blog suggest. There’s a raft ofexcellent securities which can provide both income and peace of mind, aswell as gains, for conservative investors.
It’s time to learn this. Now.