SIMPLE IDEAS

Economic Overhaul – Election 2021

BLog header

Economic Overhaul – Election 2021

 

Three weeks to go until an election, and we have another contraction in the economy. What do all the parties say they are going to do about it? Let’s see, we will borrow money and increase government spending. We will increase subsidies to businesses, we will lower corporate/personal taxes, and increase various pitiful tax credits to families. Do any of these ideas sound new to you? Have any of them seriously changed the course of our economy before? No? Then why do they keep parroting them?

 

Because we keep voting for them.

 

Canada Votes

 

I personally believe we need an Economic Overhaul where we revamp the way our system works with some major changes, rather than small tweaks.

 

I’m going to outline four different approaches that I think can be used either individually or combined that could seriously alter the way our economy works for the better.

 

  1. The rules we have surrounding free trade agreements.
  2. Altering and prioritizing different tax methods.
  3. LEM- Labour Expense Multiplier.
  4. Variable sales taxes based on company size.

(more…)

Has Inflation Gone Crazy?

Blog header inflation gone crazy

No, you aren’t going crazy.

Everything is getting more expensive. Houses, stocks, cars, food, you name it.

Except one thing isn’t keeping up…

 

Inflation showing assets increasing

 

Wages.

 

Generally speaking, the goal of a country or society is to raise the standard of living of all participants. What this means is over time you should be able to achieve more, have more, or do more than you would have been able to in the past.

 

So what happens when the price of everything goes up, but our ability to afford it doesn’t go up at the same rate? Well it basically means we can afford less than we used to. In other words, our standard of living has decreased.

 

You see, inflation and standards of living are generally controlled, or at least attempted to be controlled through what is known as fiscal policy and monetary policy.

 

Fiscal policy is the result of actions of members of parliament. In other words, its what all of the people you vote for end up voting for. You would hope that the people you vote for try to increase your standard of living, though let’s be real. That is very clearly not the case no matter which side of the political aisle you sit on.

 

 

Monetary policy is the result of the actions of the central bank. This is often the boogeyman in a lot of conspiracy theories. Basically the central bank regulates banks, and sets interest rates. This drives the demand and supply of money in the economy. Which is generally one of the best tools we have to manage inflation expectations.

 

The problem right now is twofold. First, the central bank only has a mandate to try to target inflation. The problem with this is that the version of inflation both the central bank and politicians refer to only has a roughly 30% weighting to the cost of housing. Why does that matter? Well recent data shows the average Canadian is spending 52% of their income to buy a house. I know this doesn’t factor in rent, but lets be realistic. If someone is spending 52% of their income to buy a house and rent it to you, you can bet they are jacking those rental prices up. In other words, our current inflation metric fails drastically to appropriately measure the impact house prices have on the ordinary Canadian.

 

 

The second problem is politicians are aware of this. However, it is easier for them to point to the standard inflation numbers and insist there is nothing wrong. Housing is a cash cow – and any attempts to tinker with it or bring down the prices will highly likely result in a recession. If they bring prices down too much too fast, it could easily spiral into a replica of the 2008/2009 housing crash the USA faced. For now, every politician who has held power in the last 20 years has preferred to kick the can down the road.

 

 

Headline inflation is running at 3.7% in July 2021. Economists and central bankers are quick to point out that this is likely transitory – in other words they expect that it is a short blip due to held back demand and supply chain bottlenecks created by the still ongoing pandemic. Only time will tell if they are correct.

 

When your wages are only going up 2% per year, or even decreasing due to layoffs, it sure feels like you are falling behind. When the true cost of living in this country continues to grossly outpace the rate of wage increases, Canadians end up falling further and further behind.

 

Now I’m not one to tell you how to vote. Well publicly that is. However, in this election, I strongly suggest you consider a candidate who makes tackling the rising cost of living and stagnant wages in this country one of their main priorities. Unfortunately, I can tell you from experience as someone who has voted across the spectrum, when it comes to politicians, none of them will have the spine to do a thing about it until it’s way too late and we’ll continue to vote for them anyways.

 

 

 

 

There is No Secret Sauce

There is no secret sauce blog header

 

 

I’m going to let you in on a not so well-kept secret from the financial services industry. There is no secret sauce. There is no specific investment, decisions, technique, or strategy that is going to make you rich. There is no one thing you can do that is going to make you successful.

a picture of a special sauce

 

In fact, I’d be that if you gave up and stopped trying to find an easy one thing you can do to be successful, you would have a much higher chance of getting there.

 

You see, when it comes to money, building wealth is not a matter of making 1 or 2 correct decisions. Building real wealth is a series of small decisions that over time add up to generate enormous value.

(more…)

Don’t Chase Performance

 

I really shouldn’t have to write this article. If you look online there are thousands of similar articles all trying to tell people the same thing. In fact, nearly every single investment presentation in Canada contains some form of the same “Past performance is not indicative of future results”.

 

Why is it that we have to keep being told over and over again, and yet we still don’t learn our lesson?

First, let’s look directly at what I’m talking about.

 

You are offered the choice of two investments. Investment A has been declining in value for the past 10 years and is currently worth 70% of what it was worth in 2011. Investment B has been screaming higher over the past 10 years and is currently quadruple the value it was in 2011.

 

(more…)

Successful Investing Vs Getting Lucky

Successful Investing graphic

 

Record low interest rates, rich asset valuations, low inflation, and solid economic growth expected. The result? Speculative trading.

I’ve been getting more phone calls, emails, text messages and video calls from clients, friends, family and everyone else about purchasing speculative investments than I ever have before.

Now, the usual mantra is that by the time the retail investor gets involved, it becomes the pain trade. In other words if main street is finally rushing to plow their money into these investments as they soar in value, it means that there is likely nobody left to buy. It can be seen as a signal of a bubble or a market top.

 

stock chart falling

 

Now I’m not going to say whether this is or isn’t a bubble, because that is beyond the scope of this article. Also I don’t feel like people using this later and claiming I was wrong.

However, we do need to go over how to spot the difference between making a successful investment, and simply getting lucky.

This first method. If you are investing in something purely because you have seen it go up in value and are afraid of missing out, you have to acknowledge that you are in no way shape or form investing. You are purely speculating. Now this doesn’t mean you can’t make money speculating, but it does mean you are effectively gambling and have to time your entry and exit points in order to make a profit, before greed gets in the way.

 

gambling greed scrounging for money

 

The second method is to calculate your odds of success and compare that to your payout odds. I like to use a simple dice game when explaining this. Your job as an investor is to find an investment whose odds are in your favour. If you wanted to bet me $10 that you could guess the number to come up on a dice roll, you would have a 1/6 chance of being correct. To be fair, you would want a 6/1 payday. If we rolled it 6 times, you would pay me $10 X 6 = $60. If you were right 1 out of 6 times you would get paid 6/1 6*$10 = $60. Which means if we did this over and over again, statistically neither of us would have made or lost any money as these are balanced odds.

 

Dice and dice odds

 

If your investment has a 1/100 chance of working, but only pays out 20/1 those are terrible odds, even if you do successfully get paid 20x your money. If you can find an investment that has a 1/20 chance of working with a 100/1 pay out, then those are great odds and a very good investment.

You see, the reason people get lucky on speculative investments is that in the realm of statistics, anything that is possible to happen will eventually happen. For example, statistically speaking there is a chance of a racoon falling through your ceiling and landing on you in the next 5 seconds. Did it happen? No probably not, but here is the thing, it has happened, and it will happen again to somebody.

 

Raccoon falling on desk

 

What this means is that with millions of people buying and selling random speculative investments all the time, their will always be someone who hits it out of the park even though the odds of it happening were absolutely abysmal. The reason you hear about it, is people like to talk about when it happens, or that they heard of it happening. Do you ever hear people brag that their 10-year return on their balanced portfolio was 7%? No? Because it’s not exciting. You’ll hear about how someone turned $1,000 in penny stocks into $1,000,000. Even though it only happened to 1 in 1,000,000 people who tried.

 

Remember, just because you have heard of someone making lots of money on a speculative investment does not mean you should rush out and buy it. If you are comfortable with a small percentage going into speculative investments, then make that decision. However, don’t let the emotional fear of missing out dictate your investment strategy.

 

 

 

 

Is Rising Real Estate Working Against You?

Blog article heading

 

When it comes to real estate, there are generally two types of people. There are those already in the market who are praying the market will continue to rise, and there are those outside the market hoping it will crash so they can afford to get in.

 

The interesting thing about rising real estate prices is it actually works against the majority of people until they are at the point of downsizing.

 

What do I mean by this?

 

Well let’s take a look at your standard millennial family, husband, wife, two dogs and a cat.

 

A picture of a family depicting the average milennial family

The vast majority of our generation start out by purchasing a home they can afford, but it’s not going to be there forever home. It’s a stepping stone to their bigger house.

(more…)

LEM: Labour Expense Multiplier

Labour Expense Multiplier

 

There are four primary issues in our economy which contribute to a continual rise in inequality:

 

  1. The global supply of cheap foreign labour, resulting in the outsourcing of jobs from developed nations to developing nations.
  2. How our current tax structure rewards investment and discourages the hiring of and desire to perform labour.
  3. The global race to the bottom in corporate tax rates.
  4. The rise in automation and replacement of labour.

It is my belief, that the following new expense multiplier can alleviate all four of the primary issues above.

(more…)