Hello All

Things were different this year over previous years, though fireworks were still going off until late in the night on both sides of the border.

This week, the gardening became much harder because of the heat, however, the garden box I built with my daughter is thriving with Radishes, squash, peas and broccoli. I had a few less conversations this week than previous, mainly because the way the Canada day holiday landed and it was also the 4th of July weekend, hopefully somewhere near a cool place.

The markets seem to be stuck, I’m up, which is great, but I want more… And I’m worried that the markets will tumble.

Well, there’s the rub. We all want our cake and eat it too. It is the holy grail of investing, high growth, steady income and no risk… As mentioned in the last commentary, we are in a kangaroo market. Every time the market climbs that wall of worry, it falls off the other side. And slowly climbs back up again. The downside always feels harder than the incremental steps we take to the upside and fulfill your financial goals. The markets are trading in ranges within a recovery trend, and the current range may hold for a while, as the optimistic and pessimistic forces continue to balance each other for the time being.

I’ve mentioned this often, whatever we do today has a high likelihood that it can go down from here, but in the long term, things will be better. We generally don’t look for short term gains in an irrational market – we strategically look for best in class companies that will continue to give you good results and that fit within your risk parameters and continue to be in the right long term themes. If anything has changed over the past few months, please let me know. If you need to revisit your financial plan, we should do so as well. Remember to tell your friends and family that this is what we do…

OK, that makes sense, but I keep hearing about the massive deficits, how is this going to end?

Look, no one knows how this is going to end, central banks around the world are accommodative and will do what it takes, governments are even more committed to grow their economies (its good for their re-election platforms), to quote RBC’s chief economist (Craig Wright)

As it stands, the long-term fiscal picture isn’t that bad. Canada is far off historical indebtedness, at least at the federal level. Even with as large a deficit as we expect this year, the federal debt remains on a sustainable track and is well below levels in the high-debt 1990s. Interest costs are lower than they have ever been, and look poised to remain near lows for some time. With smart management going forward (and no further coronavirus surprises) the debt remains sustainable.

(I guess) that’s reassuring, but what about this article I read about an increase of $16Trillion in worldwide debt?

I read that report too, it was from JPMorgan, quite alarming headline… However, their strategists predicted that because of the very accommodative central bank policies, it has pushed the public and private borrowing to record levels. Which in turn leads to “more debt, more liquidity and that equals more asset reflation”.

What does that mean, in non jargon?

This means that it should lead to higher savings rates, and more cash in the overall system, the bulk of which will either go to pay down debt (but why would they do that at these ultra-low interest rates) or it’ll go into the market. I’ve attached a chart about the money supply, which includes all cash in circulation, chequing and savings money market and funds.

OK, so I “read” this other article about Preferred shares in the Globe and there has been quite a bit of buzz on TV. We own Prefs. what should we do?

use preferred shares as low cost and tax efficient fixed income in your non registered portfolios and some US pref. shares in your registered portfolios. While its true some of these issues didn’t work out as well as others, we generally, don’t own the pref. shares mentioned in the article.

As you know we always try to avoid uncertainty (and measure risk) especially when it comes to stability of income. The article talks about fixed/ floaters – which base their “reset” on a 90 day T-bill, or LIBOR or some other short term paper. As Interest rates dropped to zero, the article’s pref. shares also dropped and as interest rates aren’t going anywhere(for a while) the rates will remain low, especially those with low resets.

If you feel that you would like to revisit your pref. share holdings please call me and we can discuss, but overall we hold perpetual (fixed rate) or floored (a rate reset with a floor) pref. shares in Canada. They are still a great way for you (or your friends and family) to generate a tax efficient income that is higher than most bonds.

I knew I was in good hands, so how do I book a meeting with you?

The best way to reach out is to email Shazia.khan@rbc.com or contact me directly at 416-842-7213. It would be good to catch up and have more conversations.

Thank you,

Christian