DON’T BE SURPRISED
I think there are a lot of people who are going to be surprised - and quite possibly unprepared - when inflation finally hits them. That impact clearly has not occurred yet, because we continue to see such strong spending numbers, which, as I pointed out in the June edition of the Journal, has resulted in Canada having the highest level of household debt in the G7 - more than our entire GDP.
Despite the complaints we are all hearing about things like more expensive groceries and travel, it is rising mortgage interest rates, and the fact that they haven’t hit home yet, that are the bigger concern. Case in point: I have a friend whose mortgage was at 2%. It just came up for renewal. He was offered a five-year term at 6.1%. So his interest expense is going to be triple what he was paying before. How do you suddenly factor that into your budget?
Two-thirds of all mortgages are fixed-rate, which means they will come up for renewal, sooner or later. And since interest rates have been increasing since “only” March of last year, there are still many folks who’ve yet to experience the shock my friend just did.
IN CASE OF EMERGENCY
The bigger picture is: I believe there is going to be a recession. There have been five of them since 1970, roughly one per decade. The most recent one, which began shortly after the pandemic started in 2020, is now known as the Covid-19 Recession and was the shortest and deepest since the Great Depression.
What happens in a recession, defined as two or more consecutive quarters of negative GDP growth? Of greatest concern to most people is the fact that layoffs could occur (because businesses are not earning as much due to lower consumer spending).
That’s why it is a very good idea for everyone to have an emergency fund. If you are employed, a recession could mean you become suddenly unemployed; if you are retired, it is still reassuring to know you have extra funds put away, just in case you need them. Our standard recommendation is that everyone have enough cash on hand for between three and six months of expenses. In volatile, uncertain times like these, we suggest you think of six months as a minimum.
LEARNING FROM EARNINGS
Here’s another indicator of what might be coming in terms of a recession: the Q2 earnings reports of the big Canadian banks. They begin this week. Might they be preparing for potential loan losses, for example - which would show that some consumers have reached their spending max?
We review and talk about earnings trends at the banks, and across the markets as a whole, for some important reasons. First, earnings are an indicator of the long-term stock performance of the companies we own. Second, in their quarterly earnings reports, companies’ management teams include commentary that explains those reports - and that information can help us assess what is happening in today’s markets and what could happen in the future.
Most US companies have now reported their Q2 results, and they have been relatively weak - but they still surpassed expectations.
HOW TO WORRY LESS
If you’ve been following the markets closely this past month, you’ll know they are down by approximately 4%. And if you haven’t been following the markets closely, good!
Because the reality is that they’re up more than 14% so far this year, which is a very encouraging performance. It is also true (see the chart below), that the longer your time horizon, the more likely it is that you will achieve positive returns - to the point that since 1977, there has been a 100% likelihood of positive returns if you hold for seven years or longer. Remarkable.
It just goes to show: you can lower your level of worry by lengthening your perspective. There is no reason to watch the yo-yo of the markets day to day.
THEY REALLY, REALLY LIKE US
Other Canadians - mostly from Ontario and BC - continue to flock to Alberta. The Canadian Real Estate Association reports that in the first quarter of this year, 31,000 people made the move, up 44.7% from last year.
A key driver is the search for affordable housing. True, I reported in the July edition of the Journal that the Alberta Advantage (i.e. our affordability advantage vs the rest of the country) was at risk. Here’s the thing: to folks accustomed to home prices in Toronto (average $1.1 million) and Vancouver (average $1.3 million), prices in Calgary and Edmonton, at approximately $500,000 and $400,000 respectively, are great bargains.
How to keep Alberta affordable for everyone? As I said in July, “The province has clearly been successful in attracting workers, although we need to attract even more skilled workers, who will demand higher wages and thus push up incomes. This may help with affordability, especially in housing.”
JOIN US!
It’s time again for a very exciting event: RBC Race for the Kids, in support of the Children’s Hospital Foundation, a 6K race that Colleen and our entire family will be running on September 10th. Would you like to join us? We would love to see you there.
Since starting as a single race in New York in 2009, RBC Race for the Kids has grown into a series of 30+ events that take place around the world. Altogether, more than 325,000 participants have raised more than $74 million CAD for youth charities.
You can register or make a donation at this link. If you are doing the run, please be sure to let me know, so we can meet up.
THE FAMILY FILES
The family enjoyed a week-long visit to Victoria this month, where we stayed in a VRBO with a pool, which the kids of course enjoyed. Victoria is a very walkable city, so we didn’t rent a car, but made our way around on foot.
And, it’s almost back-to-school time. Cara is going to grade 4, and Jake will be starting high school, even though he is just in grade 7 (and gets a photo ID and a locker and everything!).
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