A plea for patience from Canadian investors
With an economic situation as confused as any in recent memory, says this Canadian analyst, it can be better to wait than to act in haste.
Canadian investors can take a lesson from the story of Hannibal.
That doesn’t meant they should try riding elephants over the Alps as the great Carthaginian general did when he invaded Rome.
But, says a leading Canadian analyst, they should consider how the Romans finally defeated this dangerous adversary.
They did nothing. That is, after being crushed in one big battle, they decided to delay, avoid direct battle, harass his lines, and wait for him to give up. And he did, returning across the sea in frustration.
And that’s how you should face today’s frustrating conditions, says Mr. David Baskin in The MoneyLetter. Wait them out.
“Military metaphors are common in the investment world,” he adds. “But it is the rare investor who wants to be known for inaction.”
But there are good reasons for not acting hastily. “The economic situation is more confused, at the moment, than at any time in my memory,” he says.
As the head of his own financial services firm, he has dealt with many different scenarios over the years. And he gives his readers very specific advice on how to deal with this one.
Unexpected report card
Just a few days ago, Canada’s economy came home with an unexpectedly good report card. But even that came with disclaimers from economists who don’t think the pace is sustainable.
Not to mention the threat of rising interest rates if the economy does heat up.
In the wake of one of the worst financial crises in history, nothing seems straightforward. Mr. Baskin draws up a list of contradictions.
Housing starts in Canada are at record levels, but in the U.S. the rate of foreclosures is still rising. In both countries, many are discouraged with their job prospects, even though unemployment figures are falling.
As banks try to recover, they may be hamstrung by regulations. Meanwhile, some economists call for more government stimulus for the economy, others believe it would be throwing good money after bad.
Some forecasters see recovery around the corner, others expect anemic growth — and still others look for a “double dip” recession.
“Most confusing of all, some important voices continue to warn of deflation, while others believe that inflation is just around the corner.”
Right at the right time
Who is right is not the most important question. “In the investment business, it is not enough to be right. One needs to be right at the right time,” states Mr. Baskin firmly. It’s a matter of dollars and cents.
“For example, acting too soon on a forecast of higher inflation and interest rates to come will cause my clients to miss out on the current attractive dividend yields on banks and utilities.”
It is apparent that both the U.S. Federal Reserve and the Bank of Canada are delaying on the matter of higher rates. But across the border, the deficit is reaching dangerous proportions — within a decade, it may reach $22 trillion, equal with the projected Gross National Product.
If the problem is not dealt with, interest alone on the debt will be over $1 trillion a year — and that’s with today’s low rates. “In my view, the American debt and deficit are likely to cause the American dollar to fall against the Canadian dollar,” says the analyst.
This in turn will cause serious problems for Canadian manufacturers and exporters and for our tourism business.
Worse yet, it promises to drive U.S. inflation to levels not seen since the 1970s. Interest rates will rise, and those in Canada will surely follow.
Mr. Baskin and his associates do not pretend to know exactly when this flood of inflation and the building of an interest rate dam will come, but they expect them within the next two or three years.
Mr. Baskin has specific prescriptions for these problems. Some you can act on today. With others, it’s better to wait.
Real things do best
“In times of inflation, investors who own real things do best,” says the analyst. Real estate, energy, metals, timber — these assets will have rising prices and the firms that deal with them will benefit from inflation.
Companies that owe money get to pay it back in deflated dollars. The creditors — banks, insurers and mortgage companies — must accept those deflated dollars. They lose in the exchange.
“In a high inflation environment long bonds, perpetual preferred shares and cash will be big losers.”
Mr. Baskin gives his readers in The MoneyLetter three specific directions. First, dividend stocks and preferred shares will lose value with inflation. But don’t pull back yet. Keep them for now. “I would delay on these sectors until there is more evidence to support a major move.”
But it is time to sell U.S. dollar stocks and bonds. The currency losses could cancel out any gains in the market. He makes an exception for companies like MacDonalds or Coca-Cola that earn the majority of their revenue outside the U.S. and thus profit from a lower dollar.
Finally, reduce the duration of your bond holdings, he says. “The market is not paying us for the inflation risk on longer bonds.”
The sad fact is, few of Hannibal’s famous elephants survived the journey through the mountains. And his bold actions came to nothing in the end. Those who waited patiently were the winners. They still are.
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