Hilliard’s Weekend Notebook

Thoughts, views and opinions as current events unfold: With topics taken from current market events and my recently released book — When the Bubble Bursts: Surviving the Canadian Real Estate Crash (Dundurn: March 2015)  and my first book Investment Traps and How to Avoid Them (1999) — this short piece will give you unique and valuable insights filtered by my thirty-six years’ experience as an investment professional.

Weekend Notes - Page 1

 

Money creation is not what people think --- September 15, 2017

The money creation process has been shrouded in mystery for centuries, with different and confusing theories in circulation. While people realize that banks are central to credit creation, the mechanism that links lending to printing money is obscure.

Recently the Bank of England has explained the process of “printing money”, and it’s not what people think.

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Guest post: Cryptocurrency mania --- September 8, 2017

Why didn’t I invest in Bitcoin?

We hear that lament often, especially as the aging bull market in stocks shows signs of weakness. However, the cryptocurrency mania, while interesting, has a long way to go before developing into a reputable long-term investment.

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The Brexit process --- September 1, 2017

The Brexit process, started with a June 2016 referendum, continues to wind forward. But stress over Brexit is taking a toll on the life of British people, especially those in London. Business investment is suffering and the pound sterling is trading lower against most currencies.

Will Britain survive the Brexit process? Is it just a “spot of bother” or something more?

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The Greenspan Put --- August 25, 2017

Alan Greenspan became Chair of the Federal Reserve System in August 1987, beginning an eighteen-year reign. Two months after he took over, on October 19, the Dow Jones suffered a one-day crash of 22.6 per cent; the largest one-day loss in history. The Federal Reserve took unprecedented action on Tuesday, October 20. Those interventions came to be known as the Greenspan “put”.

As central bankers and economists meet in Jackson Hole this week watch the speeches for a hint that the thirty-year legacy of the Greenspan “put” has run its course.

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Debt-deflation: Fisher style --- August 18, 2017

American Irving Fisher (1867-1947) was the first economist to present a theory about debt-deflation. His work is considered important in explaining what happened in the Great Depression of the 1930s. Today people are rediscovering Fisher’s work, and applying what he wrote to the Global Financial Crisis in 2008-09.

What can Fisher’s theory tell us about the likely outcome of the housing speculation mania in Canada?

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Queen Elizabeth II still waiting for an answer --- August 11, 2017

Queen Elizabeth II, in at the height of the Global Financial Crisis in December 2008, asked a group of economists at the London School of Economics the following question about the crisis:

“Why did nobody notice it?”

What answers did the economists and central bankers give?

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Nassim Nicholas Taleb's Black Swan --- August 4, 2017

In 2007 Nassim Nicholas Taleb published “The Black Swan: The Impact of the Highly Improbable,” which details the nature of unexpected and very rare events. Shortly after that book came out the world experienced Global Financial Crisis, which came to be known as a “Black Swan” event.

As the ninth anniversary of the collapse of Lehman Brothers approaches in September, 2017 it’s timely to ask: Are more “unexpected” events likely to happen?

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President Donald Trump targets Canada on trade --- July 28, 2017

President Donald Trump and Wilbur Ross, his 79-year-old billionaire Secretary of Commerce, seem determined to get a better trade deal with Canada (and Mexico) by renegotiating the North American Free Trade Agreement (NAFTA).

Should Canadians be worried, especially about exports like softwood lumber and crude oil?

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Retail industry downsizes --- July 21, 2017

The North American consumer is shifting buying preferences and the retail shopping industry is feeling it. New evidence of this trend arrives almost daily with yet another retail chain store bankruptcy and related struggles for shopping mall viability.

Will this disruptive change in how people shop spell the end of traditional retail stores and regional shopping malls?

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The Bank of Canada finally did it --- July 14, 2017

The Bank of Canada did it. Finally, after seven long years, the BOC raised rates by a ¼ point, to 0.75 percent. Banks and other lenders immediately responded by hiking mortgage rates.

A quarter point is hardly enough to send shock waves through the Canadian financial system but it could be a turning point.

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Canadian oil exports flood the U.S. --- July 7, 2017

Canada’s oil output is still growing, as a result of massive investments over the last two decades in Northern Alberta oil sands.

This increase in production will continue for many more years, according to some, as new plants are still being completed and expanded.

Can the United States continue to absorb all of Canada’s growing production without depressing prices?

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Has Warren Buffett lost his Midas touch? --- June 30, 2017

Has Warren Buffett lost his Midas touch?

With his recent foray into subprime lender Home Capital Group, after a reported due diligence period of just three days, some observers are wondering if the world’s best-performing investment manager is past his prime, in his 86th year. Given Buffett’s stellar long-term track record as an investor, this question will be of interest to investors.

So I delved into Buffett’s recent decision-making and found a couple of intriguing clues.

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Australia stands alone --- June 23, 2017

Australia stands alone with its massive housing bubble. Home price growth there has outpaced gains in most developed countries.

As well, increasing private sector debts threaten the stability of Australia’s financial system.

Is Australia’s housing and debt bubble likely to cause a financial crisis?

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BOC highlights evolving risks --- June 16, 2017

The semi-annual Bank of Canada (BOC) Financial System Review highlights risks and vulnerabilities to the Canadian financial system. For several years the Bank has identified two key vulnerabilities — the “elevated level of household indebtedness” and “imbalances in the Canadian housing market”.

The central bank for Canada reiterated their concerns, saying that “the most important vulnerabilities … have moved higher over the last six months.”

Reigning in housing market speculators will require much more effort before authorities can declare, “Mission Accomplished”.

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Bailout of the Canadian homebuyer --- June 9, 2017

Recently an article in Maclean’s by Kevin Carmichael appeared: “Why Ottawa should bail out homebuyers if house prices tank”. The article reminds me of the controversy that erupted in February 2009 over President Obama’s attempts to help U.S. homeowners during that real estate market crash.

If a similar debate happens in Canada, will we hear the same arguments?

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Can we avoid another financial crisis? --- June 2, 2017

There’s a new book, Can we Avoid Another Financial Crisis?, that reveals new insights about the 2008-09 crisis and explains why another crisis is coming and gives workable solutions to avoid that future crisis, in just 130 pages.

The author, Professor Steve Keen, describes, in easy-to-understand prose, how mainstream economics failed us before 2008. And he outlines what he thinks will happen when current unsustainable trends reach their ultimate conclusion.

For anyone who wants to know what will happen next…

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Impeachment: what are the chances? --- May 26, 2017

The U.S. President Donald Trump is in trouble over allegations concerning inappropriate cooperation between people in his campaign and the Russian government. Many investors have been asking if impeachment is likely and how it would affect the stock market.

Will President Trump be impeached? If he were, how would it affect markets?

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Too much concentration --- May 19, 2017

My first book, “Investment Traps and How to Avoid Them” (Prentice Hall 1999) discussed how much of the value of the 1999 stock market was concentrated in just a few dot-com stocks. The S&P 500 in the U.S. market included a large number of highly valued companies in one narrow sector. As it turned out that was a major “investment trap” that hurt many investors in the 2000-2002 bear market.

Is there a similar concentration problem today in the U.S. market? In the world?

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Real estate contagion --- May 12, 2017

Real estate contagion is the topic of the month in Canada. Will the recent troubles that have surfaced with at least one Canadian alternative lender spread to the wider real estate finance industry and the Canadian economy? How does a Canadian investor find a safe haven from possible spillover effects?

I covered this topic in “When the Bubble Bursts: Surviving the Canadian Real Crash” where I discuss some options to protect stock market investors from the fallout. Here’s an update.

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Insanity of housing conditions --- May 5, 2017

The torrent of news regarding residential real estate in Canada and related matters such as mortgage financing and the instability of at least one lender accelerated last week.

The uproar around the news that Canada’s largest alternative lender had to seek emergency funding meant that almost everyone involved ignored the release of CMHC’s quarterly assessment of the risks facing the housing market.

There are some interesting tidbits in the report. And I would like to suggest a new category to their proprietary risk assessment ranking, borrowed from comments about the U.S. housing bubble of a decade ago.

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Wind power goes offshore --- April 28, 2017

At the same time as OPEC struggles with a decision to extend the agreement to cut crude oil production the expansion of alternative energy sources is booming. One source in particular is gaining credence, at least in Europe.

Offshore wind power was once dismissed as too expensive.  But installations of this new energy source are growing rapidly and could be significant for electricity production sooner than most realize.

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Ontario's gamble on housing --- April 21, 2017

This week the Ontario, Toronto and Canadian governments met to decide how to “fix” the real estate market in Toronto and Greater Golden Horseshoe in southern Ontario.

And on Thursday, Ontario’s Minister of Finance announced 16 new measures that are designed to reign in out-of-control housing markets in his province.

Are these measures enough to make housing affordable again?

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Guest post: Robo-advisors have yet to be tested --- April 14, 2017

The latest competitor in investment management is the online portfolio manager – colloquially known as a robo-advisor. These platforms build a portfolio of exchange-traded funds (ETFs) for investors on the basis of a short questionnaire.

While convenient and low-cost there are problems with relying on this technology.

Read more….

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Brexit triggered --- April 7, 2017

Prime Minister Theresa May wrote a letter March 29 2017 to Donald Tusk, President of the European Council, to trigger the process of negotiations for the United Kingdom to exit the European Union.

Europe’s immediate response indicated that discussions could be contentious.

Did the Prime Minister make a mistake in deciding to revoke membership in the European Union?

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The rapid growth of debt in China --- March 31, 2017

The current period of rapid growth in China’s debt burden will end at some point. Some analysts believe that China will be in crisis in 2017 while others maintain that China can continue to borrow more indefinitely.

Can China’s debt bubble just keep getting bigger forever?

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An alternative to condos --- March 24, 2017

In my 2015 book, “When the Bubble Bursts: Surviving the Canadian Real Estate Crash,” I singled out the condominium as a rental property as a particularly bad idea. Recently, I had the chance to spend an hour with a top investment analyst, Jimmy Shan. He covers the real estate sector analyst for GMP Securities and he’s done the calculations:  condominiums are a terrible investment.

And he outlined an alternative — much better than condo ownership — for someone who is determined to invest in residential real estate as a landlord.

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Guest post: Give yourself a bonus and defer CPP --- March 17, 2017

Many Canadians know that they receive a discount or bonus if they choose to receive Canada Pension Plan (CPP) payments either before or after age 65.   But Canadians often aren’t aware how significant the discount or bonus can be and what other factors may influence this decision.

In some cases taking early CPP may make sense but given rule changes and rising life expectancy it can often be a better choice to defer CPP. 

Read more….

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Canada gets another warning --- March 10, 2017

Canada is attracting attention again; this time in international banking circles.

The Bank for International Settlements singled out Canada, along with China, as a country with a banking system at risk of “serious financial strains” based on their concern about excessively rapid debt growth and house price gains.

Will these oft-repeated warnings of financial stress ever come true? What is a good indicator to watch for signs of strain?

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London safe haven status in question --- March 3, 2017

In “When the Bubble Bursts” I wrote about a 2012 conversation in Prague with an American advisor to ultra-high-net-worth families who saw London, England property as a good investment for her clients. At that time I questioned that strategy but, for a few years, that advice looked good.

Recent declines in house prices there are throwing doubt on expensive housing as a “store of value”, even in a city like London.

If prices falter in London, could there be any safe places in Canada to park capital in housing?

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Debunking the population growth theory --- February 24, 2017

Toronto home prices are soaring, up 20.9 per cent in the last year, according to Teranet-National Bank. One justification for this unusual price jump cited in recent media articles is the possibility that record numbers of people are moving to the Greater Toronto Area, pushing up prices.

Is population growth really the main factor in pushing Toronto home prices higher? And how does Toronto compare to Alberta for population growth and home price gains?

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"Drop the pretense..." --- February 17, 2017

It’s official; it is a housing bubble. One senior Canadian economist said so:

“Let’s drop the pretence. The Toronto market — and many cities surrounding it — are in a housing bubble.” From a recent report by Douglas Porter, Chief Economist, BMO Capital Markets.

Up until now, there was no consensus about Canada’s housing bubble. But with Mr. Porter’s pronouncement, the bubble, at least in Toronto, is officially recognized.

Will the discussion about possible solutions get more urgent?

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Europe is cheap for a reason --- February 10, 2017

After last week’s review of the U.S. stock market, we examined other markets to determine where the bargains might be.

Europe is as cheap (based on price-to-earnings) as it has been in a long time. There’s serious political uncertainty in 2017 and the consensus says “Europe is cheap for a reason”.

But, as a contrarian trade, is it time to buy European stocks?

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Time to consider selling U.S. equities? --- February 3, 2017

Equities in the U.S. are expensive, as measured by the ratio of stock prices to earnings. U.S.-based equities are starting the eighth year of a substantial rally, more than tripling from the bottom in March 2009. The Dow Jones Industrial Average recently broached the 20,000 level.

Is it time to avoid the U.S. stock market?

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One radical tax proposal for President Trump --- January 27, 2017

A potentially radical corporate tax reform is under consideration in Washington. But President Trump might choose this tax — called the “border-adjustment tax” — as it subsidizes exports and taxes imports.

This proposal, if implemented, would have a substantial effect on world trade, the U.S. dollar and U.S. corporations. Canada, as the largest trading partner, would feel the impact.

Read more….

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Housing or the stock market? --- January 20, 2017

Some people see housing as an investment, as well as a place to live. Many believe that their house will be a great investment. Alternative investments like the stock market, or government bonds, don’t seem as attractive.

We compared house price gains and stock market returns during the last sixteen years.

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Biggest bond market bubble in history? --- January 13, 2017

Paul Schmelzing of Harvard University, and currently a visiting scholar at the Bank of England, has studied the history of bond markets throughout history.

Recently he wrote that:

“Looking back over eight centuries of data, I find that the 2016 bull market was indeed one of the largest ever recorded.”

Often after a major bull market there can be a violent trend reversal, which in this case would mean much higher interest rates. Is there a sell-off in the bond market just over the horizon?

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The Federal Reserve versus President Donald Trump --- January 6, 2017

The increase in government spending promised by President-elect Donald Trump could be a big boost for the economy, as stock market bulls obviously believe.

But if that spending pushes economic demand only it could lead to higher inflation. And if inflation rises too quickly Chair Janet Yellen of the Federal Reserve has indicated a willingness to raise interest rates aggressively, in defiance of what the new President wants.

Is a major confrontation between the White House and the Federal Reserve inevitable?

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Twitter in 2016 --- December 30, 2016

In this last note of 2016 I highlight some interesting and entertaining Tweets seen in the last year.

I include a few of mine, just in case they were missed.

All the best for 2017. It will be interesting.

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Shale oil is the big winner --- December 23, 2016

Oil is getting much cheaper to produce from shale formations using advanced techniques and horizontal drilling. Shale oil is threatening to push out OPEC-sourced imports as a major source of supply. And in the future it could get even more difficult for those wishing to export oil to the U.S. as President-elect Trump touts energy self-sufficiency.

Should OPEC producers be worried? And what about Canada, another major exporter of crude to the U.S.?

Read more....

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The Federal Reserve hiked and Canada will wince --- December 16, 2016

The hypothetical question I’ve been asked most frequently in dozens of interviews is about the impact of rising rates on house prices.  This week the Federal Reserve raised their target rate again, for only the second time in many years. And interest rates on bonds and mortgages are already substantially higher than levels seen a short time ago.

What will be the impact on Canada’s economy and housing from the push to higher interest rates?

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Buy German housing instead --- December 9, 2016

One surprising discovery from my research on house prices is that two of the largest bubble countries, Canada and Australia, have very low population densities while a country with much higher density, Germany, had no housing bubble at all.

How did Germans experience flat house prices in a much more crowded country?

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Another OPEC deal --- December 2, 2016

Another OPEC deal and the price of crude oil soars about 10 percent from $45 to $50.

Several OPEC deals have been touted in the two years since 2014, when the oil price slide accelerated. From June 2014 at $105 to February 2016 at $27 crude oil measured by WTI crashed. Most deals fell apart.

Will this latest deal hold and will the price of crude continue to rebound?

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