July 2018 Sovereign Wealth Letter

In this mid-summer letter we’ll be brief and yet clarify critical events that are arising this season.  The goal remains Financial Security for Life.  Where at times we've blamed news media for noise I give them a pass this season due to the whirlwind of tweets and sketchy reports from Washington, N. Korea, Moscow and Helsinki.  So if possible to see through it all, let’s review what’s really happening and the impact on our financial security to enjoy a long happy life.

Tenth Anniversary of the Great Recession.

2008 was the worst global meltdown since 1820, and we’ve come to a tenth anniversary.  Each would have their own memories, but fortunately it wasn’t what grandparents lived through in the great depression years, 1929-1939.

In those “Dirty Thirties” frenzied stock markets tumbled precipitously and speculators jumped from their windows to the pavement below.  Drought weather patterns prolonged the misery.  Money seemed worthless, families lost homes, countless lived in chronic hunger, children’s growth was stunted, single men rode the railroads for work or for protest …and it ended when governments committed money and guns for a second world war.

Ten years ago, mid-summer, our Canadian TSX market reached 15,073 – falling to 7,567 in March 2009.   This market now is 16,500 representing near 1% gain annually over the past ten years.  Over the same period, S&P indices show returns at 2.5% for Europe, 1.5% for Emerging Markets, and 4% for the world.  Amid such mediocre measures it’s barely mentioned our TSX has been reaching new highs this year.  U.S. measures have raced ahead for a bit, a compensation for 0% over 12½ years, Aug. 2000 to Jan. 2013.

Experience Proved Rewarding.

Fortunately ahead of 2008 our convictions protected clients from the extreme meltdown and provided a much faster recovery.   For 20+ years my letters have affirmed the value of certain “mandates” to reduce risk, recover quickly, and support Income for Life.  Canadian and global income from dividends, diversified real estate and infrastructure assets proved resilient in reducing the losses other people faced, and we mostly recovered within 18 months instead of the world’s dragged-out 6 years offering higher values well before stock markets could do so.

I can safely say that 98% of our clients fared very well in those years and also the ten years since.  2% had a harder time when illness or job loss occurred at the peak or as markets were falling.  This is why I stress to always have at least 3 years’ buffer or income-reservoir from which you’d support monthly expenses if investment values were to be down for a while.

Noise or News:  What’s True Today?

We hear a lot now about tariffs being raised to restrict international trade.  Trump is daily tweeting threats against Canada, Europe, China, Japan, Mexico, and more …and changing tune by the hour.  Tariffs currently announced or contemplated represent a threat ranging 0.5% to 2% of our GDP (national productivity).  That’s a serious headache for some industries but not a general calamity.

It’s equally a concern to many businesses and regions in the U.S.A.  Trump’s theme seems to be:  “we lose, but you’ll lose more!”  One hopes representatives in Washington will stop all this and regain focus on economic growth for all.

Seven Keys to Remember Now:

  • Tariff disputes will continue for a time.  Canada once was protectionist but since the 1980s became more agreeable to open trade.  If Trump’s tariffs lighten our GDP by 5% to 2% this on its own will not sink the boat.  Among those protesting Trump’s trade war are forty-some state legislatures, the U.S. Chamber of Commerce, countless local and family businesses, and a vast number of American global enterprises:  they beg him to cease his disruption of profitable international trade.  As November’s mid-term elections approach there will be greater push to move ahead on trade.


  • Earnings however are the #1 guide to show where investments are headed.  A fair-valuation model (two-standard-deviation channel I frequently share) shows the U.S. slightly overvalued with room to move gradually higher, while Canada, Europe, Japan, and Emerging Markets are broadly undervalued with safer (low) P/E ratios and good room to expand.  Earnings will drive investments higher.  Q.2 earnings in corporate North America grew near 20% -- best since 2011.  (By comparison, high-momentum stocks with P/E from 30 - to - 350, or infinite/negative like Tesla, could become hangman’s trap-door.)


  • Inflation-worries are the media’s substitution for recent deflation-worries.  Those who camp at this time of year can liken this to the smoke you get by rubbing some sticks together vigorously or stirring embers in hope of building a bonfire.  Central banks have been eagerly aiming for 2% inflation and now in sight.  Smoke is a good sign in the right place, and inflation now augments the case for economic growth.


  • Interest rates in the U.S., Canada, and Europe should normalize at 4% and higher.  These rate increases reflect greater resilience of our economies.   With US 10-year bonds nearing 3% (double what they were last year) and Canada 10-year bonds at 2.15% it remains a long journey to 4%, even to 2019 or 2020.  Europe, Japan, and Canada continue to coddle our economies with low rates.  Japan is near 0% for the year ahead.  Switzerland and some others still have negative rates.  This has never happened before.  It could take ten more years to unwind such monetary stimulus.  Meanwhile, gradual rate increases are not so much a threat as a proof of increasing economic


  • Emerging and Frontier Markets carry enviable growth seen in corporate earnings and rising GDP.  Second-quarter performance stepped downward but has resumed the ascent.  Emerging economies who used to depend on US$ loans have more power and choice today to borrow internally or from non-US sources.  Trade patterns and borrowing include an increasing array of nations among EMs and also Europe, Canada, China, the last being a very willing and wealthy lender to less-developed high-growth countries.


  • Value vs. Growth.  A powerful line from the renowned Nick Murray was that he focused on the return of his money, more than the return on his money.   Ponder this as you realize just 8 stocks have been responsible for all growth in the U.S. stock market this year.  Just 8 stocks …and all the rest together would result in a negative.  Of the eight, only two pay dividends, and there are weak or negative earnings that look like the dot.com 1990s.  There’s a stock-market party – even a bubble – and eventually that piece will burst.  Much of today’s market is in deep-value territory, historically cheap and paying rich dividends.  Success will reward the patient.

Netflix is one of the so-called FANG stocks and has a P/E ratio of 160 which says if earnings were steady it could take 160 years to earn back the value of your investment.  Google looks cheaper at 51.  Facebook could be healthier at 35.   Amazon’s P/E is 232.   Those are the “fang” stocks.  Compare that with ratios of Canadian banks, P/E near 12 and paying 4% dividends, real estate firms at 10 to 20 and paying 4-8% dividends … and much the same in infrastructure.  Bubbles blow up but strong mandates for earnings and dividends smooth the journey and assure not just the return of your money but a healthy reward on your investment.


  • End of a Bull Market?   Some question how the market is still intact nine years after the 2009 bottom.   Others point out significant corrections such as 2011 that have segmented the rise.  It’s especially notable that the raw stock markets have gained so little headway since 2008 that much room remains for growth.  Some common wisdom offers that bull markets never die of old age – it’s simply not a matter of how many years since the last downturn.   Four real factors include:   (1) imminent threat of recession (hardly likely with vigorous earnings), (2) overly restrictive monetary policy (but interest rates remain still highly stimulative), (3) excessive valuations (yet while the US is slightly above-norm other economies are still sitting at appealingly low valuation),  and (4) external shock which can include aggressive protectionist actions against trade, and also punitive import quotas, domestic subsidies, boycotts, exchange rate manipulation, procurement restrictions, etc. As it takes two or more such factors to derail matters completely it seems at least 2019 or 2020 before the bull cycle would start to turn.


Stock markets turn and correct a bit like a yo-yo while climbing stairs.  Today’s world is still recovering from 2008 and its aftershocks.  As a possible guide for the coming year, the fair valuation model of RBC Global Asset Management suggests (subject to many variables):

  • Canada’s TSX by June 2019 fits a range 14,557 to 22,071 with mid-point 18,314 (forecast near 17,000).
  • S. S&P 500 by June 2019 fits a range from 2,197 to 3,662 with mid-point at 2,929 (forecast 2,925).
  • Forecast for Europe suggests a rise from 128 to 139.
  • Similar for Britain, 7,636 rising to 8,250.
  • Emerging markets 1070 to 1250.
  • Also Japan 22,304 to 24,650.

WE FOCUS of course not on the raw indices but the time-tested portfolio allocation with strongest fundamentals to protect and grow wealth.  Vitally, this includes lower P/E ratios, rising earnings, and strong dividend return, thus building and sustaining wealth for lifestyle, legacies, and lasting income. 

Yours in Financial Security for LIFE!

Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500

627 Guelph Line, Burlington, Ont. L7R 3M7.  1-877-937-3500


Author:  A Lifetime Of Wealth — And How Not To Lose It  (2013). Protecting Life, Loved Ones, and Future Dreams  (2013). Your Business, Your Retirement: Halton Retirement Study (2015) .

** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to GLC, RBC, CIBC, Mackenzie, Franklin Templeton.  Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to consult alongside your legal and accounting firms to advance your financial security and unique goals. We are grateful always to receive your comments and questions.

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