On the Grind


Work picks up substantially for me during March and April so my posting activity will go down during this time.

It is hard to keep up when working 12 to 14 hours per day but I will try to blog at least once a week to blow off some steam. It is the price to pay in order to achieve financial freedom. The long days only last for a few months so there is light at the end of the tunnel.

I still try to exercise at least 3 times a week during March and April. I find exercise to be one of the greatest stress relievers. It is great for your mental and physical health.

Updates and my thoughts on the last week:

Our savings rate was actually only slightly above 60% for February (down from the projected 65% from a week earlier). This due to some additional expenses at the end of the month. Our average savings rate for 2017 is 75% to date. We are projecting our March savings rate to be higher.

The Canadian and US stock markets continue to trend higher. My focus is particularly the US stock market as most of my investments are US equities. The markets have been trending higher but there has been no corresponding increase in corporate earnings. So this keeps pushing valuations higher to the point where future long-term returns are likely going to be lower. I still not have purchased any investments, nor have I sold any. I continue to stock pile cash, waiting for a correction. It seems as though markets keep trending higher because they expect Trump’s tax cuts, infrastructure spending, and reduction in regulations to increase corporate earnings, thereby eventually reducing valuations to more normal levels without stock prices declining. I think this may prove to be unwise because his immigration and trade policies could have the opposite effect, particularly the border adjustment tax which may trigger trade wars. Trade wars are never good for the world economy.

No one can predict what the stock market will do tomorrow or the next month. But over the long-term which is defined in multiples of years, valuations matter. High valuations today mean lower returns in the future. The volatility of the S&P 500 is also near all-time lows. This generally means investors are becoming complacent. Complacency is usually bad. Based on historical trends, periods of all-time low volatility are usually followed by high volatility as stock markets get shocked after a period of complacency.

Due to high valuations in most Canadian and US stocks I have on my radar, I am willing to wait for those fat pitches Charlie Munger and Warren Buffett allude to.

The Toronto housing market is looking like the 2016 Vancouver housing market. Prices have risen 30% year-over-year. All the while inflation is stuck below 2% and wages have risen by barely 1%. Toronto home prices were not undervalued to begin with. So the increase in housing prices makes no sense from a valuation perspective. The increase is based on people piling on more debt and hysteria. People have a fear of missing out (FOMO). If they do not buy now, they never will be able to. That is why properties are seeing bully or multiple bids. There are few listings because people cannot afford to move anywhere.

The housing market in Vancouver has cooled substantially as sales have dropped in all housing segments. Inventory in the detached market still remains quite low though. Prices have dropped in the detached housing market but are rising in the condo and townhouse market. Condo and townhouse inventory remains scarce. Condos and townhouses are what buyers can only afford so they are chasing limited supply. So it seems as though there is a standoff between buyers and sellers in the detached housing market while sellers still have the advantage in the condo and townhouse market.

There are lots of people out there who think the Toronto and Vancouver housing markets will not falter. However, for those who may remember or have studied it, the Toronto housing market fell by 40% (adjusted for inflation) from 1989 to 1996. Why? Because there was a huge run up in housing prices up to 1989. There was a bubble. The increase was not based on any fundamentals. It is not different this time around – it never is.

The Canadian housing market and Canadian/US stock market frenzy comes in the face of Janet Yellen’s comments this past week that the US Federal Reserve is expected to raise interest rates in two weeks, barring economic surprises. Janet Yellen is the Chair of the Board of Governors of the US Federal Reserve. Higher interest rates will tighten monetary policy which should push up US interest rates, making debt more expensive.

For Canadians, this should drop the Canadian dollar relative to the US dollar. If the US Federal Reserve keeps raising rates throughout the year, the Canadian dollar should keep falling relative to the US dollar. This creates inflation issues in Canada because Canadians import goods from the US. Although, a lower Canadian dollar does help Canadian exporters but importers are often not the same companies as exporters. Thus, importers and Canadian consumers are also worse off because they are stuck paying higher prices for goods. The lower Canadian dollar will likely place pressure on the Bank of Canada to eventually raise rates and follow the US Federal Reserve. The outcome of this? Debt should become more expensive in Canada. So those mortgage, line of credit, and auto loan payments may be going up. This will put Canadians living paycheck to paycheck in a bigger bind.

I worry most when investors become complacent. Whenever people think real estate and stocks will go up forever, I try to think the opposite. Because the opposite is generally what happens. No asset class goes up forever without interruption. It is hard to justify an asset class will keep rising when valuations are already so stretched. My plan is to be patient and wait for bargains to arise because they inevitably do.


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