2019

We will begin to see the first signs of an economic slowdown in North America in late 2019.  The main cause will be real estate, politics, and excessive personal debt.  Other notable reasons for a slowing economy is a lack of world leadership, the attack on world trade by the United States, and surpluses in just about everything we grow and produce.  Plus, Ottawa and B.C. continue to tell the world to not invest in Canada.  Business people are listening and directing their investment dollars elsewhere, mostly to the U.S.

National home prices are falling only slightly now, but we expect sizeable drops in the new year as house sales will confirm they are falling off a cliff. No matter how one twists the numbers, house prices share no relationship to family income.  History says house prices must fall or wage gains must soar.  Since after-tax wage gains do not equal inflation, coupled with numerous tax increases coming to Canada in 2019, Canadian house prices must fall.  The same can be said for most major cities across the globe. 

The TSX is trading at the same level as it was in June 2014.  This is four and a half years of no growth. Investors either broke even or lost about 6% due to commission.  Fortunately, if you followed our portfolio you have had one of the best rates of return in all of Canada.  Almost every company has raised the dividend at least once a year.  In the 195th issue we predicted that “for the rest of this decade dividend income will be the main source of earnings from investments.”  On August 1st, 2016 the portfolio dividend yield was 7.5% while the GIC rate of return was .75 of 1%.  The yield had grown to 10.4% in 2018 based on the recommended purchase price.  It should be higher again in 2019.    The TSX is not going to experience new highs until Trudeau stops scaring away foreign direct investment. 

Other warnings are that copper prices are down 8.5% from a year ago.   This is the most important industrial metal and is a leading indicator. Its price decline is warning that construction and manufacturing spending is falling. The Baltic Dry Index, which measures the cost of shipping, is down 15.1%.  Is this a sign of shrinking world trade?  Figures show that car sales are falling.  Platinum warned of this as the price of it is now down 12.3% from a year ago.  The CRB Index is off slightly which shows people are still carrying on their day-to-day spending.

The sell-off in the stock markets in December was due to two things; no leadership anywhere in the world and, more importantly, stock markets were seriously overvalued.  Markets over the long term are based solely on corporate earnings.  The Dow Jones a year ago was trading 28.45 times earnings.  This was double the 99-year average and indicated that investors expected corporate profits to double every 2.5 years, which is literally impossible.  Today, the stock market is trading in this millennium’s average price earnings ratio of 18, but still high compared to its historical average of 14.6 times.  At 19.6 times, the S&P 500 Index is also trading in expensive territory based on their 119-year average.

The North American economy is currently running well enough to justify rate hikes.  This should mean interest rates will go up in the U.S. and Canada at least twice in 2019. Not even a slowing consumer will stop the coming increases.  The stock markets are probably at or near the bottom. But there will not be a big rebound due to the dysfunction of Washington and Trudeau.  It is time for investors to buy the blue-chip shares that offer a good yield and chances for increases in the years ahead.  Our selection in the Sacola Financial Newsletter have yields of between 6 and 8% at current prices.  They remain a buy.