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Federal Budget | Government Debt | Freedom
Last week's federal budget was, at least from an investor's point of view, noteworthy for its lack of surprises. Although there was speculation the tax rates on capital gains, stock options, and personal and corporate income would be increased, none of these happened.
However, there were some things of note, such as the elimination of the Public Transit Tax Credit and the creation or expansion of credits for: caregivers to infirm (non-spouse) family members; courses related to occupations; and medical expenses related to reproductive technologies. If you're interested, Raymond James has provided
some highlights of the budget
from an investor's perspective.
My concerns regarding the federal and governmental debt...
The federal deficit
is now projected to be about $100 billion over the next five years. That works out to about $2,739 per Canadian. A little context: Our
national debt is about $636.8 billion
, or $17,419 per Canadian. In other words, our national debt is estimated to increase by 15% over the next five years. This is of course assuming everything goes as planned----- interest rates don't increase, energy prices stay stable, no recession... you get the picture.
A year ago, the
current total Canadian governmental debt
(federal, provincial, and municipal) was $1.3 trillion, or $36,600 per Canadian. This most likely means we'll be well over $40,000 of government debt-per-citizen in five years. Oh, and, there's also our personal debt too. The Canadian household debt-to-income ratio reached an all-time high of
166.9% in December
.
I believe governments and individuals should pay down their debt when times are relatively good or stable and interest rates are very low. This provides a cushion and flexibility against surprises, recessions, and black swans. If you're my client, you'll already know that my advice is to always live within your means, and don't run up what you owe. To be clear, I'm not predicting something bad will happen in the future. However, historically when unexpectedly bad events happen---- as they do from time to time----- high debt levels almost always make them worse.
On Emerging Markets
Dividing factors into quadrants helps clarify my thinking and sort through my options. Let's take investing, for example. I generally plot growth (fast/slow) along one axis, using GDP, and price (cheap/expensive) along the other, using a
price to earnings
(P/E) valuation. Once visualized, it's easier to see which investments to avoid (expensive, slow growth) and which ones to focus (cheap, rapid growth).
Using the quadrant method,
emerging markets
(EM) look the most attractive. They are clearly growing much faster than markets in the developed world (and should for the foreseeable future), while their valuations are much cheaper. However, by definition, emerging markets aren't as mature, which can lead to increased levels of corruption and volatility.
That being said, if you are a long-term investor and committed to rebalancing your portfolio (trimming in good years, adding in bad ones), you'll be happy with more volatility in an investment that is growing over the long term.
For this reason, our portfolios fairly overweigh in the emerging markets. To compensate for the volatility, we rebalance and use two ETFs with very different geographic focuses, ensuring we have the best chance to ride the EM wave.
On valuations in most of the developed world
Last year was a great year for global markets, and the U.S. market has had a particularly strong run for a few years. Although we've seen the U.S. economy grow relatively fast, this type of growth leads to higher valuations. Translation: the U.S. market is currently the most expensive (by price to earnings ratio) it's been in years. Historically when this happens it's generally not good for long-term rates of returns, but this doesn't mean it can't continue this strong performance for a while longer. The rest of the developed world is also fairly frothy, but not to the same extent. To protect ourselves, we've rebalanced portfolios to take these gains off the table and allocate them to bonds and other securities with better valuations.
Freedom to, and freedom from
Most people dream of freedom-freedom to take a trip whenever they want; freedom to go wherever they want; or freedom to buy whatever they want. Although "freedom to" is important, there is another side to this coin-freedom from. Freedom from obligation, freedom from needing to stay on top of the latest big news, or freedom from needing to be who the world expects you to be. "Freedom to" is really important, but sometimes I think we forget that "freedom from" may be just as important, and we often have more control over it, if we give ourselves permission.
In the review queue
The Economics of Social Status
by Kevin Simler:
Every once in a while I come across something that really makes me think about why we do the things we do. This article did just that. I highly recommend it, if for no other reason than to get a different perspective on your own and other people's actions.
Scientific Concepts We All Ought To Know
by Farnam Street:
Every year Edge.org has a question it asks some of the top minds in science and other fields. This year's question was "What scientific term or concept ought to be more known?" In this post, Farnam Street picks a few of their favourite responses. If you're curious, here is
the direct link
to the Edge.org's feature.
Let me convince you to save money
by Morgan Housel:
A great reminder of the many things you can gain if you choose to spend based on your needs as opposed to your desires, or society's expectations.
The Knowledge Project podcast with Naval Ravikant
:
An interesting conversation with CEO and co-founder of AngelList. The discussion covers everything from philosophy to books to achieving personal goals and living your values. I enjoyed this podcast so much I'll likely go back to give it another listen and likely take notes.
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Matthew Lekushoff, CIMA
Financial Advisor
Raymond James Ltd.
T: 416-777-6368 | F: 416-777-7020 www.Matthewlekushoff.ca   
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