October 2018


Ten years after the start of the so called “Great Recession of 2008”, we find few reasons to celebrate its anniversary but many lessons to be learnt from its aftermath.  We will draw from the lyrics of “I’d Love to Change the World” by the band Ten Years After, appropriately enough, in reviewing the events of a decade ago, ones that will likely shape the future of global economies for many more decades to come.  The autumn of 2008 was a time when: “…nation bleeding, still more feeding, economy.  Life is funny, skies are sunny, bees make honey, who needs money?... I'd love to change the world, but I don't know what to do.  So, I’ll leave it up to you.”  Recall that ten Septembers ago, a number of very large US corporations, in quick succession, filed for bankruptcy and many more seemed ready to follow in ignominy.  The culprit was massive amounts of defaulting sub-prime loans held by nearly every major US financial institution.  Investors were gripped with the fear that a domino like chain of bankruptcies would soon spread worldwide to effect a complete meltdown of the global banking system, at first, and then the rest of the global economy.  Clearly, everybody wanted to change the world, but most were frozen in panic and few knew what to do.  Thankfully, the task of saving the world from total economic calamity was left up to the Central Bankers, who knew exactly what to do.  In lockstep around the world, they slashed interest rates to zero, implemented monetary stimulus programs, and fed the economy full of liquidity to ensure that money was available to those who needed it.  While monetary policies stemmed the nations’ bleeding, bold fiscal policies would be needed to get the economies firmly back on track for growth.  On this front, the US had the good sense of cutting business and personal taxes to boost its growth outlook.  Unfortunately, Canada did not follow in America’s footsteps; our government took to heart another verse of our referenced song’s lyrics, perhaps a little too literally, and instead decided to “tax the rich, feed the poor, till there are no rich no more”.  Additionally, our government badly bungled the management of its foreign trade and resource development files to further blunt Canada’s economic growth.  So, in summary, excessive leverage combined with excessive risk taking nearly destroyed the US economy and in the process almost took down the entire global economy with it.  Despite the very dark fears and predictions of an economic Armageddon, a “great recession” was minimized to just an average recession, all because Central Bankers were astute in their implementation of monetary policies.  While there were indeed large losses initially, financial markets managed very respectable gains over the past ten years.  On a compounded average annual basis, the Dow Jones Industrials Average gained 12.2%, the S&P/TSX Composite Index climbed 6.3% and the Canadian Bond Index edged up 4.4%. 


The US economy is currently performing very well with reports of a higher than expected GDP growth rate, record low unemployment and strong consumer spending.  We do not foresee any immediate developments that would disrupt this trend.  The Canadian economy did not match the US’ hot streak mainly due to businesses postponing investments over the ongoing trade uncertainties.  But as Canada has pulled off a last-minute trade deal with the US and Mexico, those uncertainties are now mostly behind us.  This new trade agreement looks a lot like the old one, which to us, is a good thing.  We are now much more confident in our forecast that our economy can reach a growth rate of 3.0% annually.    



Interest rates in the US climbed further when the Federal Reserve, as planned, raised them by 25 basis points at its September meeting.  The hike was warranted given the strength in the US economy and its above target rate of inflation.  Canada is also experiencing growth in its economy and its inflation rate is also above target, but the Bank of Canada held off on upping interest rates at its September meeting.  The Bank felt that it should wait out the uncertainties surrounding the ongoing trade dispute, specifically the aftermath of the ensuing tariffs and retaliatory tariffs.  We now know that such tariffs are no longer a concern and expect the Bank to prudently raise interest rates in October to head off early inflationary pressures.  The Canadian bond yield curve has shifted upwards slightly to reflect higher interest rate expectations but remains very, very, flat from 5 years out.  Despite moderately higher yields, we still cannot see any investment merit in bonds. 

Income Trusts

It was a somewhat uneventful second quarter for the real estate income trusts sector.  There was not much in way of news or announcements made.  The trusts just quietly kept to its task of out-performing both stocks and bonds without fanfare.  We do not see rising interest rates as an ominous threat to the trusts.  As interest rates rise due to strength in the economy, the trusts should be able to enjoy sizable gains in income to offset any downward pressure on their unit prices.   We have no plans for portfolio changes. 


Now that North American equity indexes are at or near all time highs, questions of whether stock markets are overvalued invariably arise.  From our perspective, stock prices currently reflect a well-balanced mix of optimism and caution.  The causes for optimism include economies operating at near capacity, solid corporate performances, and tax cuts in the US.  Offsetting these positives are a cloudy trade picture (the US vs other parts of the world), too much consumers debt, and a Canadian oil industry that has to bear an indeterminable postponement of the Trans Mountain Pipeline expansion.  A review of valuation metrics points to an encouraging risk versus returns picture for equities.  Price to earnings ratios remain within historic norms and do not show any signs of excessive investor exuberance (marijuana related stocks not withstanding).  Dividend yields in general have risen in line with bond yields, but the former remains favorably higher than the latter when compared under a risk adjusted basis.  We believe equities currently present very good value and thus warrant the maintenance of our current portfolio weighting.