The 2020s mark the third decade of a third industrial revolution in the global economy, and massive capital investment and efficiency improvements are necessarily underway. The financial presumptions used in 2030 are likely to look very different than those of 2020.
Most households and businesses are ill-prepared for the changes afoot. This is true of Canadians, in particular, who have spent the past twenty years saving little and borrowing crippling amounts of debt to fund consumption and increasingly unaffordable shelter.
Expansion, mergers and the accumulation of uneconomical assets has continued so long as more cheap debt could be added. In the process, consumption has driven about 60% of Canadian economic growth over the last decade, while productivity slumped, and output per capita has flatlined. Now loans are harder to find, and defaults are predictably leaping.
At the same time, thirty years of shareholder-first policies, falling corporate tax rates and lax accountability worldwide, have left massive holes in the coffers of critical institutions and government services. Historically, when monetary and regulatory conditions cannot get any laxer, the pendulum starts to swing the other way. Already, new financial disclosure rules and increasing producer responsibility for waste and harmful by-products are starting to bite–and this is only just getting started.
Financial realism is wildly out of favour today. If only blind-optimism and ignoring math worked indefinitely. The fact is that even while equity and corporate bond prices have rallied to record valuations, 2020 begins with unprecedented deficits and unfunded liabilities. The next bear market will make capital holes much worse.
Conventional wisdom asserts that long-standing historically informative investment measurements are now irrelevant artifacts and that the price we pay for future cash flows no longer matters when deciding what and when to buy. This highlights just how far from reality participants now abide. If valuations are irrelevant, then what are we to bank on, momentum? Luck? More central bank bailouts? You call this investing?
Where misplaced confidence and fear of missing out (‘FOMO’) prevent today’s holders from selling, the truth is that most never will–until they are forced by crashing prices, margin calls, panic, ETF sales and mutual fund redemptions as the masses liquidate and flee once more.
With cash levels at record lows, debt, asset valuations and blind-optimism all at secular highs, and central banks now hyper-extended, we are closer than ever to the third bubble-implosion-end of this secular bear, and finally, the best investment opportunities of our lifetime.
To get to that other side though, we must resist the madness of crowds and the self-destructive practices of the masses at large. We do this today as follows:
- Pay off debt as fast as possible and manage to live without it.
- Build savings monthly.
- Minimize capital risk as you enter or near retirement, especially at this late stage in the market cycle.
- Keep any funds needed for purchase goals (like a home) or spending (like education costs or retirement income within 10 years) in capital-protected instruments and deposits.
- Minimize today’s widely held ‘no brainer’ holdings like stocks, preferred shares, corporate bonds, commodities, funds or ETFs of them, and non-essential real estate you are planning to sell within five years.
- Downsize expenses where feasible in order to spend less than you make.
- Consider renting out or sharing part of your personal real estate to lower costs and increase cash flow/productivity.
- Maintain employment or active business income into your 60s in order to delay drawing from savings. Do not hold high-risk assets as a way to cease work earlier. ‘Freedom 55’ is a self-serving marketing slogan from financial sales firms. Beware.
- Be careful about giving money to other people or family members, you may have less surplus funds than you think.
- The time to add corporate assets will come in the next bear market when capital risk will be a fraction of present levels and income yields much higher. Realistic retirement plans can be re-evaluated at that point.
- If you are taking your financial planning and investment advice from representatives of financial sales firms–you need to seek out an independent review.
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