Juggling Dynamite

There are many wise, helpful insights in this discussion.

In this episode, my guest is Morgan Housel, an expert in private wealth generation and management and author of the bestselling book The Psychology of Money. We discuss how desiring, pursuing, saving, and spending money impact our psychology and perception of wealth. We explore why people tend to either overspend or oversave and examine the most common mistakes made in the pursuit of financial freedom. Additionally, we discuss how to best use money — and one’s relationship with it — as a tool to create psychological security, freedom, and a deeper sense of life purpose. We also delve into the impact of purchases, social media, and wealth signaling on our internal reward circuits, the dangers of using money as a gauge of career progress or self-worth, and the healthiest psychological stances to adopt while building wealth at any level. By the end of the episode, listeners will have gained numerous practical tools for making smarter financial decisions and should have a clearer understanding of the role money plays in their psychology, happiness, and life.

Here is a direct video link.

The Canadian government’s plan to constrain population growth by reducing immigration over the next few years is designed to relieve demand pressure on key services like housing, education and health care. That’s needed.

The downsides are that Canada’s economic growth will weaken, and the government will collect less revenue. RBC economists estimate the impact to be about 1 percent less economic growth over the next three years (blue line below) and some $50 billion less government revenue over the five years starting in 2025 (shown in yellow by year).That’s rough, considering that even with the record immigration in 2024, Canada’s economy expanded at just a 1.5% year-over-year annualized growth rate as of the third quarter and an estimated 1% growth rate from the second to the third quarter (quarter over quarter change shown below since 2016, via The Daily Shot).
The fourth quarter started with flat growth in October. Notwithstanding the weakest loonie since 2020, exports shrank by 1.1%. Capital expenditures from the corporate sector contracted by 27.8%—the largest drop since the second quarter of 2020 and something rarely seen outside of a recession (hat tip, Rosenberg Research). Non-residential construction was flat. Manufacturing has contracted for the past four months with output -4% year-over-year. Government spending was the only engine firing, up 4.8%; Canada’s economy would be contracting without it.

Canada’s unemployment rate has risen 160 basis points from 4.8% in July 2022 to 6.5% in October, faster than any other advanced economy. The standard of living for most Canadians has been weakening for a few years, with real GDP per capita contracting for the sixth consecutive quarter and eight of the last nine quarters—a deterioration not seen since the brutal real estate-led recession of 1980-81.

Next comes the prospect of increased trade tariffs in 2025. Some 21% of Canada’s GDP comes from exports to America (sector breakdown below, courtesy of The Daily Shot), mainly oil and gas and other commodities.

For all the hype about insatiable commodity demand, prices have not rallied with the stock market since the November US election. Despite ongoing wars, oil prices (WTIC) have been flat since May 2021 and are -40% since May 2022. Natural gas is at the same price as five years ago in October 2020 and is -68% since August 2022. Dr. Copper has followed a similar trend—flat since March 2021.

Sustainable growth does not come from more monetary and fiscal gimmicks to further inflate asset price bubbles and unproductive debt. Every country on earth has learned this the hard way through centuries. Japan is the leading example of our generation, but many other countries—like China and Canada—have followed the same playbook and are now suffering the hangover. America had a comeuppance in 2008 but is due for a replay since it doubled down on the same asset bubble-inflating policies.

With real interest rates at their highest in 24 years, capital is no longer free and desperate to take any bet. How well we do in the next decade will depend on how thoughtfully we allocate our resources today. Investments that increase productivity, improve health and training, reduce waste and harm, and lower living expenses are all the right ideas. We can’t afford more of the opposite.

About 15 million, or 37% of Canada’s 40 million people, live in the Vancouver, Toronto, and Montreal areas, three of the top seven least affordable cities in America and Canada.

Over 25% live in the two least affordable cities—Vancouver and Toronto—where the average sale price in 2024 was 12.7x and 10.7x the median household incomes of $66k and $71k, respectively. That’s right: Housing is less affordable there than in LA, San Diego, San Francisco, New York, and every other major American metropolis (table below, courtesy of WOWA.ca). And it’s not much more affordable within a two-hour drive of the major cities.

That’s a big red flag, considering the historically insightful University of Michigan Consumer Sentiment Survey shows that the percentage of Americans saying now’s a bad time to buy a house is above 80% and worse than in 1981 when conventional fixed mortgage rates briefly topped 16% (chart below via Nick Gerli and re: venture). Today, fixed mortgage rates are just over 7% in America and 4% in Canada, yet home affordability has never been worse. In other words, interest rates are not the problem; it’s prices that have risen much more than household incomes.

During the 2006-08 U.S. real estate bubble, negative U.S. homebuyer sentiment peaked at 40%, less than half the current level of pessimism (see above).

To restore 2019 levels of home affordability, the median U.S. single-family home would need to fall 36%, or the median household income would need to rise more than 60% (Fannie Mae data). History shows that the former is more likely than the latter. And since Canada’s home-to-price and rent ratios are much worse than America’s, restoring Canadian affordability requires even bigger adjustments than south of the border.

As we saw after the 1980, 1990, and 2008 housing bubbles, impossible pricing has a habit of imploding as interest rates fall. There’s no evidence that this time will be different.