Michael Mott

  • Address:  1223 Cedarcroft Cres
  • Phone Number:  613-746-8065
  • Office Location:  Ottawa
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April 2015

My last newsletter to you was October 2013. In it I made several, at the time, bold predictions. I said “I have never been so optimistic for the period of the next one to two years. From my point of view everything is working well.” I went on to say “If you were considering adding to your investments, do so now. I think the entry point now will be much better than anything we will get one or two years from now.”

We are eighteen months from that prediction. Any of you who acted on my advice to invest at the time have been well rewarded. In fact, those who stayed invested over the last 18 months have done well.

Predicting is perilous, even more so with financial forecasting. The chance of being wrong is high and the chance of looking foolish is equally high. Nonetheless, flush with the success and accuracy of my 2013 prediction, I am proceeding further down that path, risking being wrong, but with enthusiasm.

When one studies a subject thoroughly and over a long period of time, insights can occur. In financial and economic terms you come to see patterns or cycles, some of which are not apparent to others. The investment managers at Edgepoint refer to this, when researching prospective companies, as “proprietary” insights.

One of the fund managers I have had on my short list for years is Kim Shannon. Kim uses a template of questions that she wants her junior analysts to answer when researching companies to possibly invest in. One of the questions relates to the composition of a company’s Board of Directors. The analyst needs to find out if a number of company Directors have academic or political backgrounds. People who have spent their careers in these areas tend to be poor decision makers. This knowledge helps anticipate the possible risks to investing in a company. One company that had this Board composition was Yellow Pages. It is now a penny stock.

I was at a presentation by Bill Kanko several months ago. There has been a growing perception the last several years that the United States is past its peak and in decline. Financial journalists seem to feel China is the big story and will shortly overtake the US as the world’s largest economy. Bill made a comment which surprised me. He said that China will not be the dominant economy in the world for quite a long time. The reason he gave is because of China’s “one child” policy. Furthermore, the cultural practice that the one child always be a boy has significant consequences for their economy. They do not have enough workers to maintain their economic growth rate and will not be producing enough to meet the employment demands of local businesses any time soon. We will see if he is right.

Europe, particularly Greece, continues to occupy the financial media. In the recent past, Greece was in danger of defaulting on its debts. It would be the end of the financial world if it did. Greece did default. The media forgot to report the fact it did, but the world somehow continued. Now the story is that if Greece doesn’t pay their debts according to the newly agreed upon schedule, they could be gone from the European Union. No more use of the Euro currency, back to the Drachma. If Greece separates then the European Union will fall apart.

Here is my prediction. Greece is gone. Too bad, for them. In time, several other countries will also leave. Probably those with a “me first” culture. What will remain will be a European Union of the strong. A formidable economic and financial block that will compete effectively with North America and Asia. The new global world will be a better place to do business and invest. You heard it here first.

So what is in store for Canadian investors? There are several issues of which to be mindful. Our dollar is linked to the price of oil, so expect vacations in the US to continue to cost more. Also expect your grocery bill to be 20% higher than you want. Demand is increasing slowly, but not at too great a pace. Employment has been increasing but, interestingly enough, not to such an extent as to cause wages to rise. This is, in part, thought to be because the type of jobs being created now are mostly burger flipping jobs. Longer term, this could be a problem.

Also of concern is what appears to be the politicization of the Bank of Canada. Consumer debt to disposable income in Canada is the highest it has ever been at around 163%.  In response, the Bank of Canada lowered interest rates to help Alberta, which is suffering because of the drop in oil prices.

What happens if you lower interest rates? Don’t people go out and spend more (and increase their debt)? By the way, where is our Prime Minister from, Albert perhaps? Political expedience looks to be directing our fiscal policy. This can’t be good.

As such, my recommendation going forward is to invest globally. That is where 97% of the action is. Also, temper your expectations with regard to investment returns. We have come through two years of big returns. The going will be tougher for a while as the world resets.

Stay focussed and stay invested

Wishing you continued success for the rest of 2015.

Michael Mott