Sunday, December 9, 2018

Is Alberta Separatism real?

I live now close to 47 years in Alberta and went through Trudeau 1 and 2. I always considered myself Canadian but it seems like when the Liberals are in power, in particular the Trudeaus, that I feel less Canadian and definitely a Westener. Maybe, like so many Albertans and I should include all Westerners except those in the Lower Mainland along the Fraser Valley. We Westerners feel abused by those Liberal Governments.  Looking back, maybe Chretien and Martin were not that bad (except for a bit of corruption) – but the contrast between the Trudeaus and the West is always like fire and oil. 

I am obviously not a fan of Trudeau and his sleazy crowd. But when I read the comments sections in our national news papers then I nearly sound mild.  It seems that Albertans are mostly National Post readers and if you believe their comments, Western Canada will go independent in a heart beat!  I wonder how Trudeau would feel about the national unity he has created?

The Globe is different. It is more dominated by those in Eastern Canada. The comments there though also become more critical of the Trudeau Liberals. No wonder after Morneau’s attack on middle class small business owners, the illegal immigration and many other issues including the wasteful liberal provincial governments that have finally have been shown the door.

Still, there are a significant number of comments in the Globe (probably mostly from Westerners) that also call for a separate western nation. A nation that would include Alberta, Saskatchewan, Manitoba, NWT and a large portion of B.C. The Lower Mainland would become so isolated that it would not be viable on its own and it likely becomes part of the new nation as well.

So then we have Canada, not population wise, but certainly in terms of landmass being split in a Greater Canada of the North-West and a severely diminished Eastern Canada split in an English and French portion. Wonder how that will work out?  So thank you Justin for being at the root of our dis-unified country.  You energy policies stink, your lack of competitiveness has triggered the exodus of many businesses, and national unity is kaput!  Wow such a successful prime minister! 

JT you are everything your fellow Liberals accused Stephen Harper of. In the meantime, under Stephen Harper this country was never more unified. This country under Stephen Harper was never more economically stable. He may have been to the right, but he governed from the Center. You, claiming to represent the Center, you governed from the elitist left!

Many here in the West predict that if the next government of Canada is another Liberal Government then we have a Western Separation Referendum within six months. I don’t know whether that is realistic, I just describe the mood in the West. 

I am a proud Canadian. I brought my children up here and love from ‘mare a mare’. Together we’re stronger but not if this abuse from the Liberals continues, including Bill 69. Canada has a long tradition of mild-mannered compromise and a passion for hockey. We are proud of our national projects like the Trans-Canada Highway, our railway system, the peace keeping tradition and our independence from the U.S. Many of us consider our southern neighbours ‘barbarians’.  Friends but loudmouths who wear their hearts often on their sleeves. Not like us, more reserved and polite Canadians. The latter only if the hockey rink is closed! 😊

I know, even former Prime-Minister Harper once thought about a firewall. I don’t think separatism is the answer. But Trudeau has shown why our east-west relations ought to be reconsidered. I for one had enough of this Liberal animosity towards the West. To the rest of Canada: You threw out Wynne and we will get rid of Notley – although I must admit that the latter is lately standing up for the West. She better recognizes the realities of her home-province than Justin and his pal Horgan who represents B.C. lower mainland’s fashionables - the Lululemon Crowd. Still it is too little too late. Alberta owes Notley as she showed us the lack of conservative vision and an attitude of excessive arrogance of the now defunct PC.

If Canada is to remain whole, we MUST get rid of Trudeau and his Liberals. Ontarians you have shown that you can stand up against this elitist left. Please, now do it also for Canada or whatever is left of it after Trudeau. Because the West is not far from going it alone!  I for one would hate to see that happen.

Saturday, December 8, 2018

How much cash should you hold for the coming stock market crash?

It is 100% sure that we will have a stock market crash during one of these years or decades to come. Typically, we have a crash every 5 or 6 years. But it all depends on your point of view. Some call 1982 – 2001 the big baby boomer bull market. But let me tell you that there were a number of crashes or super-corrections exceeding losses of 20%. 1987, 1990 and 1998 come to mind. There were also years of flat or slightly down markets; often following years of excellent market returns. The super-corrections did give me the heebie-jeebies, always did. I was only happy in 1987 because I had hardly any money in stocks and so I could benefit from ‘buying stocks on-sale’. I had been overcautious during previous years still fearing my 1982 losses; just like many today sit on the sidelines because of 2008. The real crash will come when all those sideliners are in as well – that may still take a while. Yet, don’t even think that those ‘super-corrections’ are painless.
The big secret is, that over the long-term, that is 10 or 20 years, often we all make money. Stock market return as has been pointed out in this blog repeatedly, typically averages 7% plus inflation. This together with preferential tax treatment of dividends and capital gains makes stock market investing profitable. Yet there are ‘dead decades’! That is typically in terms of stock price appreciation, however, in the meantime you can keep on collecting dividends which are typically better than plain interest on an after-tax basis. 

Do you really need 60% stocks and 40% fixed-income?  Maybe, but it is only a tool to reduce your portfolio volatility. If you have a ‘weak stomach’ for temporary losses – and many do – then this may be a good strategy. But interest income in my books is the closest thing to government theft. You see, interest rates are high during high inflation and low during deflationary times. Ahh, you had this government bond in 1982 when inflation was 14% and interest rates were as high as 22%.  Wow, that would make you a lot of money, right? Wrong. You see interest rates are fully taxed; in those days around 50%. 50% of 22% is 11% after tax income. But inflation lowers the value of your principal (amount of loan) by 14% per year. That is a real interest rate loss of 3%!!! (11-14%)  Today you don’t get a tax credit for investing in a negative interest bond. Even if your interest rate was 2% today - something most GICs don’t even pay, then your after-tax return is 1%. Oops and then there is 2% inflation. Again, a negative real return. If you must have interest income the best place is your tax-sheltered TSFA and to a lesser degree (now it is getting complex) your RRSP. In my books and in today’s world, fixed interest (other than real estate – another story all together) is theft by your government and debtors.

Buy-and-hold works if you have a strong stomach. On the other hand, buy-and-hold doesn’t work at all. 😊 If you had bought in the late 1800s the stocks that made up the Dow Jones Industrial and held on, then you would have made virtually nothing. Today the last of the bunch, General Electric is biting the dust under a cloud of fraudulent or misleading accounting. If you collected dividends rather than reinvest, at least you may have had something.

The secret of the Dow is that it is managed by the editors of the Wall Street Journal. Every year it is adjusted by a tiny bit. Last year they finally replaced G.E. with a hot stock that has good promise to shine over the next decade or so. The same is true for many market indexes. As such, what is the difference between an actively managed stock portfolio, a mutual fund and an market index ETF?  In my books, 87% of actively managed portfolios and mutual funds are trying to keep up with the index but underperform thanks to commissions and MERs.

Having said that, those market index ETFs are untested in bear markets (because they are so new). However, a bear market is nothing more than a very large correction with ‘losses’ exceeding 20% from the most recent market peak. This is just a question of volatility if you have an investment horizon of decades. In that case, do you really need to have cash?
Yes, downturns nor market peaks are very predictable. That is why you may just as well only invest in companies that last and with growing dividends when you can get them at a reasonable price. If you find such a stock, then just buy whether it is a bull market or bear market as long as the price is right. The strange thing is that at least 50% of profits from dividend paying stocks comes from said dividends. The appreciation resulting in capital gains is when you sell, which like buying real estate may be decades away. The impact of the early bargain price fades over time.

With commodity stocks this is different. Buy low when nobody wants them. Don’t use stop losses because the commissions and taxes may kill you. Hold them until the next peak of the commodity cycle and sell them for mostly capital gains and if lucky with some dividend profits. This is where you need nerves of steel and just dumb arrogance. The roller coaster rides those stocks take you through is damn rough. In the down markets you never seem to be able to do anything right. And… it is not that price momentum will stay the same all the way to the top of the market. If you look at commodity legends like Ross Beatty or Rick Rule, they tell you to follow the commodity cycle and only invest in companies with proven management and a diversity of projects. If you don’t think that Buy & Hold is easy then don’t even try investing in commodities. You will get eaten alive!
You even have to watch out with Buy & Hold stocks because the underlying companies, like G.E., can go bad even after decades of good performance. Thus, how much cash do you need during a downturn?  

The answer my friend is blowing… eh… is dependant on your investment style and your personal needs. The two big things that leads to real losses is if you sell in a panic at or near the bottom of a market or… if the underlying company is about to go under – again think G.E. Buying into G.E. right now is probably like trying to catch a falling knife!

Some professional managers don’t like to hold cash at all: ‘my investors pay me to invest not to hold their cash’.  Or more like Warren Buffett who always seems to have a lot of cash on hand. I have tried to simulate portfolio performance for many different strategies. My conclusion is that if you stay out of the markets during bad times, you are likely to underperform because the extra appreciation you may get from buying low, disappears over the long term and you are losing out on dividends. You could though during bad markets collect those dividends and build up a cash hoard to buy additional stock at bargain prices during the down turn. Also, I recommend you sell risky or highly cyclical stocks (like commodities) when approaching a market top, adding to your stash of cash.
So how do you avoid forced selling of your investments. The answer is simple: you need cash to pay for your cost of living and cashflow to service your debt. Especially a lack of cash to service debt can become very nasty. You see many corporate managements are selling assets to repay debt. That is not for the benefit of the shareholders but rather for the creditors who want their money back. Often you see bad management selling those assets at rock bottom markets and that makes matters even worse. Think about it, the assets that are being sold often generate income. The idea is to pay off the debt and debt service costs out of the project’s cashflow and the rest is profit. Well if you sell at the market bottom nobody will buy your crappy assets because then they lose money as well. They want to only buy your best assets at rock bottom prices. That is why those poorly managed corporations are forced to sell off their cash-flowing assets and end up in a death spiral. The managers often get golden hand shakes, but the share holders end up with the losses.

The same is true when you sell of assets to get out of debt at the bottom of a downturn. You get a poor price and you lose typically cash flow (dividends). You just need to have enough cash to live through the downturn and cash to service your debts (which is not always easy so be careful – better safe than sorry). You also may have a minor cash reserve augmented with cash flow from dividends to take advantage of buying opportunities. And… when you buy, you are probably too early while you salivate at ‘bargains’ that may fall even further. Don’t buy those ‘bargains’ all at once. Do it in small steps and if it works then buy more. You may even lose value before the actual upturn occurs. Just look at the current downturns in uranium, gold or oil and gas; recovery always takes longer than you think. Don’t be in a hurry usually there is a better deal around the corner.
In my experience, cash management is most difficult if you have made a commitment to expenditures for a large project like building a new plant or a new residence. Because, often when you count on your portfolio to generate lots of cash you get hit by a downturn or it seems a downturn is just around the corner (like today). I know the large project is likely to throw of a good profit, but it is going to be offset by underperformance of the rest of the portfolio because you are holding so much cash. Oil companies can stabilize their cashflow by hedging production and many do – Canadian Natural Resources was a master at this when building their Horizon open pit mine. And I am pretty sure that when oil was recently hitting $70 to $80 per barrel they hedged again. Suncor hedges probably as well but they also are protected by their refinery operations which make right now huge profits. As usual Encana and Cenovus are the real suckers. Why? Simple. Encana and spin-off Cenovus managers are not business founders; they are mostly managers that climbed up through the bureaucracy; they are not real investors. Many have barely skin in the game. That makes a huge difference.

Think about your own portfolio in terms of running a business as a manager with lots of skin in the game. Maybe you should consider if you are afraid (or even if you are not afraid) to hedge part of your portfolio, for example by buying ‘put options on a market index’ to ensure that any investment losses are offset by gains in the options. But, insurance or buying put options do cost money. So how concerned are you about a real down turn?

That is why investing is always agonizing about ‘what is the right thing to do’. In the end the buck stops with you and nobody else. Take care of your portfolio and consider what the right amount of cash is for you.

Friday, December 7, 2018

Where do we invest in 2019? When will Canada be once again open for business?

Forecasting stock markets is a money-losing game. Forecasting the economy works only for those who forecast often. But we can extrapolate trends we see in the world. Despite the rise of nationalism and even rightwing extremism, I see Europe to continue its turnaround. I was two weeks ago in Europe and the mood in countries like the Netherlands and Germany has improved and the left seems in retreat. No more liberal democracies but rather centrist or slightly-to-the-right mainstream democracies. Italy being the exception as well as the a-political yellow jackets in France standing up against evermore taxing governments. It seems the French are slow learners while the Italians are looking for the 'black-box' easy solutions. But what do I know?

It looks like China has not been doing so well.  For several years now, even before the bear market in Chinese stocks, ex-pats have been leaving the country because of strangling regulations and rising wages. Many once successful entrepreneurs are returning to the U.S. Disney reduced its operations in China because of fears for intellectual property theft and hacking. They are apparently not alone. 

The current trade war between the U.S. and China did not come out of the blue. China is hurting but so is the U.S. In the meantime, though in the U.S. much of the hurt is offset by record low unemployment. Stories we used to hear about lack of workers in Alberta's Grande Prairie with restaurants closing on weekends due to lack of staff we now hear in the U.S. For example, labor shortage in California’s vineyards.  With such a strong economy, the U.S. is likely to weather the trade war much better than China. Trump may be a pain, and even a guy like Jim Rogers is boohooing him, but the bully seems to be onto something. Lately, he engineered the temporary fall in oil prices through his manipulations of Saudi Arabia and Iran. Was that skill or dumb luck?

Even in Canada the economy is doing well except for Alberta and Saskatchewan. Of course, what is going to feed economic growth in B.C. with overseas money and real estate purchases drying up?  Maybe the LNG plant(s) will help but it seems the lefties in B.C. are creating a pipedream for a green economy. Yes, B.C. has a lot of renewable resources, but it also has a mining industry which requires workable regulations and cheap energy. That is about to fall along the wayside. Look no further than Ontario where 12 years of green dreams came to a sudden halt, even during good economic times the people there woke up.  I don’t know about losses in local by-elections, but I suspect that the quiet style of an Andrew Scheer may become a lot more attractive to many Canadians compared to a flamboyant Justin who is intent on destroying Canada’s oil and gas industry. I wonder what Canadians, especially Quebeckers, will say when those transfer payments dry up or even reverse?

I suspect that B.C.’s economy will become the basket case it has often been in the past with the left in power. Then Western Canada will likely re-unite and who knows, separatism in the West will become a real threat. In previous downturns, even Stephen Harper talked about building a ‘Firewall’. This economic downturn is a lot worse than most and Trudeau’s policies are highly divisive. Not only is the man destroying Canada’s golden goose but soon he will destroy a lot of what made us all proud Canadians.  Not to mention large deficits that must be cleaned up just like after his Dad.

Will history recognize the real fool: Trump and/or Trudeau? My bet: Canada and Trudeau (who cares about boy-wonder?) will be the real loser. Canadian stalwarts such as Brookfield and the Canadian banks are increasingly turning southwards to the U.S. and International. CGI is basically an international high-tech consultant based in Canada. My guess, next year we will see the U.S. stock markets turn up with 10 to 15% gains, easily papering over the current days of investor pain and ensuring election of Trump for a 2nd term. Hopefully, by that time Trudeau and his silver-spoon-fed cronies are gone.  Hopefully by 2020 or 21, the two pipelines to the south have been build and the West will once again ride high. But this time it will become more difficult to make the separatist talk disappear.

So, I will invest more and more into Canadian companies with a strong U.S. or international presence. I will stay suspicious of China which is turning increasingly belligerent and its labor is no longer cheap. Maybe India’s time or South America and later even Africa’s time has come. Also, more of my money, currently invested in the U.S., will gradually shift to Europe and emerging economies other than China.  Remember it was first Asia without Japan, now it may be Asia without China (and Japan – bad demographics). 

By the way, due to the one-child policies, China’s population is getting pretty old and just like Russia it may decline in spite of all factors that favor it. With increased automation in manufacturing and ever increasing demand for energy, local manufacturing may pick up near the North American consumers. That should also reduce emissions by a lot. Of course, that is, provided we are open for business. Justin and his liberals really have to go!

Wednesday, December 5, 2018

Agonizing Investor - You are not alone!

It seems like investing is such a black & white thing. We show such a façade of confidence to the world. But what is really going on behind that façade?  Below is some of my current 'back-and-forth' thinking.

We don’t know the future. On TV and in the news paper you meet a never-ending stream of experts who know exactly how the future unfolds. Then there are those that trade large volumes based on mathematical algorithms, after all they calculate the future or at least the probabilities of various futures. The math is beyond me. 

In the meantime, during corrections and bear markets like we experience today, I and many others look at the depressing prices our assets are valued at. Is the value real and were we wrong?  How come the others seem to know so much more? When you live on top of all this fake-prognostication in Calgary, apparently the epicentre of Canada’s disastrous liberal politics, it is hard to stay optimistic and believe in the future. Alberta is pissed!  Yes that is certain!

Look at the bright side!  Stocks are on sale and they are dirt cheap!  Then why is nobody buying?  Is this a rational and efficient market?  I doubt it very much. I may be a believer of selling high quality services for a fair price, but many clients put work out for bid and in the end, it goes for the cheapest and most worthless. Who needs clients like that? They never will be successful. So, you win the bid this week and you don’t enjoy working for a cheap skate who doesn’t have pride in its own performance but who only cares as long as it is cheap!

But then, don’t I do the same when building my new house?  I look for a fridge and no, I don’t buy the cheapest one on the market. Instead I buy the one I want for the lowest price and then the final decision still depends on the pricing of the entire appliance package.  So, I save a few thousand; do I get the service from the seller that I crave? And… is the price difference meaningful? 

Should I go for an IKEA kitchen or a custom-made one at double the price?  I may not even get value, but do I upset the builder’s relationship with his suppliers?   Is it worth to worry about $5000 if the total project is $600,000? Is it even worth the grieve? Yet, I have to show the builder that pricing matters to me. That my pockets are not bottomless so going through these moments of penny-pinching are worth it after all?

The same with investing in stocks. Does it matter if you buy at the cheapest possible price? Should you embrace the blackness of the market? Yet, over time your performance will even out as long as you buy a good company that lasts for decades with ever growing earnings?  But commodities are not like that!  Nor are most companies around for ever. Buy and hold works only for Warren Buffett stocks, but now even Warren has invested in high tech - a business he claimed he didn’t understand.

What is right and what is the wrong investment decision?  Even if you are right; the market can be longer wrong than your pockets are deep!  Who says investing is easy? Maybe investing in long term market index ETFs and not trying to outsmart the market is the best thing to do.  But then, I like to know what I invest in and I am kind of a market groupie and… it is so difficult to let active management go!   I don’t think driverless cars are for me… but then again…

The good news is that my house will be finished in a few months. Thank the Lord at least I can enjoy living there. Spending every month tens of thousands makes me nervous. Can I afford all that?  Maybe I should sell everything but the market is so depressed....

I hope reading this makes you feel better :)

Tuesday, December 4, 2018

Are Alberta’s Oil Quota’s really necessary?

Oil pricing based on so-called oil supply-demand math is highly questionable (see previous post(s).  I consider the most recent fall in WTI and Brent pricing manipulated by speculators and … Trump.  Trump seems to be the ultimate manipulator. First he announces cancellation of the Iranian nuclear deal.  Oil prices strengthened but not just because of speculation on coming supply cuts. Next Trump calls oil prices too high (just like he is disavowing the Fed for raising interest rates). Then the murder at the Saudi embassy in Turkey where Trump plays friend with the Saudi’s. So the latter are obliged to obey and increase production together with the Russians, squeezing every drop from their remaining production capacity.  But when the Iranian boycot should be implemented, Trump sticks a knife in the back of the Saudi’s and allows special ‘waivers’ to continue Iranian oil exports. The oil price collapses further enhanced by maintenance shut-downs at many refineries to prepare for winter/summer production. Voila, an oversupplied market (temporary) and a significant drop in oil prices.

Is Trump really that smart? I wonder. His bluster is nearly becoming a trade-mark. The China-U.S. trade war was carried out with a lot of bluster until just past the mid-term election when a combination of tariffs and a super strong dollar are just starting to bite into U.S. corporate profits. Then, suddenly, the trade language softens culminating at the G20 and voila stock markets pick up.  This ‘suddenly’ improves the economy and worldwide oil prices shoot up along with rumors OPEC and Russia may cut back production. Duuuuh!!!

Due to refinery shut-downs which always occur in North America during spring and fall to switch seasonal production, this year the discount rates were falling to extreme levels. Capitalism suggests that Alberta producers cut back. Nothing happens after Cenovis on its own cuts production by 10%. I am sure Canadian Natural and others were not producing at peak levels either. The discounts did not let up. This summer the discount was $23 dollars – substantial but not insurmountable. The Trump manipulations together with the refinery shut-downs and lack of pipeline capacity created this ‘crisis’. 

The moment Notley announced the official implementation of quota’s (which may have been anticipated by these large producers) and just before several refiners announced that they were operational again caused a sudden price reversal. The speculators reacted belatedly while most of the elements for the production cuts were already I place (Cenovis won’t cut back further than the 10% cuts already implemented). Over the coming year up to the opening of Enbridge Line 3 near late 2019, we are reducing the excess production and lowering Alberta oil in storage. At the same time, we’re likely recover soon from Trump’s price manipulations especially when OPEC and Russia revert to less extreme production capacity.

My prediction for oil and already improved gas pricing (natural gas in North American storage has already significantly declined) and in anticipation of the new LNG plant in Kitimat remains as it was:  higher natural gas prices which are now in excess of U.S. $4.00 on NYMEX and a return of WTI pricing to $80 during most of 2019. The boom or Calgary is coming especially if Trudeau is shown the door (but that latter is far from certain).

Saturday, December 1, 2018

The bear market that did not come

2018 was a poor year for stock investors; for investors in commodities; for those investing in banks.  Every investor is afraid of what crazy Trump may do next. Every investor is expecting another 2008 hidden behind the bushes. Then there is the trade war and Brexit and… a whole wall of worry to be climbed.  

Many markets, not only Canada’s have back paddled in the wake of rising interest rates and FAANG has fallen nearly 25% or more. This is not market euphoria; this is a market of fear and uncertainty. As such, there is little to trigger a major down turn. Yet, earnings are very good but again many fear that this is the peak of earnings growth.

Well, maybe the economy and earnings will slow in growth, but both will still grow!  Dividends will increase to stay competitive with interest rates as well. Fixed income is often exactly that… the interest rate these investments make are ‘fixed’ while dividends payments often increase to reflect higher earnings or to compete with rising interest rates. To top that off, there are the tax credits on dividends from great, but undervalued Canadian Banks. Insurance companies are currently somewhat less than banks, but they are also to benefit from this new environment of rising interest rates.  Will rates go up along a straight line?  No, I am pretty sure they won’t but overall this trend of rising inflation and interest is likely to last for a decade if not longer. 

Just like rates declined from 1982 until 2015-2018, today we are starting the upward leg. First to ‘normalize’ at around 4% and then government deficits will balloon, and Canada will have to pay higher interest on the debt left behind by a certain Trudeau; the same in the U.S. with the escalating Trump deficits.  Remember the Mulroney era?  Higher rates meant larger deficits and thus more taxes which in turn caused higher inflation which triggers yet again higher interest rates. Thus, I am sure that interest rates will not peak at 4%.  And, yes oil and natural gas demand will unavoidably rise and thus there will be energy shortages which also translates into higher inflation and yet higher interest rates. Will we in a decade or two reach the 14% inflation and 22% prime interest rate of the 1980s?  Possibly, maybe not that probable – after all, we have learned from the past or NOT!  So yes, I bet on 22% mortgage rates and escalating tax rates based on trends starting today.

We will see many market set backs or bear markets over the next decades. But it is now the era of the Millenniums. It is their turn to belatedly start families and then there are the economic refugees that will try to live in the more prosperous parts of the Western economies. You bet, they will be motivated to earn money and to invest. The bull market of the 1990s then caused by the baby boomers will repeat with the Millennium generation and the new immigrants.  Just like with the baby boomers these new families will take on a lot of debt and both inflation and interest rates will grow even more.

Will there be a bear market soon? Not likely we are still way too pessimistic and we’re still carrying the fears of 2008. There is currently no market euphoria; more likely the opposite. First people must think that the market ‘cannot go down’. That the economy this time is different. Until then you can buy on the dips. Once many are convinced that there will be no bear market then we will likely be hit. 

Next year is one of the best performing stock markets in the presidential cycle; just like year 2 (that is this year) traditionally is one of the worst. So, we seem to follow that scenario to the ‘T’. I think this year’s pessimism has prevented a major market crash in 2019. Trump, oh I hate that guy nearly as much as Justin, will likely have a good economy and stock market next year and he will blame all his failings on Democrats who now control the house. I wouldn’t have believed this until recently but I think we’re in for a 2-term Trump presidency. Oh… my G…

The U.S. dollar is still the safe-haven for uncertain times; more so than gold. Gold’s time will come but not right now. Use this time to build up your gold hoard because your dollars in cash will rapidly depreciate in the coming years of high inflation. 

Canada, ohhhhh…. Canada when doeth thou come to thy senses… or something like that. Kick out that trouble maker of a Trudeau and live up to your potential!  Maybe a pipedream. So, unless the coming resource boom (and it is coming if not tomorrow then shortly thereafter) is completely wasted by Canada, our banks and resource stocks will do just fine. For the rest invest in the U.S. and maybe a bit in Europe and China. 

I do not know how peaceful the coming century is going to be. That is my biggest fear – China turning totalitarian again believing in the hubris of a superior millennia old culture with the right to dominate the world. China supported by a has-been Russia could still be a formidable threat to world peace. As such, I support Trump and I beg our governments (for whatever that is worth) not to fall asleep at the military wheel. Remember Chamberlain’s attempts to appease an aggressive Nazi Germany. Let’s not play that game over with China. In that, Trump’s Fire & Fury talk against North Korea’s bluff seems to have merit. China’s Xi Jinping may require a similar treatment. I think there is a chance for a third world war now focused on Asia. Heaven forbid! 

Overtime, Muslim extremism is likely to recede. I see the state of Islam as that of Christianity in the 1950s when we were afraid of the devil and dreamed of heaven. In 20 or 50 years, Islam maybe as sleepy as the Pope is right now and with mosques empty as are today many Christian churches in Europe. I think the greatest threat to world peace is an escalating confrontation between a growing China and a declining U.S.  It is just a matter of population numbers. But there may be a third surprise contender – Africa with a future population even larger than China’s. We’ll see. That scenario may still be long off.

But for now, a reinvigorated stock market in 2019-2020 and a bull market even longer than most can imagine. But remember that rising energy prices are as much a retardant of economic growth as interest rates. Thus, investors be alert for set backs. For now though, I don’t see a major market crash (until tomorrow 😊).

Tuesday, November 27, 2018

Financial Planning allows me a boom-bust career

I love geology and working in the oil-patch. I think we are completely underappreciated in society and blamed for all that is wrong in the world.  Yet, our society would be impossible without oil and gas. In Canada, working in the oil patch is nearly a calling. The boom-bust in the oil-patch is unnerving. It is a harsh career where the industry eats you alive and then, at inopportune times, spits you out. Not many survive a career until retirement.

In the 1980s, I lucked out with a 13-year long position at what is now Encana and then a part of the Canadian Pacific conglomerate known as PanCanadian. There were shake-ups in management but hardly ever a lay-off like in the rest of the industry. But it also felt like working in a high-school. At one management shake-up, some people were literally skipping across the office floors for excitement. It motivated me to leave corporate bureaucracy and become a consultant. Also, I together with my spouse had saved enough, to ‘afford’ the life of a geological consultant. If you think that oil & gas is ‘up and down’ try life as a consultant. But I had enough of managements and arrogant blowhards who didn’t understand that all the ‘power’ a position in management brings is ‘fake’, that you are just a messenger boy from senior management. The latter often lacks vision and are the bell-hops of the stock market and its financial ‘gurus’.  The average senior manager doesn’t hold on to his/her job more than five years.

The existence of many small cap oil companies is often not much longer than that; after PanCanadian, I never held a staff job longer than 5 years. The best staff position I ever had was at Canadian Natural Resources Ltd. (CNRL), but personal circumstances forced me to ‘retire’ in 2006.  In 2012 I joined then Penn West, the worst management and job I ever held in the oil patch. Yet, I made many personal friends at that company, many of whom went through the same bad experience or worse. If I ever learned the disease of poor corporate debt and the effect stock markets have on weak management, then I learned it first hand at that company.  Penn West owned fabulous oil and gas assets, but it was arrogant and thought it could run an oil & gas company based only on corporate ratios and ignore technical expertise. In many ways it was very similar to old Renaissance. These companies allways seem to hit a wall and their corporate ratios turn into the nails in their coffin. 

Many oil and gas professionals live in Calgary. They love the adjacent Rocky Mountains and also the prairies on the other side of the city. Many are avid outdoor people. That is nearly a must since the outdoors is also the outlet of their daily stress. Hiking and skiing are very popular. Then there are the winter vacations to Mexico and Hawaii or Florida!  To say that oil & gas people don’t care for the environment shows enormous misunderstanding of this Canadian industry sector.

The oil and gas industry supplies society with most of the energy it needs for today’s lifestyle. Many young people do not appreciate how cushy today’s life is and that it nearly all depends on affordable energy – oil and natural gas. It is taken for granted. Yet oil and gas production are a financially very risky and technically challenging endeavor. 
In Calgary there was a boom on and off, in the 1970s with the OPEC oil shocks. Overall Calgary grew like a sprout. I arrived in 1979. I heard about the terrible recession in 1974 but I was about to experience an even more terrifying down turn in 1982 when the oil price crashed and kept on crashing (to $10 per barrel in 1986). Many oil patch people, including geologists, lost their jobs. In 1982, real estate prices in some parts of Calgary crashed by 50% in a matter of months. From then on until well into the 1990’s it was not uncommon that 98% of a ‘year of graduating geology students’ could not find work. There were many small upturns, but whenever my consulting company reached 3 subcontractors, I could predict an oil-price crash within the coming months. I am still proud that I never layed off anyone. However, if there was no work, my subcontractors did not make money and so they gave up on there own or they lucked out and got a staff job at a client. 
There were years that my take home was around $30,000 annually while being father of 2 young children and married to an engineer who claimed that ‘engineering was a respectable profession to leave’. That is why those first years at PanCanadian were so important in establishing the finances that ‘allowed me the life of a consultant’.  Around 2000, I had enough of this marginal but very adventurous life as a consultant with overseas stints in Indonesia and Egypt. I went on staff with CNRL. The stock options helped supplement our savings until I was too busy with other things in 2006 (teenage kids) to have a full-time job in the oil patch.  I ‘retired’. I always liked saving – living below your means - and investing. Over the years, in spite of many ups and downs, our portfolios had done very well. The 1982-2000 secular bull market had helped a lot. So, did investing in commodities although to this day, I have trouble understanding it fully. Probably I never will. Profit taking is very important – it definitely is NOT ‘buy and hold’ I learned to my chagrin.  However, buy and hold in banks, at least since the early 1980s has worked fabulously. But it took a while for me to learn that too. Then in 2008, I learned that no investment strategy is ‘forever’.  Thank ‘you know who’ that I owned only Canadian Banks. 
I liked teaching geology and did a few short-term contracts in the oil patch during my ‘retirement’; but with the kids grown up and after experiencing the 2008 stock market while looking through my home-office window in my ‘retirement years’, I got bored and got a realtor’s license. Part of learning investing in real estate. My daughter had always worked hard at high school and graduated as a geologist in June 2008. She worked as a petrographer in a rock laboratorium for wages a Calgary Coop grocery store employee would look down on. Then the gas price collapsed and so did the oil price. She never got a job at an oil company. Many top-grade students were hired direct from university but if you were not immediately in that crop, you have a hard time finding work in the oil industry. The oil patch eats you alive and many juniors thought that the party would never end. That was until 2012 or 2013 for Penn West and later, especially in 2014-2015 when oil prices crashed back to $26. Many of the bright students turned junior and intermediate oil and gas professional learned that the industry also spits you out as ‘garbage’. Many were forced to choose another career. Some of my peers haven’t worked in 3 or 4 years. Many baby-boomers have retired from the oil patch in disgust. 
This latest downturn is worse than 1982 when Pierre Trudeau made matters even worse with his NEP. No wonder the Liberals are so hated in Alberta.  Today, his son Justin is even worse. Worse than worse 😊. It will virtually guarantee that the Liberals will not get a foothold here for the next 40 years or so. Probably neither the NDP, although Rachel Notley’s eyes have finally turned away from the green dreams and learned about energy in the real world. I have written about this repeatedly on this blog and maybe with my career story as back ground you may better understand why Albertans hate those ‘lefties’ in their ivory towers so much.
Life in the oil-patch is entrepreneurial and many start-up oil and gas producers have bitten the dust over the years. You may have grandiose visions of ‘Big Oil’ but nothing is farther from the truth. It is ‘Mom and Pop’ oil and gas; we are price-takers. Victims of fantasy stories and manipulations in the stock and commodity markets with their ‘gurus’. Gurus who always change their stories and math. Just look at the current estimates of supply and demand.
But we’re coming out of the current bust, in spite of yet another Trudeau. Yes, not all the pain is because of Notley and Trudeau. But they certainly don’t help – as has always been the case with Saskatchewan and Alberta. We may have a large economic impact on this country, but we are only 4 or 5 million people. Politically we have nothing to say and we always seem to be envied or looked down upon (Red Neck, Cow-Town). No wonder that every once in a while, although being proud Canadians, this part of the country including Stephen Harper, dreams of getting out of Canada. We seem to be good for paying in the good times, but better shut-up and keep on paying during the bad. And then we see how sycophant provinces such as Quebec either whine and extort more money from the rest of Canada or it flaunts its great economy thanks to Alberta’s transfer payments. Is it any wonder Alberta today is steaming and can’t wait to get rid of the ‘lefties’? 
The current down-turn is the worst of my entire career. I have seen many friends leave the oil patch. Retired or gone to another career. The lost expertise is tremendous and those left behind or about to come in because they are ‘cheap’ do often not ‘know what they don’t know’. The same mistakes will be made over and over. The lack of political will and the drying up of investment funds lay the foundation for another tremendous oil and gas boom. This in spite of the green dreamers who think we can run this world on sol, wind and a bit of water. Wow how naïve we Canadians and many others in the world are. Just wait when those greens wake up learning they can no longer fly around the world because of the high price of energy. Just wait until they once again will blame the oil and gas industry rather than their own actions. Somethings will never change.
It is hard to see my friends experience the financial difficulties of being basically out of work for 3 or 4 years. My daughter found finally a good job at an educational institution in Calgary after 3 years of studying for an accounting degree for which there also are no jobs here. One of my closer colleagues immigrated here a decade or so ago. Now he is running out of money with having to finance his son’s university career. We really can’t wait for the new boom and Justin just invented bill 69. Our government is truly one of our worst enemies.  
But the worse it gets, the higher the bill for the rest of Canada in the coming years and here in Alberta we will not feel for your pain. Rather, many will think ‘Sweet’. If I hadn’t done my own financial planning, my sometimes-excessive saving during the ‘good’ times, I would not have been able to take some distance to Alberta’s pain, I would have been as grumpy as my friends if not worse. 
This blog is my financial diary. If you, Eastern Bums, read this I hope you better understand what it takes to make a good living in Alberta. It is not easy but doable and even for you with your defined benefit pension plans, you may also have learned how powerful and important it is to live with a financial plan and a bit of investing knowledge. Maybe it is a must to be financially independent in Alberta, but even in the pampered East you would like to say from time-to-time to your boss: “Screw you!”. You can only do that as a financial adult, i.e. working towards financial independence.