Saturday, January 2, 2016

Investment Crystal Ball: Conclusions and my outlook for 2016

So we invest to have the cash to live the lifestyle we want; to pursue our goals in life and… to reinvest for even greater richness. To better appreciate my good fortunes, I bought a … pressure cooker this last December. How to better appreciate your life than to eat well, talk with friends, enjoy your kids and… a touch of romance?  You may consider my house modest, but it is located at the best spot in the city for my current lifestyle and the house is renovated to meet my needs. Biking to work or be downtown in under 15 minutes with an indoor parking spot at my employer’s for bad weather days. I bought the pressure cooker for a mere $80.00, on sale of course! Now I am revisiting all kinds of recipes from my past recreated in minimum time with maximum taste. I made a larg potato salad Dutch style for new year’s Eve when my kids came by. I also made traditional ‘olie bollen en appel flappen’, the ones that are so poorly imitated by Tim Hortons.  [Ah… you thought that donuts, dutchies and apple fritters were Canadian?] Combined with a bottle of bubbly and antipasto made by my daughter, a board game and lots of chatting. Life can’t be better! Christmas Day I spend with my girlfriend’s relatives out in the country until deep into the small hours. Two days later we skied in the mountains! Tonight I made an enormous pot of lamb stew while listening to German alpine music combined with Al Dimeola and Paul McCartney while writing this post on my SurfacePro tablet and lubricating my palate with a glass of decent chianti. Tomorrow skiing and maybe a supper in my favorite Greek restaurant. Monday working again in the Calgary oil patch that currently tries to live under the Chinese curse: “May you live in interesting times!”.
I have a job where I feel I have an impact. I do something that in my books is worthwhile. Yes, the world is grim, but we still live a beautiful life!  Maybe a trip to Mexico in late February and a ski weekend near world famous Banff at the end of January and later in the year a European trip and possibly an investors conference in the U.S.  So is that such a bad lifestyle? That is mine and I really think this is ‘as good as it gets’. You choose your own lifestyle and follow your dreams financed by your investments. When you’re truly diversified you are typically downside protected. Use stop-losses when things get out-of-hand and make sure your investments provide you with the cash flow you need. You may not really need as much as you think to lead a happy, employer independent, life. Don’t be just smart with your investments – also be smart with how you pay for your desired lifestyle. Make sure you have the lifestyle you truly want and not the one your neighbors seem to aspire.
A $500,000 portfolio with an annual return of 10% may provide you a $50,000 after tax return when properly planned. Well, right now you might need twice that with current returns in the 5 to 7% range. But remember… there is no real difference between a 10% return when inflation is 4% and a 6% return when inflation is 0%! What I do want to stress is that retirement or pensions to pay for the rest of your life are pipedreams invented by smooth talking politicians and life insurance company adds. Your financial goal in life should first be that you are financially independent. Diana Krall is just singing on the background with me overlooking a fireplace and a real Christmas tree full with sparkling ornaments… Maybe I interrupt my writing and make myself a cappuccino… hmmmmm!  Yes!
I am back. So, we plan an ‘immortal life’ not the life insurance pension plan where you run out of money on your 85th birthday! We’re planning to do activities that we consider worthwhile NOT vegetating away in front of a TV watching endless replays of the ‘Young and the Restless”. We foresee a world that makes dazzling technological progress in medicine and in the way we live. Basic life needs may become increasingly affordable for all. Cancer will be conquered with sophisticated forms of chemotherapy and immunology. Transplants for worn-out organs will be common staple and likely your thoughts and memories will be transferrable to a memory storage device until your new augmented clone body is fully grown. New ethical discussions and philosophies will arise based on questions such as ‘whether after clone transfer, your new self is another entity without a ‘soul’ and whether your true self has left this world’. Churches will be in existential crisis as disputes arise about heaven, eternal life and what God really represents.
Oil and gas will still be around 50 years from now; probably another 100 years from now. But their importance has likely been greatly reduced. New ways of measuring economic progress have been invented such as a quality-of-life index and a peace-index which measures the decline in war casualties replacing measurements such as inflation and GDP. Environmental issues have been mostly resolved (new ones will arise) and are measured more realistically in terms of sustainability and the acceptance of the fact that earth is a living system always evolving. Humanity is embracing Earth’s continous change rather than being misled by politician and scientist with scaremongering forecasts about global warming and the evil influence of mankind on nature.
Oh… by the way 50 years from now, we’re probably talking about the laws and regulations regarding the settlement and exploitation of Mars by the private sector. Most of this will happen in our lifetimes so be prepared for enormous change and for adjusting your investments accordingly. If mankind doesn’t learn to exploit the planets around us or better how to expand into space, economic growth and the economy as we know it now is likely coming to a halt. We will have to learn how to survive in a stagnating economy with population growth coming to a halt. Some demographic studies already indicate that world population growth may peak by mid-century. So how will that affect us?  Start thinking! Robotizing manufacturing may lead to economic stagnation as there are no workers earning wages that allow them to buy the goods that the new robotic factories churn out. What will we do? 
In the near future (2016) we also foresee other grim scenarios such as a blowing up of the Middle East – especially now that the world just became awash in oil. OPEC members are fighting economic warfare against each other because of religious and ideological differences. The North American oil industry is becoming collateral damage in this fight between fanatics, demagogues and dictators. What is the West trying to do standing in the middle of these warring factions with Russia trying to stir up the pot? Just today, Saudi Arabia executed 47 terrorists to scare the heck out of its ever more restless population while fighting a proxy war with Iran.  Iran and ISIS trying to trick the West to become deeply entrenched in this senseless ideological and religious infighting. Millions of people are in the process of fleeing the Middle East hoping to find new lives in Europe and North America. It may sound heartless; but in a few years the population of these last two continents may be rejuvenated because of it; just like illegal Mexican immigration has been doing for the U.S.
 Current oil prices are at a low with OPEC producing at maximum capacity. Desperate Western oil companies trying to keep cash flow and production up while going deeper and deeper in debt. But North American oil production is falling; world oil production is teetering at the decline cliff. Everything has to work out perfectly for oil prices to stay low; especially with demand still growing worldwide. But what when the Middle East in all its ugliness blows? It is already like a powder keg with its fuse already lit!  Things could change in a heartbeat. I don’t know what will happen in 2016 – low prices, recovering prices or a major war with skyrocketing oil prices. I think it is a 60 to 70% chance that oil prices will be higher a year from now ranging somewhere between $60 and $100. From an investment point of view, I think that Canada’s TSX will outperform many other stock markets. The Canadian dollar tracks the oil price to a tee, so probably we’re within a few percent from the bottom. Consider hedging your U.S. dollar denominated investments against a rising Loonie.
A sky-high US dollar is not good for Wall Street with over 40% of its revenues derived from overseas. No wonder U.S. corporate earnings are not that hot and thus its stock market was flat. Now that the hurdle of a Fed short term interest rate increase has been overcome, the Greenback may have peaked. A stronger US dollar will weaken the rest of the world in particular emerging markets. So really in whose interest is it to have a strong dollar?  Certainly not U.S. exporters! Europe may finally come back a bit; in particular tourism to Southern Europe – that will strengthen countries such as Italy, Spain and even Greece. Especially when combined with low airplane fuel prices! With a falling Greenback, U.S. dollar denominated debt will decrease in value versus debt denominated in other currencies. Who, apart from emerging market economies (with mostly U.S. dollar debt) will benefit the most from such a trend?  Yes a falling dollar will be good for the U.S. stock market but it also is good for U.S. debtors such as  federal and state governments especially as its interest rates have started to rise.  So I think the U.S. dollar is near its peak and a falling dollar will not only benefit the earlier discussed matters but also commodity prices.
So 2016 is likely a year of rising U.S. stock markets and a market of falling bond prices. Commodities will begin their recovery and also Europe will improve further. It is behind the U.S. as far as Quantitative Easing is concerned and in the second half of 2016 its economy will likely start showing the benefits of the large influx of Middle Eastern fugitives. Ironic isn’t it? Yet, there are likely terrorists who have snug in through the cracks of the security nets and they may cause some disruption. However, remember, the chance one has dying at the hand of a terrorist is much smaller than dying of cancer or in a car accident. Terrorism affects our psychology not so much the economy. Especially since many these days consider terrorist acts not much more than a nasty but unavoidable fact of life. If the Middle East truly blows up hold on to your energy shares and pipelines because their lot may suddenly change for the better at the expense of other parts of the economy, in particular air lines such as Air Canada. West Jet less so.

So there you have it – a forecast or better a scenario that likely may take place in the new year. I wish you a prosperous 2016 and may all your goals come closer to reality.