Thursday, December 13, 2018

Before the big millenials bull market

Over the long term, I may be very optimistic. I see what’s happening with the millennials as very similar to what happened to us baby boomers. Of course, no generation is the same and we all know how many millennials still live with ‘Mom and Dad’, even with children of their own. The millennials, in many ways are much more conservative but then they went through 2008 and saw how baby boomers struggled to keep their jobs in a very uncertain job market without life-long jobs at one or two employers. The millennials directly around me are financially much more conservative than the baby boomers and many are savers rather than spenders. I think, sooner or later they will have families and their own house and maybe even a recreational property. They are likely to do things somewhat different just like baby boomers do things different from their parents.  As the Questrade commercial says so eloquently: "Times have changed”.  But maybe these commercials also show something else about millennials with their fashionable short hair cuts: millennials fall for clichés more than their baby boomer parents.

Here is another cliché: The more things change; the more they stay the same. So lets draw some parallels.  Yes the 1982-2001 market was a big secular bull market but things were not always smooth; far from it. And yes we had a rabble-rouser president: Ronald Regan – a damn movie star! He was president from 1981-1989 and although the world was very skeptical of this outsider’s skills as president he is now considered as one of the best. Donald, Ronald what is the difference? Well I did like Ronald a lot more than I do like the Donald. But this is not personal – this is business! Who said that again? 

So in the 1970s we experienced a major commodities bull market along side a nearly flat decade long stock market. The 1970s were a never-ending economic quagmire but then we had run-way inflation and rising real-estate. The parallels with 2000-2008 or 2011 were uncanny. Then in August 1982 started the big bull market but it was also a market with falling inflation and low commodity prices. There was much economic pain in Alberta where everyone hated a Liberal Prime Minister named Trudeau (PET) who after some struggles was booted by a certain smooth fellow who would help the oil patch named Mulroney. Some intern was named Stephen and he felt that Mulroney betrayed the confidence that the people of Western Canada gave him. But Mulroney also gave us, together with his Irish Buddy Regan, the Free Trade Agreement. Mulroney also smoothed Canada’s contorted sales tax system and replaced it with the GST - for years, hotly contested by the Liberals.
Strangely enough, it was the conservative Mulroney who finally came up with one of the environmentally most important agreements with the U.S. that addressed Acid rain - a major issue in those days. Mulroney was later awarded significant environmental Kudos. Not his predecessor Trudeau who was hated in the West for decades. Meech Lake and the Charlotte Town Agreement showed Canada’s self-destructing tendencies like today’s pipelines along with the unfortunate rise of the Bloc Quebecois. Today the negativity from the East and Vancouver is nothing new. They want to control the West as the leftist Trudeau clique tries today. But guess what… JT's name will be mud for the next 40 years if not for history.
In the meantime, the West recovered gradually from the collapsed oil prices which took another beating in 1986. Gold 'never' recovered from its collapse in the early 1980s. Not until early 2000. Calgary recovered slowly but certainly, and it expanded over the decades from a population of barely 400,000 to 1.2 million in 2018. Mulroney’s big failure was getting the government debt created by Trudeau Sr under control. With baby boomer kids needing schools and swimming pools, inflation was hard to tame but interest gradually fell in Canada and the Western world. In those days, Canada had a very poor credit rating and taxes, were increasing continuously. It wasn’t until Alberta’s Ralph Klein showed how it was to be done, that Chretien and Martin (Liberals who took over from Mulroney’s failed deficit fight) finally started to control the federal deficit. They, thank the lord were more neutral towards the West but their reign did end with a corruption scandal and the now famous clarity act that laid the groundwork for the demise of the Bloc – but Quebec’s separation blackmail outlasted them by many years.

It took Stephen Harper and a generational change in Quebec to finally kill off separatism. What was much less noted was the separatist movement in the West. Albertans are a lot less melodramatic than their Quebec cousins. But the hate of Trudeau with his Eastern bias was palatable and in the early 1980s there were actually separatist parties in Alberta. In the meantime, low oil prices, a boom in computer technology culminating in the internet as well as falling interest rates created an enormous demand for consumption goods by baby boomers and their young offspring. Initially the baby boomers were poor, but their finances improved dramatically and tax rates, especially in Alberta, along with government debt kept on falling. That culminated in the years of Stephen Harper who successfully defeated the corrupt and visionless Chretien Liberals.
In 1987 we first experienced the dangers of high-frequency trading and stock market algorithms. A major crash that lasted just a couple of months, caused stock prices to fall most since the Great Depression (until 2008 came along). But just like today, the economy did not stop recovering from the 1982 recession. While federally, the Liberals weakened, the conservatives continued to grow in strength and ended with the unification of the Conservatives under Stephen Harper.
With falling interest, the oil and gas industry and Calgary kept on getting better – recovering from the Trudeau nightmare. The West became happier in confederation, but no-one would ever forget the damage done by Trudeau Sr. It was not only Senior that caused so much damage during the 1980s it was also falling oil prices and the hubris of Calgary’s oil and gas executives that underlined much of the damage. But still, Trudeau’s PetroCanada today merged with Suncor was a scar that remained for decades, along with the PetroCanada building in downtown Calgary that was aptly named the ‘Finger of Trudeau”.

In the mean time the stock market boom continued with interruptions of the 1990 U.S. Savings and Loan Crisis. The latter was the nail in the coffin of George Bush Sr. Bill Clinton and Monica took over and in spite of this sordid sex scandal, the U.S. Tech and stock market outperformed Canada by leaps and bounds. It wasn’t until China’s thirst for resources exploded (with the rest of the world importing Chinese products) that the commodity boom accelerated into 2000-2008. In 2001 the Tech boom ended with a crash and companies like Microsoft did not recover fully until years later. It also was the beginning of the end for G.E. Big Auto GM, Ford, etc. are still hanging in by the nails. They call that the ‘lost decade’  The crash of Nortel and Blackberry combined with exploding demand for resources put a big damper of East Canada’s growth.

Finally, Alberta and the West flexed their muscles and when Stephen Harper became Prime Minister of Canada, the pain of Trudeau and the Liberals finally disappeared. The West was on top of the World. Alberta’s economic growth equaled that of China and, of course, federal tax revenues from the West shot through the roof financing Quebec’s economic decline due to their separatist dreams to the tune of $20 billion or so per year. Unfortunately, the provincial conservatives lost their way in Alberta and matters deteriorated all the way to Alison Redford around 2011-2014. If it weren’t the memories of Trudeau and the success of Stephen Harper, the Alberta's PC would never have stayed in power for 44 successive years. The success of the Oil Patch, in particular with horizontal drilling brought an oversupply of oil and gas. The decline in oil prices really hit hard in 2016 and ironically it was then that Alberta was tired of the corrupt visionless conservative party; especially after an extremely unappetizing floor-crossing by Daniel Smith leader of the then Wild Rose Spin-off of the hapless remnants of the PCs under Premier Jim Prentice.  Rachel Notley was elected by default – after all, the Liberals were still the West’s biggest nightmare soon to be resurrected.

During the 2001-20011 resource boom Canada recovered from all failings of its stock market during the 1980s and 1990s. The Dow Jones’ performance paled by that of the TSX. But then 2008 and the subsequent success of horizontal drilling brought an end to Alberta’s prosperity. The East was envious of the West and loved to play the environmental card. Whether in the 1980s during Canada’s constitutional crisis or today with the climate change craze (real or not) Canada showed its self-destructive tendencies and tried to kill the goose that laid the golden eggs. This culminated in the return of the Trudeau Jr. Liberals.
The parallels are uncanny and too say history repeats is an understatement. Like his Dad, Justin may like skiing in Kelowna and he was a charming young man with a minor sexual mistake. However, he has no clue of business and is absolutely tone death towards small business and the West. The combination of Alberta’s experiment with the NDP and the crash in oil prices, this province's animosity towards his government (that of neighbouring Saskatchewan) is outright disastrous for the Liberals .  Today they are leaning so far to the left that they can no longer be considered mainstream. No wonder Ontario voted them out of their province after 12 years of liberal mismanagement. Liberals and Quebec always seem to  brush with corruption. Alberta’s PCs in their final days were close to their own corruption scandals but they never surfaced until the Daniel Smith – Jim Prentice affair. That was more moral corruption than financial. In the meantime, Canada’s stock markets fell far behind that of the U.S. in terms of performance. Canadian banks never looked back since there third world debt crisis in the early 1980s. But I am sure that sooner or later they will get hit again. So we shouldn’t think our banking system is bullet proof. But if the oil and gas boom in Western Canada resumes and I am nearly sure it will (maybe a little bit less vigorous than in 2000-2011), the banks will do fine for some years to come.
Right now, the world is in a modest bear market. The U.S. is still doing fine and I think their stock market will resume its uptrend, since just like in 1987 their economy is doing relatively fine. But the strong U.S. dollar, rising U.S. interest rates, the trade war with China and the uncertainties of Brexit and Italy have put a damper on the global economy, especially China's.  I think this all will be resolved, and the world will recover possibly even boom to the point that investors who stayed out of the markets since 2008 are returning in full force thinking that you can’t loose buying stocks on dips. That is until, not long from now, those stocks won’t recover from a dip followed by a much larger fall than today’s 10-25%. So right now, we’re going,in spite of the U.S., through a mild global down turn which probably flips on a dime.  In the meantime, just like the investment world underestimated the oversupply of oil thanks to the horizontal well revolution, today investors are underestimating the worlds hunger for oil, gas and affordable energy. This has led to massif under-investment.

December's fake oil-price crash is just that: fake. Western Canada will boom; Rachel and Justin will be gone if not next year then in 4 years. Justin has damaged the Liberal reputation for at least a generation here in the West. The sudden re-emergence of separatism in the West is worrisome as Albertan’s don’t bluff like Quebeckers.  So we have a real crisis in Canada – one that is barely recognized in the media let stand that an intellectual lightweight such as Trudeau Jr has a clue.
I like Canada if it is a fair proposition. Today it is not, and as such there is another constitutional struggle in the making. Maybe the coming boom will help heal some of the wounds but today’s discontent in the West is viral and building on wounds deeply  buried below the surface.  I am sure that the West is a viable country by itself although diminished compared to the Canada under Stephen Harper. There is no doubt in my mind that an Eastern Canada comprised of basically Ontario and Quebec is a no-go thus if the Justin is re-elected then I don’t think Canada is viable. I don’t believe in extremes so lets hope that Canada as we all love it grows up and that it survives. In the meantime, I think that with the millennials coming to age, the bull markets of the 1980-2001 will repeat and that we now live in a time comparable to the 1970-1982 period with rising commodity prices, inflation and ever increasing interest rates.  Simplistic?  Maybe but then the world is simplistic and very complex at the same time.

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