Boiling frogs

April 10, 20224 Comments

It has been said that a fool and his/her money are soon parted. Perhaps, a better twist on that saying these days might be “A Liberal and your tax dollars are soon parted”. Today’s blog looks at the implications of government budget spending, and its long lasting implications on inflation.  ValueTrend was amongst the only investment firms who made the following absolutely correct observation 2 years ago: We argued that supply/demand realities combined with the actions of Liberal (USA and Canada) government’s policies would ensure a long period of inflation. The key difference between us and the masses was our argument that inflation would not be transient, as the government, and most investment mangers believed. Through this blog, I made it clear that inflation looked to be setting up as a longer termed problem. Our clients have outperformed due to this stance.  To us, this outlook was as clear as anything we have seen. Yet, we stood largely alone at the time, despite the logic of our convictions. Read my blogs during the summer and fall of 2020 to confirm this statement if you wish. You were warned. You profited if you listened.

I continue this tradition by holding no punches back today. For good reason. North America is not Europe. We are energy producing nations, and we have absolutely no excuse for being in the high-debt, high inflation situation we are sitting in right now. Because we saw the lunacy of the ill-informed green policies by Trudeau & Biden in 2020, and I wrote about it,  investors like you are profiting if you paid attention. But – I fear that the majority of people are not quite so positively set up to deal with the non-stop idiocy coming out of US and Canadian left-wing governments. And now, the Canadian situation has just been made worse with an NDP coalition.

Today, just as I did in 2020, I want to emphasize the necessity of portfolio protection against these ill informed “leaders”. Yes, this blog will present harsh words against Trudeau and Biden, as I have done in the past. But the words are backed by facts. More important to you, I’ve been proven correct about the effect of their policies. After all, the very art of contrarian investing is to profit by the acts of fools. You have made money off of their incompetence if you listened. Today, I will present an argument for continued inflation despite recently announced fiscal and monetary policy changes by NA governments. And I will show you how we are positioned to hopefully help our clients outperform once again. I cannot guarantee that I am right, and I cannot provide advice to you unless you are a client. But I can tell you what we are doing on a macro level to help protect our clients and their families against this absolute lunacy. On with the show.

To start: Don’t be fooled by the claimed improvement in Canada’s fiscal deficit by our non-financially educated Finance Minister. The Liberals have exercised poor fiscal management since the day Trudeau got elected in 2015 – well before the pandemic struck. Claims such as a balanced budget within 5 years after Trudeau was elected are so far off –  its laughable. The budget, he said, “would balance itself”. Ha! Instead, our national debt has exploded, and NOT simply because of COVID spending. Since taking office in 2015, Trudeau has increased the equivalent level of per-person government spending at an average of 5.2% a year. This is 400% higher than Harper’s, whose spending, from 2006 to 2015, increased at an average of only 1.3% per year (Fraser Institute).

“We’re like the frog that’s being slowly boiled. We’ve become so accustomed to these huge numbers we don’t realize how bad they are” : Conservative interim leader Candice Bergen.

The Trudeau government are believers in Modern Monetary Theory, and Biden isn’t far off. I did a deep dive on MMT in this blog. I believe the logic of my observations will appeal to all but the most entrenched socialists out there. MMT/ “spend as you wish” policies, simply cannot work. Please read the blog for more on that.

Leading into this budget, Prime Minister Justin Trudeau’s poor strategic decisions surrounding capping energy and disabling pipelines with immensely inept timing, his disgraceful comments about the Freedom Protesters, and his declaration of an unnecessary national emergency were heavily criticized. He’s been nothing short of a national embarrassment. During a plenary session of parliament in Brussels, several MEPs called Trudeau out, accusing him of violating human rights over the handling of the Freedom Convoy protests.

It reached a point where it was believed his leadership was on borrowed time.

With this in mind: Enter the desperate act of a coalition with the hard left socialist NDP.  Together, the new far-left Liberal/NDP coalition are doing what they know best: Tax n’ spend. The total new spending outlined in the 2022 federal budget adds up to approximately $60 billion, though the net new spending works out to roughly half of that, after factoring in plans to rake in tens of billions in new revenue by targeting banks. Banks and insurers are now being punished for being profitable. How dare they? Forget the fact that some 6 million Canadians hold RRSP’s with ETF’s and mutual funds – some even have pension plans, most of which hold the banks.

I don’t think its much of an assumption to assume more tax increases for all of us will be in our future budgets. Don’t be fooled by the non-financially educated Finance Ministers’ promise to painlessly control the deficit, while spending happily away.  New NDP driven social spending plans will only add to our debt, and the rampant spending will do nothing to help reduce inflation. Any promises that the government can reduce the deficit and spend money should be taken with a huge grain of salt. This, in light of the original balanced budget promises in 2015. Liar, liar, pants on fire.

Investors should continue to hold inflation-sensitive securities

And now, we get to the inflation problem, and how to invest around it. Canada has the highest debt/GDP in the world. I repeat. HIGHEST IN THE WORLD.  See the chart below. Our children will inherit this problem. Rising interest rates will inevitably make it more difficult to service this debt burden – for governments and individuals. Taxes will have to rise to pay for it. At the same time, inflation is skyrocketing. The basic necessities of life – housing, food, transportation – are becoming increasingly unaffordable. And yet, what did our Liberal finance minister announce in her budget? More spending. More programs. More deficits. More debt.

No surprise, inflation continues to run HOT. In the inflation story, energy costs  are a major factor. Energy costs show up everywhere- not just at the pump. Yet, the present policies will keep those costs at high levels. The current regulatory environment by green vote seeking governments has cut off lending to the Oil and Gas industry, and now private equity is abandoning the sector  in Canada and the USA. Yes, it is slowly coming back, but this is not an overnight process.

As a band-aid fix, Biden recently announced another tapping from the Strategic Petroleum Reserve (SPR) which amounts to 1 million barrels a day for the next 6 months leading up to the mid-term US elections. The timing of this move near the elections is surely just a coincidence (!). The entire draw amounts to 9 days’ worth of U.S. consumption. Meanwhile, our ill informed Canadian PM increased the carbon tax on April 1st. And that isn’t a joke. He really did this! In the midst of the energy crises! You just can’t make this stuff up! Trudeau didn’t shoot Canadians in the foot with his “green agenda”.  He shot us in the head.

The release of the SPR in the USA will possibly reduce prices temporarily. The neartermed picture is overbought for energy, anyhow. Its time for a pullback, and the momentum indicators below show this reality. Note the circled indicators showing a rolling over of momentum. Nonetheless, the uptrend in WTIC crude is firmly in place.

Releasing the Strategic Reserves (SPR) will also likely ensure longer-term demand stays high. Here’s one reason why:  In the US, this emergency deposit has to be replenished eventually. In the case of oil, that means more barrels will have to be added to resupply the SPR in addition to current demand. Anyone hoping for, or anticipating a change that would lower the price of energy may be as ill informed as Justin and Joe. End result: High Energy costs mean inflation stays around for longer than many are anticipating.  Rate increases will not solve the high inflation rates in Canada or the USA. The fundamentals support the long termed trend analysis.

The fact is – embracing the capitalistic, free market system has brought hundreds of millions of people out of poverty.  Meanwhile, there have been over two dozen government attempts, like the Liberal/NDP, to build more socialistic societies over the past hundred years.  All of them ended in failure and often outright poverty. These free-market consumers want to live in freely competitive (aka its ok to be richer than others) first-world living standards. And first-world living standards involve the consumption of gross amounts of petroleum-based products, metals, minerals and nitrates. To believe otherwise is a fantasy.

The Russian/Ukraine war has put a spotlight on the tragedy of death and suffering – and  to what is needed to run the global economies of the world. Despite the rush into renewable energy, this war has made it abundantly clear the global economy is very dependent on oil. US and Canadian Liberal governments have shown they are, and were, too inept to recognize this reality. As you know, ValueTrend saw this reality in 2020. We saw what the destruction to oil supply that the new Liberal green policies like Trudeau’s and Biden’s were going to do to prices. So we profited by it.

But most people were not as profitable by these horrible policies as you and I have been in buying oil stocks. The Liberal agenda has produced terrible consequences for society. Hundreds of millions are impacted. Lower and middle class citizens are the ones paying the price. All in the name of “climate policy”. Inflation is everywhere, but the wealthy elites like Trudeau and Biden will never personally feel the impact.

What we are doing

It’s certainly a priority to promote renewable energy, but ignoring the fact that first-world living standards are still hugely dependent on oil is going to cause continued severe economic repercussions the likes of which have not been seen in decades. Until the mindset on energy policy changes to REALITY from ideology, the global economy is at great risk of a long-drawn-out recessionary period in the midst of rising commodity prices like energy.

It is for this reason that, despite periodic corrections and pullbacks in the inflationary trade, ValueTrend continues holding a portfolio emphasizing commodities and inflation-benefiting companies.

You have to decide for yourself if you have faith that government foresight will work this time. We feel the same way as we did in 2020 insofar as our faith in the competence of the current government. If we are correct, we will once again profit.

 

 

quote-teal

4 Comments

  • Hi Keith,
    I agree with your point of view, except that I think Trudeau reversed course April 1st on the carbon tax. He didn’t do it.
    See the Toronto Star article April 1st.
    Anywho, all else holds true as far as I can tell. Blunder after blunder from Trudeau.
    As far as inflationary stocks go, besides commodities (oil/gas/metals including gold)do you mean areas like utilities, grocers like Metro/Loblaws etc, residential real estate like apartments that can pass on rising costs? Any others? Do you consider financials also an inflationary place to be? I could see a case both pro/con there, so I’m not sure. What’s your view?

    Reply
    • Thanks Wendy–although I couldn’t find anything announcing the reversal of the carbon tax. If you have a link, pls let me know and I will correct my blog to reflect that.
      As far as sectors–yes – commodities makes sense. And even rare earth minerals which will be used in renewables. Normally, financials are good in rising rate environments, and we do hold a few, but there is a strong potential for a recession – which can pressure them. So I am becoming more concerned about that sector despite the rate hikes. I do think that low beta plays like staples and utilities and REITs – although not inflation orientated at all – may turn out to be a good addition to a portfolio if markets go through a rough patch as my last blog on the Bear-o-meter suggests.

      Reply
  • Hi Keith and thanks for this blog. Does your chart depict debt-to-GDP of households only, government (soverign) debt only, or both?

    I couldn’t agree more with you on every point but I fear that only a long, vicious recession will begin to change voters’ minds about these disastrous policies. When I try to explain to people how money printing and artificial manipulation of energy markets through legislation have created runaway and unnecessary inflation, they respond with blank stares. To their peril and culpable ruin, they don’t want their pretty heads bothered with conversation on high finance. Then they go right back to their ‘proofs’ that Trump is a criminal! OMG! What will become of us?

    Reply
    • Yes, it is interesting how apathetic people are about what the current government policies are doing to them, and their children or grandchildren. Also, don’t forget that there is a very real bias in the media–and now JT has started taking the last of the independent journalists licenses away. This leaves the narrative coming from only one perspective – his. I open MSN fr. page daily, and yes, you are correct. There is little attention paid to what matters. But lots of news about what Trump had for breakfast yesterday, or other issues of little importance to us. Its diverting the lemmings attention away from the real issues.

      Reply

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