Spend Liberally

The guy who claimed that you could spend your way to prosperity  and “the budget will balance itself” may have some cold hard reality hitting him in the face right now. A new analysis by TD bank says the Trudeau government is on track to run $150 billion in budget deficits over the next five years. Originally, Trudeau was claiming a fraction of that deficit number. Before the election, even Trudeau’s opponents underestimated just how much the left-wing government would spend.  Opponents suggested that the deficit would not be $10 billion as Trudeau claimed, but closer to $25 – $30 billion. Trudeau slammed that estimation by his opponents stating : “That is completely wrong!”.

It was completely wrong – unfortunately for Canada.

The TD report estimates Ottawa’s current fiscal path will take more than a decade to bring the budget back into balance — unless the government raises taxes or cuts spending. Something to look forward to! “I’m still promising to balance the budget, but do it in 2019” said Trudeau. Really? Reality may finally reach Justin when the bearish trend for our loonie, a decline in the long bond, and a struggling business environment continues. Then again, it may not reach him. Think Edie Brickell’s song  (“What I am”)

Ok, enough venting. Let’s look at some charts. The iShares Canadian Long Bond ETF shows us that the Canadian long bond is struggling at a key point of overhead resistance right now. We can see what happened last time it reached similar heights back in 2015. This time around, it has Trudeau-nomics to fight in addition to market forces.

xlb

So, too, will the loonie struggle if TD’s predictions are correct. I’ve drawn some potential downside projections based on the recent failure of the 0.77 neckline to hold out.

c

Oil plays a role in the loonie’s strength. I am temporarily bullish on oil with a neartermed (less than 1 year) target of $62 or so on WTI.  Any strength in oil should only delay – not forego –  the likelihood of a longer termed decline for the loonie. For this reason, I continue to endorse holding significant USD representation in your portfolio.

 

oil

21 Comments

  • Hi Keith,
    this deviates from equities but I was curious if have you ever completed a technical analysis on Bitcoin?
    I did not realize it’s value had run up as much as it has.

    Reply
  • Trudeau should have created $120 oil like Harper who also discovered the technology of “Fracking while building thousands of miles of Pipelines .Welcome to Trump’s Twilight Zone Keith.

    Reply
    • Not sure that anyone can create oil prices, given the many international forces affecting its price – but yeah–new and interesting politics abound everywhere!

      Reply
  • Keith,

    Being aware that the CND$ is a petro currency, wouldn’t oil decouple somewhat from the loonie if your scenario unfolded?
    Thus the loonie could and would find new lows as a reflection of the nonsense being undertaken at the political level (like a kid who found an unlimited credit card). We will need much more than “sunny ways” to fix things in the near and long term.

    Thanks,
    Mark

    Reply
    • Yes the loonie will have a tug a war by two forces–balance sheet degradation, and a possible rise in oil

      Reply
  • I didn’t realize that this was a political blog, but while we’re at it, I’m not sure that the last guy’s vision to underpin the economy on oil and a housing bubble was very sound.

    Reply
    • Debt was low, economy was strong. Government (a cost – not an addition to economic growth) was smaller. It was an evil plan, indeed.
      Like stock trading – if oil is strong, you play that card – as did the last government. When it weakens, you change the plan, but you don’t aggressively leverage or margin your portfolio to play catch-up. That’s a dangerous game.
      As a financial guy, I can never endorse imprudent balance sheet management. Too many examples out there show us why it doesn’t work.
      In 27 years of stock trading and Portfolio Management, and I have never – until now – made government policy comments in any of my writings – But Canada has taken a very dangerous turn towards spend and tax policies, and for the first time in my career, I am concerned enough to speak out about it. It will affect your portfolio, our stock markets, our loonie and bond markets (per the blog), our business climate, and our economic future. We cant put our heads in the sand.

      Reply
  • Hi Keith,

    I would like to say that I enjoy your appearances on BNN and find your point of view refreshing and informative. I also agree that we are in strange or strained times and that the US election will have a bit of effect on the market until we see the certainty appear. Lately I’ve been looking into the effect of the U.S. Rate hike might have a more sever impact on the markets similar to the last rate hike in 2015. Do you think that the combination of the rate hike, tax loss selling and the changing of the guard in the White House and general sentiment could be the catalyst to take 10 – 15%?

    Thanks,

    Bruce

    Reply
    • Thanks Bruce–this is a good point. I follow the belief that markets migrate between undervalued, fair value and overvalued. While earnings drive stock prices in a longer time frame, sentiment and crowd behavior drive stock prices in the short to mid term. The current situation is a case in point. Its not been great earnings that keep this puppy going. As technical people, we can observe that crowd behavior (short to mid termed analysis) has changed a bit over the past 1.5 years. Markets have not been moving on a relatively stable trendline as the were from 2009-2014. Instead they have been rising, then moving sideways for extended periods, then rising again – repeat. This is a sign of change in behavior and buying/selling patterns by market players. Which likely means that the next “problem” that comes along will not be shrugged off the way that – for example–the PHIGs” (Portugal, Hungary Italy, Greece) debt crises, or Brexit, or Korea bombs, or ISIS attacks, or (insert your favorite crises here) has been shrugged off. So- your guess as to a catalyst for correction may be correct–or not. The point is, it will happen – evidenced by fundamentals and based on a change in market trend behavior. When, and why, is the question. Not if.

      Reply
  • It’s already at 30 billion,but JT has the answer to balance the budget. Sell lots and lots of pot! Problem is he needs an increase of 48% of new pot smokers to make it work. That to me doesn’t work. I don’t believe there will be that big an increase of pot smokers just because it’s legal. You either smoke or you don’t. I think he’s totally disillusioned about what pot’s going to bring in to help balance the budget. He better have some better ideas other than taxing us to death. Everybody will be affected. I imagine your car insurance will go through the roof if they know you use medical marijuana.

    Reply
    • Imagine being on the road driving at the same time as a legal user of pot.

      Reply
        • Yeah–lots of drunks on the road too. But–Harder to test for drug usage by police. 2 neighbors of mine are upper-rank police, and they tell me they have their methods, but it sounds pretty subjective -whereas drunk drivers can be quantitatively tested on the spot via breathalyzer. Its a “yes this person is drunk due to factual blood alcohol limits”, or “no he/she is not”– vs.–well, he/she appears to be high because of eye dilation, etc.
          To me this is a little scary. But, I am sure an entrepreneur will create a quantitative analysis device to spot check for drug use to aid police with this dilemma. Meanwhile–driver beware!

          Reply
          • Actually there’s at least one company already working on that that is publicly listed – BLO. I think they’re actually trying to make this a larger type of breath analyzer, not just limited to one specific substance (be it alcool, thc or whatever else). It’s just a CNX security and at any rate way too far down the road to be interesting now (and too small a stock to be interesting, I believe, for TA).

            In fact my comment is more directed at what I think is (but perhaps soon we’ll say was) a rather incoherent and somewhat hypocritical attitude of our society with regards to tobacco, alcool, marijuana and perhaps drugs in general (medical included). I don’t think we really base our legal and social decision on the facts so much as on our global prejudices. I don’t think someone driving while high is better or worse than a drunk driver, nor is a driver impaired by say medication that causes drowsiness. Or an extremely tired driver for that matter. We can’t detect those either – yet they are legal, widely used and cause accident. As a society we’ve decided that alcool is widely accepted (and in fact sold & to an extent promoted by the state), but marijuana isn’t. Tobacco is somewhere in-between. But when you look at the fact, the global impact of those in terms of health & other aspect aren’t worlds appart. Alcool use, and abuse, is extremely costly. Effects are different, but the social impact are in the same ballpark. Plus marijuana is less addictive than alcool and much less so than tobacco.

            I don’t mean by this to be an apologist for legalisation of pot – thought I do indeed believe in the wider scheme of thing it is better legal and controlled than stay an issue that’s hidden under the rug as it is now. What I mean to say is that we have huge double-standards on these topics as a society and I am glad that we seem to be moving forward in addressing those. If you were going to tell we’ll prohibit alcool & tobacco as well I would say at least we’re being coherent. Though that was called prohibition and it didn’t work out too well either….

  • I always wondered in spite of the multiplier effect, how borrowing $30 billion really juices a $1.5 Trillion dollar GDP economy….. it certainly has not worked in Ontario….perhaps a feel good measure that your Government is here is help…. sadly, we are creating a culture of dependence……meanwhile, today is the one year anniversary of the Liberal election and the latest Ipsos poll confirms Justin’s honeymoon approval rating at 64% …. they obviously did not call me.

    Reply
    • They called his newly hired 59,000 government employees and college kids.

      Reply
  • Keith, this article reminded me of the 90’s when Canada was being warned about our debt level… seems laughable now ( dark humor I suppose) but what were the debt levels back then of of Italy, Greece,, USA , etc. Why were they not being chastised, why were we singled out I wonder? .

    Reply
    • The 1990’s in North America were an era of hiding from reality– everyone believed that New World stocks (tech) would keep going up, PE ratio of 150 on Nortel was ok, non-profit companies like Global Crossing would flourish, and debt… no worries.
      Greece–that really is a good example of imprudent balance sheet management–and its consequences!
      THE USA has plenty of debt and that’s a problem- but our economy is much less diverse- not saying the USA is in great health, but its a relative investment question. Which is the better bet..Canada’s economy or the US economy? …its obvious that the loonie (which reflects our economy) is the worse bet. Higher debt will make that relative performance even more obvious.

      Reply

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