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Wake up and smell the inflation

Central Banks and governments, especially here at home in Canada, have decided to risk steadily rising prices (of bloody near everything) rather than allow our economy to take a further Covid hit. You and I, the common folk, refer to this as inflation.

Just one example:

¾ "West Fraser Plywood-Standard Sheet at Home Depot Ontario

  • March 2020 - $37.98

  • February 2021 – $72.49 +90%

  • April 2021 - $97.98 +157%

Most Central Banks are trying to keep rates low using continuous printing and quantitative easing intervention to continue the flow of cheap loans. Central Banks are not going to stop buying bonds to stifle yields.

Here in Canada, we are in the "proverbial" lockdown, which is allowing the hardening of provincial borders, seriously hobbling the entire retail sector and filleting the tourism and travel businesses while at the same time adding a new charge to Daddy's credit card of around $500 billion. 30%-40% of which I would say we could have done without, if not more.

Get ready because someone will have to pick up the tab for the cost of the lockdown. Rolling over the debt leaves future generations on the hook indefinitely, which hardly seems reasonable given that the benefits are restricted to Canadians alive now. In about 20 years, our children will be heavily burdened unless we think differently about our wealth. Otherwise, how do we possibly pay off $500 billion in two decades while still having a life? If we don't alter our Grandchildren's landscape, it is destined to be a "have not" garden of handouts and takers.

So here is my suggestion to keep it simple, and yes, it hurts. Spend less. A lot less. Cut business subsidies. Reduce social spending by a chunk. Give retired people less. Just issuing more debt – as we're doing now – is akin to standing atop the CN tower and letting go of a toonie. You know it will hit the ground, and you think to yourself how much damage could a little coin cause, but when it hits the ground and crushes the car below, you are shocked. More debt happens slowly, and you think a little here and a little there can't hurt until it is so much it crushes us all.

Our generation is not the generation of 'ole that understood with passion what wealth is as a society. Our generation no longer understands that a country without debt is dependent on nobody. We no longer have a growing thriving middle class that owns assets like gold, silver, real estate. (Real hard assets that protect and get us the hell away from the "paper mentality" of today.)

We are not there right now. As a result of this mind-numbing pandemic, we have billions in stimulus and no place to spend it all, other than on liquor, beer and dogs (dogs are not so bad). There are also five million-plus Canadians still working from home, cutting daily overhead and adding to savings. The result is a substantial and increasing pile of cash to be unbridled as the economy reopens. When all the stores, salons, gyms, arenas, clubs, bars get back online, with the planes flying, the borders open and workplaces repopulated, you can envision the result. But instead of being a country full of spenders and thinking you need to get out and blow some of that disposable income, why not think differently? Why not view this as an opportunity of a lifetime to prepare for your future aggressively; to accumulate quality assets. Why not view it as a chance to actually own something tangible that can be held in your hand or developed and perhaps lived in.

If we do not change our mentality central bankers will likely lose control. If the crazy costs of everything – particularly real estate – surge more due to inflation and ridiculous free-spending, it could lead to sizeable compensation demands and a wage-price spiral that would have CBs jumping on the brakes. Then borrowing and interest rates would rise fast.

But for now, this is the reality for Canadians:

  • A long-term inflationary period has begun

  • The higher inflation goes, the more you need growth. Think outside the box and look at the track records specifically of gold and silver during the 1970's, and between 2002 and 2008. Gold and silver perform very well in inflationary periods.

  • Bond yields are propelling mortgage rates upwards. 5-year terms that were 1.5% are now over 2% and rising. That 2.5% 10-year mortgage has jumped an astounding 1%. Higher rates are on the way.

  • Major lenders have dropped variable-rate mortgages (VRMs) to keep loan volumes rolling. VRMs that were on par with 5-year rates are now about 65-80 points less.

  • The April-August housing markets will be excessive. Rising rates guarantee this as the fence-sitters dive all in with their FOMO in full hyperdrive.

  • Bonds and ETFs based on those rates will continue to lose capital value

  • Historically, stocks do okay in inflationary times since, in general, higher rates signal more economic growth and increased profits. As the vaccines rout the virus, that's specifically what you should expect. But be cautious because we are far closer to the peak of a market than the low of one.

  • GIC returns may eventually increase with banks' savings rates, but these are still brain-dead assets, in my opinion.

  • And keep in mind that if inflation stays with us for a long time (and I believe it will) that non-taxed, registered accounts become even more crucial to your financial future. Fill that TFSA. Make the maximum RRSP contribution. Get free money with your kids' RESPs. You can put silver and gold into these vehicles.

  • Buy a house if you need one and can afford it without destroying your family's finances. Just be selective. Maybe even buy land as an alternative.

  • Lastly, don't take any of this as advice. Please bring it to the ones you trust in your financial lives and stew on it with plenty of due diligence. It is your wealth, and it is your money. Make it count or you will end up being passive like the rest of the “sheeple”.

You have a shot to get ahead now.

Yours to the penny,

Darren V. Long

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