The real threat to our economy is how fast wallets are closing

There is one thing worrying me about the economy these days. It’s not the fact that China is having problems taking a second breath between economic sprints. It’s not Europe and their big fat debt they keep feeding like an overweight cat. Nope, what bothers me about the economy right now is the possibility of seeing all these wallets closing at the same time.

The only thing that can kill an economy in a capitalist world is a lack of liquidity. Cash is like blood going through your veins, if the heart stops pumping, the whole body collapses. If the Fed stops pumping money into the system, will the economy crash?

You don’t know what I’m talking about? Here’s a recap of what is going on…

Fiscal Cliff, Debt Ceiling and the FED

2013 will be a year of great debate between the Republicans and the Democrats. They will have to argue on how to completely solve the fiscal cliff. If they can’t find a solution, major spending cuts doubled with tax increases will hit the economy like a train. That’s a recession scenario right there.

The other great debate is the debt ceiling. Over past decades, Governments have increased the US debt ceiling (the amount of debt the country is allowed to borrow) several times. The latest episode happened in 2011. Still, we are now back at the table to discuss the same issue. The first meetings happened at the end of February. If no long term solutions happen, there will be another series of spending cuts to make sure the US Gov doesn’t break the ceiling again.

On their side, the FED continues to print money like there is no tomorrow. They are injecting billions, read trillions, into the economy with bond buyback programs called quantitative easing. Wall Street is reassured each time Ben opens his mouth to say that interest rates will stay low and the FED will keep pumping money into the market. The big bulls of Wall Street only want to hear that more money is coming in, they don’t really care if it’s good or bad for the Government.

The Government Is Not The Only One To Put The Brakes on Spending

The Government is not the only one putting the brakes on spending. On both sides of the border, we see consumers slowing down with their credit cards. Americans have started to save money since 2009 and their financial situations are getting better. However, this doesn’t mean they will open their wallet again. Since the American consumer counts for 70% of the US GDP, we absolutely need his enthusiasm for the economy to continue rolling.

In Canada, we don’t have Government debt problems yet but we surely have a huge issue with consumers. They are so under water that they don’t even see the earth where they can land. Sooner or later, they will have to slowdown with their credit cards. They will either do it because they realize they are in trouble or they will be forced to do it when the cashier returns their card saying the transaction is refused. In both cases, this will hurt the economy.

Recession, Stagnation, Where to Find Growth?

When I look at global markets, I have a strong feeling that economic growth will be pretty close to the stagnation level. I think we will avoid talking about the R word but won’t be ecstatic about the markets either.

Nonetheless, the stock market is not related to the Government’s balance sheet nor the typical consumer bank account. This means that we will still have a great year in the markets and the first two months have proven it.

If you have energy, cyclical stocks and “pure growth oriented” stocks in your portfolio, chances are that they will lag a little bit in 2013. Spending cuts will affect cyclical markets (especially if they increase taxes!). I would probably stay away from weapons and defence industries since the bulk of the cuts will happen in the military budget. They had great years in the 2000s, but I think the party will end soon for those companies.

My bet would be on cash and stable businesses. I recently wrote a piece about the food sector (click here to read it) showing how well it has done since the beginning of the year. I think that companies with strong dividend policies and low dividend payout ratios will be among the most popular stocks.

Investors are looking for steady income and bonds are not providing what they are looking for. As long as we see a stagnated economy, interest rates won’t go up. Therefore, the next item on the list for steady income is dividend stocks. I currently don’t believe in a dividend bubble since stocks are undervalued. But 2013 could probably be the year when the bubble will start growing faster.

What do you think? Do you think the economy will get back on track this year? What about your portfolio, do you think that dividend stocks will be among the big winners for 2013?

Are companies rushing their year-end dividend to avoid the fiscal cliff or is it just a last kiss goodbye to their payouts?

For the first time in 20 months, funds invested in Dividend ETFs are droppping

For the first time since many years, several companies are paying an special dividend before the end of the year

We are not Halloween, and yet we talk about Death… Dividend’s Death?

I’m taking a quick pause from my utilities dividend growth stock series to talk about the possible impact of the fiscal cliff. I don’t know if you have noticed this, but there are a lot of companies rushing their payout before the end of the year. In their announcement, they specifically mention that this exceptional ex-dividend date and dividend payout are prior to January 1^st with the only goal of avoiding the possible new tax treatment on dividends in 2013.

Companies such as Oracle, Cisco, Seagate Technology, Wal-Mart, etc are paying their “regular” dividend in advance while other companies such as Wynn Resorts & Tyson Foods are paying a special dividend before the fiscal cliff. At the same time, companies who refuse to get in line and pay their dividend prior to 2013 like GAP will be penalized by the market and see their shares plummet. Do companies and Wall Street Golden boys know something small investors don’t? Are they planning on cutting their dividend after the fiscal cliff? Or is it the death of dividend growth?

Fiscal Cliff in Numbers

To answer these questions, we must understand what the fiscal cliff is. The Fiscal cliff is a combination of measures that will drastically increase the Government revenues and cut its expenses.

The revenue increases will come from the maturity of a series of special tax reductions that were enacted during the Bush Government.

The expenses cut will come from a series of arrangements decided by congress in 2011 in order to decrease the debt level.

The problem is that the combination of both measures creates a “hole” in the economy equivalent to 3.7% of the USA GDP. So unless we see incredible economic growth in 2013, we are heading directly into another recession. Being in a recession is one thing, but what concerns folks the most is the tax increase detailed as follow:

The tax increase will mainly hit high income households along with capital gains and dividend payouts in general. I’m not a tax expert but I read that dividend income currently taxed at 15% could go as high as 38.6%. That’s more than 20% less in your pocket for every dollar received in dividends!

How the Fiscal Cliff Influences Dividend Growth Stocks

We all know that the main goal of any CEO of any public company is to keep the share value as high as possible and to generate profits. If the share value is up, it’s good for both investors and the CEO . We also know that several stocks attract investors with their dividend growth policy. For example, what has been the point of holding JNJ for the past 5 years (stock value is +3.13% but dividends increased by 45% during the same period) besides its ever growing dividend payout? None.

In a historically low rate environment, solid blue chips have slowly replaced a part of bonds and certificates of deposit in the fixed income portion of a portfolio. It seems like a good way to buy a stock that will be relatively stable over time while paying a dividend that is taxed less. What do you think would happen if the reason why you hold a stock is impacted by a tax increase of 23%? You might sell the shares and look elsewhere for another investment opportunity.

Stocks May Hold Off On Their Dividend Growth Strategy

We recently talked about a potential dividend bubble due to the fact that investors were rushing into dividend paying stocks to compensate for low interest bonds. The word quickly spread and several companies started to increase their dividends and adopted a dividend growth policy in order to get on the train and attract more investors. I’m not making this up, check out this chart showing the huge dividend burst that happened upon the dividend tax cut to 15%:

So maybe the fiscal cliff is not the end of the world and dividend investing is not dead. However, strong dividend growth stocks might be hard to find if several companies hold off on their dividend growth policy. Instead of increasing their dividend increases year after year, they might keep their money and use it for other projects.

We Are Not Done Yet With The Fiscal Cliff

Back in April, I discussed the pros and cons of Obama rising taxes on dividend. I’m obviously not a fan of the situation but it might not be as catastrophic as we think. There are still a lot of companies that will continue to pay dividends. On the other hand, nothing has been settled yet and the Government could still continue to debate throughout the beginning of 2013 as the taxes will be applied during the year but most likely paid in 2014..

So there is still hope that the dividend tax won’t be hiked to 38% and that stocks will continue paying great dividends!

What’s Your Take? Are You Afraid of the Fiscal Cliff?

Dividend investors prefer to receive cash right now instead of playing on a potential company growth. But if the dividend payout is taxed too much, there might be a loss of interest towards dividend investing.

Do you think that dividend investing will be dead upon the fiscal cliff?

You Want More Tricks To Buy Dividend Growth Stocks?

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Check out my book, there is a ton of insightful info on how to buy, manage and sell your dividend stocks!

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Disclaimer: I hold shares of JNJ & STX

Sometimes I wonder if financial journalists know what they are talking about – the FED printing money, really?

Do you believe that the FEDis the only institution that evolves in a closed world separate from real economic data and without expertise? Do you believe that Ben Bernanke is not as smart as a 5^th grader? When you read the financial news, I start to believe that journalists think so!

I’ve read numerous articles about the fact that the FEDis printing money like there is no tomorrow through their set of Quantitative Easing measures (aka QE1, QE2 and QE3). At the end of summer 2012, the FEDannounced a third round of QE by buying $40B of mortgage back assets on a monthly basis (read more on QE3). Bernanke was accused by many of printing more money and eventually pushing the States into an uncontrollable inflation spiral. When you think about it: The FED is injecting $40B per month into the markets. Where do they find the money if they don’t print it? At first glance, it seems that Bernanke is not smarter than a 5^th grader after all… but, thank God!, the reality is more complex.

How Quantitative Easing Measures Work In theREALWorld

In the real world (this is what matters, right?), theFEDis not depositing $40B into someone’s bank account each month. It’s not “real money” but rather a way of playing with accounting books to facilitate liquidity (read; more credit facilities for consumers) and add pressure to long term bonds (which results in pressure on mortgage rates to stay low). As you can see in the chart below, this part of the system works well:

IOU System

As I mentioned earlier, QE is not real cash in a bank account. It’s working like an IOU system:

#1 The FED buys mortgage back assets from a bank. Therefore, in the books, the bank can release its weight as it doesn’t hold the illiquid (and most probably under water) mortgage assets on its books.

#2 In exchange, the bank doesn’t receive cash.  The money from the mortgage backed asset sale is deposited at the FED. This allows the bank to switch an illiquid asset from their books to solid cash. The interest in theFED bank account is paying more than regular money market. This is why the bank will keep it there.

#3 The Bank now shows an improved balance sheet. With the mortgage backed assets gone, the bank shows a stronger balance sheet and is able to lend more money at better rates to consumers. It’s like capitalizing banks without “real” money.

#4 The money in the market is coming from banks to consumers. So theFED is not printing money, its only facilitating the banking industry to provide credit to its consumers. Since 70% of the USGDP comes from internal consumption, it is crucial to help US consumers to continue to buy goods.

There is No Printing Money but there is a lot of Burning Money

Another factor that most people tend to forget is the fact that we are currently burning a lot of money in the US at the moment. How can we burn money? Here’s how it works:

In a “normal” situation, you have a mortgage on a house that’s worth more than its debt. So you buy a house at 100K with a mortgage of 80K. Each time you make a mortgage payment; you drop your debt and automatically create equity in your house. Therefore, the day that your mortgage is paid down to 70K, you can still borrow back the 10K equity you’ve built on your house. If you are lucky, the house now worth 110K and you have 20k equity ready to be used (or abused ).

But right now the situation is different. You bought a house at 100K with a mortgage at 80K. Housing market has been so bad that your house now worth 50K. So even if you have paid 10K on your mortgage, you are still “under water”. Your balance sheet is showing a 50K asset with a 70K debt attached to it. You are still in “negative equity”. So each time you are paying down your mortgage, you are taking away this money from the system as you are not creating equity. This is what we call money burning.

Since there are millions of mortgages in this situation, there are millions being burned at the moment? So creating liquidity on the banks’ balance sheet in this situation is not that bad!

Monetary Mass is Relatively Stable

Everything you read here could be confirmed or destroyed by someone else like any other theory. But I think I’m pointing in the right direction since there is a key metric that doesn’t lie: theUSmonetary mass.

The monetary mass is the sum of all US dollars that “exists”. When we look at the money supply, we can see that it’s increasing but not like there is no tomorrow either:

For this reason, I’m not too pessimistic about hyperinflation. As long as the monetary mass is stable, we shouldn’t have to fear inflation.

What Truly Concerns Me is Obama

I’m not American, I didn’t vote and this blog is not about politics. In fact, I don’t really mind if Obama or Romney is the President. What concerns me is the fiscal cliff that is looming ahead and while the President is a democrat, the congress belongs to the republicans. With a neutral opinion, I just don’t think it’s a good fit since both parties have a very different way of seeing the economy right now.

The fiscal cliff is arrives in January 2013 when several spending cuts and tax increases are going to happen (including taxing dividends!) if a solution is not found. So the problem is not being a democrat or a republican at this stage. The problem is that both parties will have to walk hand-in-hand towards in the same direction to find a solution. This is where I see the problem happening. They do not seem to get along very well at the moment.

My concern is the following: while both parties argue on which way to turn, do you fear that we will jump in the cliff before they decide to avoid it?

We have been waiting for it more anxiously than the next release date of a U2 show. After a good 12 months of waiting, the market finally got what it was asking for: more money pumped in the system. Last week, Big Ben (Ben Bernanke) revived the stock market by announcing another round of Quantitative Easing surnamed QE3. The market surged by almost 2% in a single day. I guess we can call this good news… but is it really?

Quantitative Easing (QE) History So Far…

What is now a common term (QE) was almost nonexistent prior to the credit crisis back in 2008. Only Japan had used this method in the past. During the credit crunch, most banks were having a hard time with their liquidity and didn’t want to lend to anybody. Banks did not trust each other at that time. Since money is like blood in our veins, when banks stopped lending, the wheel of capitalism was quickly stopped as if it just had a heart attack. It looks a little bit like this:

Since rates weren’t the issue (they were already dropped to 0% at that time), the FED needed to find another way to revive the economy. Without liquidity flowing, there was no way growth would come back. The problem was caused by mortgage back securities (MBS) that were used as commercial paper. Those MBS were “toxic” and contained several bad mortgages along with a leveraged effect. In the end, nobody knew what was inside the toxic MBS and this is why nobody wanted to trade them anymore. This was causing huge losses on banks’ balance sheets as commercial paper was usually seen as short term assets.

This is why in November 2008, the FED started their first quantitative easing (QE1) operation with a first round of $600B purchases of MBS. It had a huge effect on the market and this is when the economy started to walk again. This is what led to the 2009 market rally.

In November 2010, FED announced another round of $600B to purchase treasury securities. The goal was, again, to pump liquidity into the market so trades would still occur. It’s like artificially pumping a patient’s heart in the hopes that the heart will restart.

In September 2012, we are now up for a third QE (QE3) where the FED will buy for $40B per month of MBS. While the first two QE goals were to inject liquidity in the market, the third round aims specifically to reduce mortgage rates. The idea is to create more demand for homes (as several Americans currently pay a higher rent than a mortgage payment due to job instability) and for more refinancing. In other words, we are trying to increase jobs through more consumer spending via the home market. Hum… this reminds me of 2003-2007 home market….

What’s the Point Of “Easing” The Economy

In a “normal” world, the central bank’s job is pretty easy. Inflation goes up, they increase rates, inflation comes down and unemployment goes up, they decrease rates. Then it becomes a real nightmare when inflation may surge at any moment, unemployment rate is incredibly high and the interest rate is at 0-0.25%. Even calling the “forever low rate” policy until 2015 is not enough to convince the stock market. Companies prefer to be cash rich then using the cheapest leverage ever.

This is why Big Ben came up with the idea of printing money (literally) to buy assets nobody else wants. By sponsoring the stock market, he hopes that the economy will continue to grow and consumers will spend. While QE1 was a great success and did what it was supposed to (restart the engine of the economy), QE2 didn’t do much. Is QE3 the answer to the US economic problem? I doubt it…

Possible Impact of QE3

The immediate impact that I see from QE3 is not a better economy but rather a weaker US dollar. By printing billions and billions of dollars, you start diluting your value. A weak US dollar might be good to stimulate exports. This is not necessarily a bad thing, especially for small and medium size companies who try to compete in the market.

However, printing so many bills can also lead to inflation. What would happen if the economy gets back on track and inflation goes up to 5%? Increasing rates in a fragile economy would probably kill the economic impetus within months. On the other hand, hyperinflation is not something you want to see in a developed country.

I’m just wondering how good it to be to inject more billions when 1.2 trillion was not enough? There is a limit of how much CPR you can do on a human body. I guess this is the same thing with the economy. At one point, aren’t we going to create a Frankenstein?

Gold or Oil?

The first reflex of many speculators was to go into gold (to protect their money from eventual hyperinflation) or to aim for oil (as an exploding economy will push prices higher). I can see both happening (gold and oil going up) but would rather bet on oil for the moment. I guess that the fact that I hold 2 oil companies (HSE and CVX) makes me hope that both companies will benefit from a potential economic boost.

But to be honest, I’m not convinced that pumping more money into the market is a good idea. It also sends the message that investors, banks, companies can do pretty much whatever they feel like doing, Big Ben will always be there to cover their mistakes…

How to Position Your Stocks

So how do you position your portfolio in light of QE3 expectations? I think that companies that have a strong potential for exportation will be the true winners. It’s almost impossible to see a strong US dollar in 2013. Therefore, exports should increase significantly.

Then, resources companies should also benefit from a low interest environment. Combined with a growing economy, we can see good things happening on this side too. Since I’m already into 2 oil companies and 1 rare earth producer (VNP), I’m not going to buy more for my own portfolio.

I’m actually going to focus on cash rich companies and not change my current portfolio for the moment. VNP is actually gaining some momentum at the moment so I’ll keep the stock and wait for the next quarterly results. I have my eyes on McDonald’s (MCD) at the moment but missed a great opportunity to sell STX at $35 and switch my money over to MCD. Now that STX has dropped to $30 or so, I will keep it and earn the strong dividends.

If I had more money to invest today, I would still invest in the US stock market even though I’m Canadian. I find that the overall stock market is still undervalued and that has nothing to do with QE3. I don’t expect many results from QE3 besides a weaker US dollar (which is always good for new buys for Canadians!).

Do you think that QE3 will have an impact on the economy or is the FED is just pumping money in the air?

There is something both quite scary and interesting happening these days on the market: the direction of interest rates. Regardless if you are living in the US or in Canada, you are currently getting the deal of the decade (or the century?) in terms of low interest rates. If you borrow for a mortgage, nobody will mention rates around 5% or 6%. Depending on the term, you will be looking at a 3% to 4% interest rates. And if you are looking short term, you can even get below 3%!

Since 2008, the direction of interest rates has gone straight to h?ll. This is because our countries can borrow at very cheap rates and our central banks (the FED and the Bank of Canada) want to keep interest rates low in order to stimulate the economy. Since internal growth is still weak, low interest rate policies are here to stay a little longer. The FED already announced that they would keep their rate policy if effect until 2014 (which was originally until 2013 and previously until 2012…).

This has obviously helped a lot of families that currently run a tight budget. We often hear that a 2% rise in the interest rate would completely change our economy and that we would see foreclosures surging all around North America. For example, the monthly payment on a 400K mortgage over 25 years at 3.75% is $2,050. If you change the interest rate to 5.75%, you get a boosted payment of $2,500.09. That’s $450/month more! Do you know a lot of families that are currently saving over $450 for rainy days on top of their budget?

What Would Happen If You Have To Borrow at 7%?

I know… you are probably thinking that interest rate won’t go up like this and thinking of a catastrophic scenario showing interest rate at 7% is crazy. Think again. You can’t imagine your mortgage going up to this rate and have no idea where you would get the money to make your payments. This is not a fun scenario and we tend to ignore it or discredit it simply because we have to say that we would lose our properties if it happens. Well there are people in this situation and it may be not the ones you think…

Current Borrowing Rate in Spain Just Hit 7% at the Beginning of the Week

On Monday June 18^th, Spain 10 year bonds were at 7%. Just to put everything in perspective, Spain is the fifth largest economy in Europe and twelfth largest economy in the world in terms of GDP. From 2000 to 2008, Spain was one of the best economies in Europe. But since 2008, things went sour and Spain is now showing a 25% unemployment rate. Since this wasn’t enough, they now have to borrow at 7% because investors are afraid that Spain is right behind Greece in the bailout line-up.

Is it normal that we, as individuals, can borrow an interest rate 50% smaller than the 12^th world largest economy? Can they find a way out to pay down their debts while 25% of their source of income (workers paying taxes) are not producing any? Worse than that; they are not only producing $0 income in taxes but they cost something since they are being financially supported by the government. If I was Spain and my mortgage rate was at 7% and would lose 25% of my income, I would definitely have to call The Mom & Dad Bank for a bailout!

What Kind of Impact it Can Have on The Stock Market?

There is good news and bad news related to this situation. The good news is that we are set for low interest rates for a while still. This is also good news for companies who can borrow at very cheap rates and generate more income through growth. The bad news is that growth may not come very fast! What happens when you go through a challenging financial moment? You cut your expenses and seek additional sources of revenues. When you are a Government, it’s called: applying austerity measures. You cut in services and increase taxes where it’s possible.

In such an environment, investing is quite a ride. You have the choice between picking bonds that don’t pay or stocks that will go down in value. In both cases, it’s impossible to generate an interesting yield from your portfolio. What’s the solution? Picking stocks that are cash rich. Your stocks will still go down in value but you know that these companies will survive and grow stronger from such a situation. In the meantime, you may as well get a few dividend payouts ?.

Where do You Start?

As a reference, I’ve compiled a few good articles that will help you chase down the right stocks to make it through this heavy environment:

Top websites for stock research

15 things I look before trading a stock

My stock analysis template

Where to find Dividend Growth Stocks

Top 10 Investing Tips

Dividend Growth Index

2012 US Best  Dividend Stocks

2012 Best Canadian Dividend Stocks

There are a few things that tick me off. One of them is how Governments act in general. The worst part is that most seem to run the same way regardless if they are American or Canadian. Unfortunately, one thing that bugs me the most is how they handle money. They seem to be pretty good at creating committees and spend money on research but they far from knowing what they do.

My suspicions are that they are more interested in making a good political announcement than looking at the real numbers. Yeah I know… this is an understatement! But still, it freaks me out!

Here’s a Shocking Example:

Recently, the Government of Quebec issued their latest budget. In this document, they introduced a new “pension program” that employers have to offer to their employees. For this initiative, I just have compliments. It’s awesome to force both employers and employees to think about retirement. The cost of supporting retirees is too big to have them supported by the Government or the future tax payers (especially considering the demographics).

However, I have a problem with the calculations they used. And I guess this is why they put us in the hole year after year! They calculate that an employee would only have to save 4% of their gross income in order to live with 60% of their income at retirement.

When you read the latest statement, there is nothing shocking about it. I mean, living with 60% of your income is pretty good. Considering the fact that you should have paid off all your debts (or almost), 60% seems like a reasonable number.

You would think that if they say that you need to save 4% of your gross income, they have done their calculations. You would assume that this number is not created by a few dreamers. You would bet that your Government hired a whole team of experts to come up with this new solution. Oh boy… I am so naïve sometimes!

My Son Can Do Better Math than That!

My 6 yr old, William, can probably teach the Government a few things about calculations! Here are the assumptions they made in order to get the magical 4% of savings to generate 60% of your income at retirement:

You will die at 82.

You will generate a 5.75% annual return AFTER FEES.

This is exactly when I started to freak out.

All right, let’s start with the first assumption. You will pass away at the age of 82. Really? A recent study showed that my young daughter, Amy, life expectancy was 100. The current life expectancy for a woman in North America is 83. And you can bet that this number will increase greatly in the next 10 years. What happens if you live until the age of 90? 95? You will be living on social benefits for 10 years or so! This will definitely be the 10 worst years of your life!

But there is something more dramatic than living past 82. It’s making a 5.75% investment return over 30 years or so. The 5.75% is not too bad, but when you consider that most people do not invest more than 50% of their investments in the stock market (they prefer low interest bonds instead!) and that most people will pay between 1% and 2% in fees, you are looking at a serious problem!

The interesting part about all this is that we do have a professional association of financial planners in Quebec that publishes the investment return norms for retirement planning. But this association is rather conservative. So instead of presenting great charts to their clients, financial planners use investment returns between 4% and 6% depending on the client’s risk tolerance (as you can’t expect to make 6% annuallly if you invest 75% of your portfolio in bonds!). At no point in time was this association consulted to build this amazing retirement plan at 5.75% (net of fees). I guess the Gov was too afraid to have its bubble burst. After all, when the retirees realize that 4% wasn’t enough, the Gov guys will be far away retired on a beach enjoying their generous pension plan!

What Scares me the Most

What scares me the most is not what just happened with the retirement fund but rather what else will happen that I’m not aware of. I’m privileged to work in the financial industry and know a little bit more about investing and retirement planning than the average citizen. This is how I caught this nonsense. Unfortunately, I’m convinced that Govs are making similar case studies to take other decisions. If they run their environmental decisions based on the same model, I guess they will underestimate the impact of our society on the planet. That again, is an understatement.

Have you ever run into any Government absurdity? I’m curious to hear your story, I’m sure they are worth sharing!

If you have been reading any financial newspaper or site for the past 6 months, you have seen numerous front pages concerning the catastrophic Government debt situation. It’s not only about the Greek debt anymore, now, we have tons of countries to be worried about:

Portugal

Ireland

Italy

Greece

Spain

And the most popular one: The United States of America has reached 100% of their GDP in debt.

So this is the end my friend, all governments are going to collapse and we will be down to trading gold for a piece of bread… really?

Why you should not care about US Gov Debt Problems

If I were a politician, or worse, a politician on Obama’s side; I would be darned worried about the US Gov debt problem! Why? Because it is the pre-game show topic of choice for the 2012 election. The Republicans and Democrats will fight until death over the debt to gain (or lose!) points in the polls.

But as an investor, I don’t really mind the Government debt problems. In fact, it is creating a huge opportunity for us, rational investors, while most people are panicking.  I don’t care about Gov debt because they are not the ones supporting the companies I hold in my portfolio.

I haven’t heard about any Government financially supporting Coke or Johnson & Johnson. I haven’t heard about Intel concentrating its market development strategy based on selling their products to the US Government. They surely deal with them but there are tons of other clients! This is why most public companies are not sponsored by the guys with debt problems.

So while the market is heading down on fear that Greece will collapse or that other PIGS will follow them to the slaughter house, you can get healthy companies paying significantly high dividends.

The Good News About the Fear of Bonds

Since there is a fear climate over bonds and banks, most solid companies are keeping their cash flow for themselves. The financial theory explains that a company pays dividends when they can’t make more money through their operations. This is how we get to a stage where we have tons of well diversified and profitable companies racking up cash in their bank accounts like there is no tomorrow. This is also how we see the very same companies distributing a part of this cash in dividends to its shareholders.

Bonds, CDs and interest rates are at their lowest levels possible while you can earn 3 to 5% in dividends. Sure your portfolio value will fluctuate big time over the next few months. You will be under the impression that you are losing money for the small promise of 4% in dividend yield. However, if you invest in bonds, you can be 100% sure that once the interest rates go back up, you will be in the same situation… besides the fact that your stock will eventually go back on an uptrend while paying high dividends as compared to low interest paying bonds!

This is why it worth it to concentrate on buying dividend stocks at the moment: because shares are undervalued and the dividend rate is high. Isn’t this the best case scenario for an investor?

Recently, I bought 3 dividend stocks through a leverage loan. They have been rocking my portfolio through the fluctuations and I am technically not making any money at the moment. However, in a few months or next year, I’ll be showing a healthy portfolio with a positive value and a dividend payout over 4% ;-D

My only concerns toward Gov debts

I do have one concern about the current government debt situation: what is going to happen to banks??? There are 2 types of institutions able to finance countries:

Governments & Central Banks

Banks

This is why European banks are in the spotlight as they hold PIIGS bonds in their portfolio. If Greece would come to default, this could have a serious impact on banks’ financial results. However, since I only look at Canadian Banks for my portfolio, I still don’t mind too much

Are you concerned about the Governments’ debts? About European banks having problems? Has it influenced your way of investing yet?

Depending on the country you live in, an individual’s need to save for retirement can vary widely. For example, in Norway (where I currently reside) they have a very socialist economy and any resident will retire with a pretty substantial income for their entire lives. In Canada, my home country, we have the Canadian Pension Plan. This pension plan is not huge – in 2007 the average monthly benefit was $481.46. This has huge implications on how I run my family finances.[ad#tdg-embedded]

If I were to live in Norway, then saving for retirement would not need to take a huge chunk of my disposable income. The government is going to ensure that I can afford to live a comfortable existence, with perhaps even a bit left over. On the flip side, in Canada I cannot rely solely on the CPP benefit. $481.46 will not be enough for my wife and I to live on (at least not with what we have become accustomed too), especially with the type of retirement I want! As a result, I need to allocate a large portion of my income to my investment portfolio to ensure that I supplement that CPP benefit.

In essence, I am forced to invest my money for retirement. The government is making me do it. This is exactly as I want it! I do not want to start a debate about the pros and cons of socialist governments, or the associated taxes. However, that is really what we are talking about here. The Norway pension plan requires a large tax burden on its citizens. Canada’s does too, but not to the same extent. I do not want to rely on a government for my future well-being.

The point I am trying to make here (although not very eloquently), is that one of the factors that impacts an investor is the government in their home country. Depending on the pension plan you will receive, more or less of your disposable income must go towards saving for future income. In addition, government rules on the taxation of investment assets must be factored into many of your investment decisions.

In summary, I am suggesting that as individual investors you consider the impact of your local government on the investment decisions you are making. Investing is not complicated but many things must be given some think-time. The government is certainly one of them.

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