I’m known to be an optimist, a guy that will always tell you that today is the best day to invest your money… since you missed yesterday! While I’m confident that I will have another great year in the stock market, I’m also not a lunatic with pink glasses either. Unfortunately, there are some dark clouds rising at the moment which concern me. Here are three things that scare me the most in 2018.
01 Canadian Debt Level & Housing Market
I’ve been concerned about the Canadian housing market since 2012 and I’m sure I sound like a broken record. However, this situation doesn’t make sense to me:
Source: Ycharts
Do you remember what happened when Americans started using their house like an ATM machine? Yeah… 2008 happened. As you can see from the chart above it took them until 2014 before reaching 2008 levels. What about us? We flew like Canadian goose flying wild toward their Florida party during winter time. Our market just ignored the warnings. As Canada was proclaimed the country with the “world’s best banking system”, many foreign investors shifted their money toward our Real Estate market. It’s nice to get some positive attention, but with a household debt level hovering around 170%, new mortgage rules requiring a “stress test” for all new borrowers, I don’t see how we will go through this situation without a housing correction.
What I plan to do about it
I plan on keeping my house. I’m comfortable here and I don’t plan to move for the next 5 years. I secretly hope that my children grant me the permission to sell everything and travel the world but I know their friends matter to them and I know I will be “stuck” in this winter country for a while.
As far as my investments, I have a reasonable position in the Canadian banking industry with Royal Bank (RY.TO) and National Bank (NA.TO). Both banks show strong positions in the capital and wealth management markets while leaving the classic mortgage business to TD (TD) and CIBC (CM). In the event of a market crash, National Bank should not be affected too much as the bulk of its mortgage portfolio is in Quebec, one of the provinces that has not been affected by the housing bubble.
02 Bitcoin!
I already wrote about why I decided to ignore bitcoins and other cryptocurrencies. I don’t deny their technology is a game changer in the financial industry but investing in a stupid coin in the hope that another stupid investor would buy it at a higher price is not a risk I’m prepared to take. If this doesn’t sound like the techno bubble, I don’t know what is:
Source: Ycharts
If you are a bitcoin fan, I’m urging you to explain to me what the value is behind a bitcoin. Which gives bitcoin its value? Please tell me your rationale behind a bitcoin at $10 or $10,000 or $50,000? Here’s a hint; if you can’t tell me what your value of a bitcoin is, then don’t have an investment in your portfolio, you have speculation. Unfortunately, we all know where speculation leads. “Not this time, it’s different”… yeah… keep drinking the Kool Aid!
What I plan to do about it
Not much. In fact, I stay away from cryptocurrencies. My play was to invest in Visa (V) as it will benefit from the blockchain technology. Another play could be to look at CME Group as I discussed in a previous article about the bitcoin frenzy. But there is no way I’m buying any coins. If you leave a coin in your virtual shelf for 10 years, what that coin will produce? Nothing. This is the reason it has only value if someone else is ready to pay more for it. And the reason why someone is ready to pay more for it is only because they believe someone else is ready to pay more. Does this scream a pyramid scheme? I’ll let you decide.
03 Remember Greece?
Do you remember what happened in 2012 when we all thought the world would collapse because of the Greek debt? Let me remind you of the important parts.
- Most (if not all) countries owe money to someone else.
- A good part of this money is lent among countries, another part among banks.
- If a country fails to pay its debt, banks will fall.
Do you remember the last time banks fell? Yeah…
Source: Ycharts
The graph above shows some countries government debt as a percentage of their GPD. As you can see, besides Germany, everybody keeps borrowing more. My question is simple, where does this all end? As an individual, we all know that we have a limited amount of money we can borrow. This limit is set by banks and other financial institutions. While the limit isn’t 100% clear, we all know that if we keep borrowing, one day, no bank will loan us more money to keep going. The next step the banks will take is to start asking for their money back. Thus, this is how we can go bankrupt.
Government debt isn’t that easy. It’s a complex beast and not many people are able to explain it. In fact, I’m humble enough to tell you that I’m not sure how to figure it out myself. However, there is one thing I understand, borrowing indefinitely can’t be the answer. One day, somebody, will have to pay their due. But nobody wants to hear about paying down their debts, austerity or about being responsible. This has no political value. This is boring stuff. Unfortunately, one day, we will have to all sit at the big table and have an adult conversation about what is going on.
What I do about it
I personally did a stricter budget and started to focus on paying down my debts in a more proactive way. In 2018, my company should generate enough extra cash flow that I will be able to reduce my debt while not pursuing any new purchases.
As for my investment, I’ve pick solid dividend growers. The idea is to pick companies that have a strong business model that will go through the next recession with more dividend increases. Since there isn’t much I can do about the government’s debts, I rather focus on building a strong portfolio and take care of my own stuff!
What worries you about 2018?
What about you? Is there anything that doesn’t make sense in the stock market or the economy? What do you think will go wrong in the upcoming months?
“Do you remember what happened when Americans started using their house like an ATM machine? Yeah… 2008 happened” this wasn’t the only Lynch pin that was pulled to cause the crash of ’08. Sovereign debt is much more complicated then the passing comments you give to it in this article (pick up Web of Debt, for an interesting primer). But I do agree with the budgeting comments, it’s always wise to work and live within your means, building for a better tomorrow though still enjoying today.
There is probably a whole PHD paper to write about Sovereign debt right now. I try to get my head around this whole mess and I can’t do it. This is scary!
Cheers,
Mike
Congratulations on winning the genetic lottery and being lucky enough to live in a developed nation! But the world is a big place, and over 3 billion people on the planet are either un-banked or under-banked. What do you think would happen to the global economy if it was more inclusive of all humans? And not just the lucky?
Bitcoin is both a technical protocol and a digital asset. Bitcoin the protocol provides humans all over the planet with a cryptographically provable digitally scarce resource. Gold doesn’t have these properties. Neither do our fiat currencies.
You have to appreciate the irony of both questioning the value of Bitcoin while simultaneously referencing Greece. I’d refer you back to what happened to the people of Cyprus after their government bought up a bunch of Greek bonds. That poor investment caused a collapse of their banking system and a run on the banks with a subsequent financial haircut for all private citizens. The government STOLE their money! This is a country in the EU mind you. So don’t think it can’t happen to you. History tells us a much different story. From civil forfeiture in the US, to hyperinflation in Zimbabwe, or Argentina, to the collapse of nation states.
“if you can’t tell me what your value of a bitcoin is”
Can you tell me what the value of a USD, CAD, EUR, GBP, etc… is? Nothing is backing our fiat currencies other than trust in the state. It’s nothing more than a socially contract — a collective story we all choose to agree on.
Do you agree more with people in positions of power? Or mathematics? I choose math.
You are making some interesting points. However, imagine Cyprus would have used Bitcoins at $19,000/coins and would suddenly wake up a few weeks later with a large payment to make, but their marvelous coins only worth $10,000 all of a sudden? Almost half of their wealth, disappeared due to mathematics… that wouldn’t be a problem?
Yes, that would be bad if we are still measuring the value of a bitcoin against some other currency. 1 BTC will always equal 1 BTC. So if (and yes it’s a really big IF!) goods and services are denominated in BTC, the value would have been maintained perfectly. Try that with a currency that can be inflated/deflated at the whim of a central bank!
‘Is the ruler measuring the table, or is the table measuring the ruler?’
That being said, it could also have gone from $19k to $50k, or more. 😉
I like where this conservation is going. Let’s imagine that all currencies are destroyed for the benefit of Bitcoins. Then what? The average revenue is 1 bitcoin a day for all workers. Then, you have a guy starting from scratch and building a huge business. He becomes the richest guy on the planet. The interesting part in the bitcoin system is that there is a finite number of coins. Therefore, he can now buy enough and control the system. Then what?
The best part is that you can replace the smart guy story by a country or bank or existing company and it will fall down to the same thing; There will be an important difference between riches and poor again. Call it gold, call it US dollar or call it Bitcoin; the same result will happen as long as we live in a capitalist world.
This is why I don’t see how bitcoin can create a revolution.
This is where game theory comes into play. If this smart guy/country was able to buys up all the bitcoin/gold/dollars in the world, the very act of doing so completely eliminates all the value. Here’s how: as this entity took more and more supply off the market, that would increase scarcity, thereby increasing the demand & the price. At some point it becomes impossible to buy it all since the outstanding supply would have a higher value than the amount hoarded. There is a very clear economic incentive to NOT do that very thing, even if it were technically possible.
The problem with the current system is that they can just keep printing more of it. Or digging more out of the ground. Venezuelan inflation has just recently hit 6500%. Can you imagine??? No amount of dividends is going to save you from that. There needs to be a better way. Bitcoin could be that way.
I just don’t see what makes Bitcoins different? Venezuela is a disastrous story, but shifting their money in bitcoins would not have made anything different. When you spend more than you earn, you are doomed. Even if Govts print money, they will have to pay their debt back at one point.
The fact you can divide bitcoins in parts is the same thing as being able to print money. At one point, we will have 0,00000000000000000000001 bitcoin worth enough to buy peanut butter and bread. It’s already starting as you only need 0.0005 bitcoins to have the equivalent of $5 in your pocket.
If someone or entity get to own let’s say 30% of all bitcoins, he/it will control the currency and what everything worth. We are then back to square one. The problem isn’t the currency, it is the capitalist system. Unfortunately, I don’t have any solution for this.
Bitcoin is only divisible down to one hundred millionth of a single bitcoin (0.00000001 BTC), and is called a satoshi. 1 Euro cent is worth approximately 83 satoshi.
You may want to consider watching a couple of talks by Andreas Antonopoulos. Here’s a great playlist to start with:
https://www.youtube.com/playlist?list=PLPQwGV1aLnTuN6kdNWlElfr2tzigB9Nnj
Going on 9 years now since the first block was mined, it’s looking like Bitcoin is here to stay. But even if it fails cryptocurrencies are here to stay, so might as well take some time to learn about them sooner rather than later. =)
Thx for the link! I will definitely watch the video.
I’m not saying coins are going to disappear, I’m saying they are not an investment. Gold is not in investment either. If you take both a ounce of gold and a bitcoin (in your virtual wallet) and you leave them on your desk for 50 years, what will happen? Nothing, they will only worth what someone is ready to pay for. They won’t create anything.
Once the speculation is gone (check what happened to gold price for the past 2,000 years, it has barely followed inflation), the bitcoin will not be an investment. Mean of payment? maybe. But will it completely change how riches are distributed in the world? I highly doubt it.
I’m actually worried that the market will NOT crash in 2018 🙁
I want to buy more DG stocks cheap!!!
Very good one @daat99!
Unfortunately, “waiting to pick deals” hasn’t been a good strategy since 2009…
@Statusquont
One last thing; if the bitcoin doesn’t divide enough, people just switch to another cryptocurrency. After all, there are now over 1,200 other currencies claiming they are all better than the bitcoin. The technology doesn’t change anything about capitalism.
A nice read. “How high can it go?”, when it comes to housing the answer is usually, ” a lot higher.” Or, “bailouts, then a lot higher.”
Bitcoin is the latest way of selling snow to eskimos, as a speculation. Some expensive snow right now!
Sovereign debt is an interesting one, because it’s an oxymoron and actually doesn’t exist. Worth starting with Modern Monetary Theory if you’re interested in all that stuff.