Chart: Urban-Rural Divide

Folks living in rural communities have become increasingly vocal about the deterioration of their way of life. Understandably so.

Flyover states are often overlooked by policies crafted to support economically dominant coastal regions. Meanwhile, they’ve watched globalization pass them by as jobs were replaced by machines or overseas workers. They blame city elites, immigrants and foreigners for their misfortunes, and gravitate to those who promise a return to the ‘good old days’.

Politicians have long used this to their advantage by misdirecting fear and anger to scapegoats, as opposed to the true source. Cheap labor didn’t steal American jobs – corporate executives drove the decision to dismantle labour power, automate and offshore. All in pursuit of higher profits, funneled to executives and shareholders. Old fashioned corporate greed, one might say.

Really though, this isn’t new. The urban-rural divide has long existed in many forms. Put aside blame and ethics, and you’re left with a rural population passed over for generations.

The following chart illustrates this.

In the early 1900s, the standard of living in America was rapidly improving as new technology was introduced. However, the experience wasn’t evenly distributed. Infrastructure – water pipes, electrical wires, gas lines – is easiest and cheapest to build in dense areas. Consequently, dense urban cities were the first to benefit from essential modern conveniences like flushing toilets.

Of course, rural populations understandably took this inequality as representative of America’s priorities. The characterization of urban favouritism has since passed down for generations and continues to this day.

Data Source: “The Rise and Fall of American Growth”, Robert J. Gordon.


Not All Stocks Rise When Markets are Up

Did you know that during any given year when the market is rising, up to 42% of stocks may simultaneously be declining?

Simply being ‘in the market’ during an up year doesn’t guarantee positive performance. Some years are worse than others, but history shows stock-pickers can easily lose money despite being right about market direction.

The chart below demonstrates this phenomenon over the past 20 years. The blue bar shows calendar year performance for all positive years dating back to 2002. The red line shows the % of stocks that were negative during the same year.

Lesson: unless you have the golden touch, it’s best to tap into market gains by building exposure to a broad basket of stocks. The easiest and cheapest way to achieve that is by using a low cost index fund.


How Canadians’ Incomes and Wealth Changed During the Pandemic

Statistics Canada recently released some data measuring changes to household incomes, expenditures, savings rates, assets and liabilities during the pandemic.

I decided to create a few graphs to illustrate their findings.

Before we get to the graphs, here are some of Stats Canada’s key findings:

  • Disposable income declined for most households in the fourth quarter of 2020, with the largest losses for the lowest-income earners (-10.2%).
  • Despite declines in disposable income in the fourth quarter, all households recorded higher income in 2020 compared with 2019.
  • In 2020, the lowest-income earners saw their net worth grow more than that of other households. These gains were driven by larger increases in real estate assets that outpaced increases in mortgage debt.
  • Lower-income households reduced their non-mortgage debt by more than other households, also contributing to their higher gains in net worth in 2020.

Household incomes rose for all income brackets during the pandemic:

As you might expect, spending declined:

This allowed many Canadians to save more. Note, however, those in lower income quintiles still have negative savings rates:

Higher incomes, less spending and greater savings helped propel net worth. Of course, Canadians’ net worth also got a big boost from rising real estate and financial asset values:

Finally, Canadians are exiting this pandemic in a better financial position than when they entered:

Investing Wealth

The Case for Deflation

Inflation is a hot topic right now. Understandably so, as prices for a range of commodities (lumber, copper, etc.) have risen substantially over the past several months.

Chart: Google Search Trends for ‘Inflation’ in the United States

Raw materials price pressures are now showing up in consumer prices with CPI rising 4.2% year over year ending April 2021. This level of CPI has not been seen since the early days of the 2008 global financial crisis.

However, it is becoming increasingly clear that this inflationary burst is temporary. The conditions simply don’t exist to support long term inflation, like that seen during the 1970s.

There are several reasons.

1) Milton Friedman once said that “inflation is always and everywhere a monetary phenomenon”. I’d argue that he is only half right. Central banks can increase the money supply all they want, but to have an inflationary effect the velocity of money must remain stable or rise. Real world experience clearly shows that money velocity is not constant and tends to have an inverse relationship with the level of a country’s indebtedness. And as you all know, we are drowning in debt right now.

It is becoming increasingly clear that this inflationary burst is temporary. The conditions simply don’t exist to support long term inflation, like that seen during the 1970s.

The relationship between indebtedness and money velocity is clear in the following chart. As the level of indebtedness of the US economy started to significantly rise in 2008, money velocity declined. Ultimately, money velocity plummeted to new lows during the Covid-19 crisis and has yet to recover, despite an improving economy.

Effectively, what this means is that new money entering the system (generally to fund new debt) is simply tucked away, mitigating any inflationary effects of monetary expansion.

This phenomenon is also illustrated by the declining marginal economic benefit created by new debt. The economic impact of additional debt today is much lower than it was in decades past. Therefore much more money needs to enter the economic system to have the same impacts it did in the past. Of course, more new money means more debt. By now you’ve probably noticed this is a vicious cycle.

2) The current inflationary pulse was triggered by the partial paralysis of the global supply chain. Exports out of low-cost producing countries grinded to a halt, forcing Western countries to purchase from more expensive domestic suppliers or compete over dwindling supply.

As vaccines are delivered the mechanisms for global trade – offshore manufacturing + shipping – can resume. Imports into the US are already back to pre-pandemic peaks and it’s only a matter of time until renewed competition from cheaper sources pushes prices down.

3) Labour productivity tends to rise coming out of recessions. Higher productivity offsets higher wages, thus putting a cap on unit labour costs that can flow into prices. I believe this phenomenon will be even stronger as we exit the pandemic.

The nearly immediate and widespread adoption of new software and methods of working have compressed a decade’s worth of productivity gains into the present. Not only that, but companies that maintain a remote workforce can benefit from labour cost arbitrage across geographic regions. Over the long run, both of these advances will keep a lid on unit labour costs. This is disinflationary.

4) Population growth in the US continues to be very weak and will be for the foreseeable future. 20-something year olds simply can’t afford to have kids. Or they are choosing not to bring new people into the world for ethical reasons.

The point is that forward demand driven by new consumers entering their prime spending years continues to decline. When demand declines prices fall.

While nobody can predict the future, one can use data and hard evidence to create a guide. Evidence suggests that those calling for a shift in the economic regime – from disinflationary to inflationary – could be wrong. I believe, as a diversified investor, it is important to prepare for the possibility that the pundits are wrong.

While I won’t know if I’m right or wrong until some point in the future, it appears that the bond market might agree with my thesis, as the yield on the 10yr has flatlined since March 2021.


Dennis Gartman’s 22 Rules of Trading

Note: These ‘rules’ are for the active trader. Not for the normal person looking to build a retirement nest egg while working a full time job. For most of us – including the financially well-educated – the best strategy is to buy and hold low cost index ETFs.

1. Never, under any circumstance add to a losing position…. ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!

2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.

3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.

4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is “low.” Nor can we know what price is “high.” Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed “cheap” many times along the way.

5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.

6. “Markets can remain illogical longer than you or I can remain solvent,” according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.

7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds… they shall carry us higher than shall lesser ones.

8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect “gaps” in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.

9. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In “good times,” even errors are profitable; in “bad times” even the most well researched trades go awry. This is the nature of trading; accept it.

10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then, and only then, can we or should we, trade.

11. Respect “outside reversals” after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more “weekly” and “monthly,” reversals.

12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.

13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen… just as we are about to give up hope that they shall not.

14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.

15. Establish initial positions on strength in bull markets and on weakness in bear markets. The first “addition” should also be added on strength as the market shows the trend to be working. Henceforth, subsequent additions are to be added on retracements.

16. Bear markets are more violent than are bull markets and so also are their retracements.

17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are “right” only 30% of the time, as long as our losses are small and our profits are large.

18. The market is the sum total of the wisdom … and the ignorance…of all of those who deal in it; and we dare not argue with the market’s wisdom. If we learn nothing more than this we’ve learned much indeed.

19. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.

20. The hard trade is the right trade: If it is easy to sell, don’t; and if it is easy to buy, don’t. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.

21. There is never one cockroach! This is the “winning” new rule submitted by our friend, Tom Powell.

22. All rules are meant to be broken: The trick is knowing when… and how infrequently this rule may be invoked!

Life Wealth

Should You Get Your MBA?

Are you considering dropping $100k on an MBA? You better think long and hard before applying. That boat load of money might not get you what you’re looking for (assuming you even know what you’re looking for).

An MBA isn’t a solution for career malaise and those who do it are often disappointed. Particularly given the cost.

Here are some real comments from a recent Reddit post by Canadians who have done their MBA in the recent past:

I completed my MBA from <school in Toronto> last year. I was also a mature student. Frankly I don’t think it is worth the investment. The program is poor and the resume build and placement assistance is mediocre at best. If you are planning a career in a sports related industry, you may be able to connect with alumni and help you in your career, but in other areas / industry – the hiring / placement is comparable to any other degree. You could recover part of the cost by working as a graduate assistant. Not recommended for gaining any new skill set or career growth. If you are interested in entrepreneurship and planning your own start-up, they have some resources and good profs. Other courses, it’s just a sham – you participate and submit any junk, you will get an ‘A’.

I think it really depends on the type of job you’re aiming for. For example, if you ask the accounting majors wheter you should get a MBA, it’s almost always going to a no because regular accounting work holds the CPA designation more valuable than an MBA. However, if you want to get into consulting, some firms may require a MBA, and going back to school definitely has its perks on career resources and events that you can attend. I would say make sure you actually have a plan in mind to use that MBA towards something, whether it be a job in new direction or something. Otherwise, if you’re doing it for the sake of doing it, it may just become a really expensive paper.

Yrs ago I was torn whether to do a CPA or an MBA. Decided CPA was better value and return. Yrs later, I have no regrets. I’m likely making much more money than if I had a MBA. To me, an MBA is really a networking opportunity. The actual content is no more than you’d get in any bachelor degree. So if you don’t plan to really take advantage of the networking it’s of almost no value. And an online MBA is (In my opinion) almost useless, and a total waste of a lot of money.

I may be wrong, but my opinion after 15 year career is that many MBA grads do it because their career has stalled and they need a credential to get another 10%. They tend to not be super talented or high performers but are good at school. Source: I work in marketing and make a comfortable living with only a BSc and relatively high IQ.

Well MBA grad from one of the top Canadian schools here. Unless you’re in management consulting or investment banking then it’s not worth it. Save your money and invest in something else instead.

My husband graduated with an MBA from uoft 5 years ago and hasn’t used it to its supposed advantage. He didn’t take advantage of the networking aspect of it and is still in the exact same industry, associate level position and income bracket. I admit he lacks the drive to really do anything with it which is why I had initially advised him against doing the degree. unless he had a clear plan for his career…which he did not. With that said, he enjoyed the program although it was very intense. Many of his classmates are now very successful in their careers. If you want to do your MBA just make sure you know why you want to do it, what you will do with it and if it will add value to your life and career.

I asked my former boss who did it and he doesn’t think it’s worth it. And as someone who never had an MBA, I don’t think its worth it as well. Education has lost its luster and its more of a “foot in the door” for consideration rather than having value. Even for candidates whom I’m interviewing for, I don’t really put much value behind it. Relevant experience is more important. This is coming from the perspective of CPG business/ecommerce.

MBA is only worth it if you can’t breakout of your current income level. If you’re already at +$100k, then it’s basically useless and your opportunity cost is insanely high for the potential return. To move into the mid 6 figure salaries, you’d be better off with a solid executive coaching program and networking with VP+

I was seriously considering this about 8/9 years ago and was planning to go to <school in Toronto>. I was getting into the tech industry and wanted something that would “help advance my career”. This is around the same time when “design thinking” was the new buzzword that every business was using and, bingo, I was a young product designer at the time. I decided not to do it and I’m glad I didn’t because it wouldn’t have been for me. I hated university the first time around and felt like I could flourish much more actually working and learning from those with experience. I’m really happy with how my career shaped out and I’m earning considerably more than I ever thought I could with room for growth. I know this is an entirely different perspective that you originally asked for but I think you just need to think about if it’s something that is going to be right for you. Do you enjoy what you do? Do you feel like your position has room for growth (seniority, managerial, exec.)? Do you feel like your industry has room for growth (tech, etc)?

Far too often, degrees are seen as a way to get a better job as opposed to a way to do a job better. I think employers can see through this by now.

Successful MBA graduates aren’t successful because they got an MBA. They’re successful because they work their asses off to leverage any opportunity (education/network/namebrand/alumni) to move the needle further. Having the expectation that the MBA will open doors will set you up for a lot of regret.


The Sad Truth: Plastics “Recycling”

(Originally distributed in “The Responsible Investor” eNewsletter)

“There is plastic in your food, plastic in your sea salt, and there is plastic coming out of your tap.”

The Problem: Plastics

Last Week Tonight with John Oliver (click image to watch on YouTube) exposes the plastics recycling farce.

The solution?

Loop and Terracycle CEO Tom Szaky speaks on his work with major consumer brands to reduce waste to nearly zero (followed by interviews on other ESG issues).


The Origins of Money and Inflation

Since the early days of humanity we have strived to obtain the goods and services we desire by trading our surpluses to fulfill our deficits. Throughout history a society that could produce an excess of sable furs (for example) would trade with neighbouring societies that were especially efficient at producing wagons. 

Early trade simply entailed an exchange of goods, known as the barter system. This method of trade is very cumbersome because it requires both participants have coincident needs, appropriate divisibility of tradable assets and agreed-upon measures of value. These three conditions often prove elusive leaving many potential barter trades incomplete and many others unfair. As an alternative to the barter system, universally-accepted measures of value developed in different cultures around the world in many different ways.

The first universally-accepted measures of value were items with widespread appeal, easy division and widely-accepted values. In many societies, commodities were often used as a medium of exchange because they tended to have widely-known and stable value for most people in society. In many societies, commodities were the first form of money and gold was often the commodity of choice. 

In Britain goldsmiths helped to develop the modern banknote. During the English Civil War of the 17th century, citizens deposited valuables (gold, jewellery) into the safes at various goldsmiths for safekeeping. In return, the citizen would get a receipt that provided proof of ownership when the person wished to later withdraw. 

Gold withdrawals were made to make a payment for goods and services. Some merchants, however, were willing to accept gold receipts as payment since they knew the receipts were ‘as good as gold’. Goods providers accepted gold receipts as payment since they knew the receipt could be converted into actual gold at any time. The exchange of gold receipts for goods eventually became common-place and, in effect, these receipts became early gold-backed currency.

Once they discovered gold was rarely withdrawn from their safes but gold receipts were being readily traded, some enterprising early goldsmith ‘bankers’ decided to start issuing and lending more receipts than the available gold to back up the receipts. They did this knowing that most customers never actually ever withdrew their gold, so the chance of having to back up all the receipts at the same time was miniscule. This was an early incarnation of fractional reserve banking with a portion of the monetary base tied to a physical commodity, such as gold.

The ability to convert to gold is the basis on which paper money was derived. Paper money wasn’t created out of thin air…it was a contractual ownership stake of a certain amount of gold that was held in a goldsmith’s safe. As long as the public was confident that an appropriate amount of gold was readily available for convertibility, they maintained confidence in the paper receipts that represented those claims.

Of course, some goldsmiths got greedy and lent out far too many receipts. These goldsmiths created the risk that gold would not be available if many receipt-holders redeemed at the same time. Some merchants would question the ability to easily convert the receipts into gold. If it appeared that not enough gold was kept at the goldsmith to back up the receipts, merchants would no-longer accept the receipts at face value. Instead, merchants demanded more receipts for the same amount of goods. In effect, the value of the receipts went down (therefore the prices of goods went up). This illustrates the basic monetary force that creates inflation.

Like the gold receipts of 17th century Britain, the US dollar was at times convertible into gold. The history of US dollar convertibility into gold is mixed – the US dollar has been taken on and off the gold standard a few times. The last time the US dollar (and most other world currencies) was tied to gold was after World War 2 under the Bretton Woods system. 

During World War 2, many central banks around the world shipped their gold to the United States for safe-keeping and payment for armaments. By the time the war ended, the US had by-far the largest gold reserves on the planet. In an effort to stabilize the global economy and create confidence in war-torn European economies as they rebuilt, the Bretton Woods exchange rate system was created. Essentially, the Bretton Woods system tied global currencies at a fixed rate to the US dollar. The US dollar, in turn, was tied to gold at a specified convertibility. Therefore, (whether or not they actually had gold in domestic vaults) all currencies were indirectly convertible into gold in US vaults.  

During the late 1960s/early 1970s, the US was running a fiscal deficit to pay for the Vietnam war, and for the first time in the 20th century was running a trade deficit with the rest of the world. Interest rates started to rise and it is widely believed that the US Federal Reserve began printing money to buy US Treasuries, thereby increasing money in circulation as a percent of available gold reserves. As the market grew more suspicious of the lack of gold reserves backing US dollars in circulation, confidence in the US dollar began to wane, and Germany and Switzerland left the Bretton Woods system in 1971. 

Foreign holders of US dollars started demanding gold in exchange for their US dollars. Growing conversions put pressure on gold reserves and, as the proportion of gold available for conversion declined, it was only a matter of time that all US gold was used up in the conversion process, leaving the remaining US dollars worthless. To prevent this, US President Richard Nixon abandoned convertibility in August 1971. 

The act of banning convertibility effectively freed US monetary supply from the anchor of the gold standard, allowing the US Federal Reserve to print money within less restrictive limits. Monetary policy’s only anchor became the ‘full faith and credit’ of the US Treasury and the US Federal Reserve. Of course, central bank and treasury credibility becomes far more subjective with the elimination of a gold standard. 

During the 1970s, growing money supply, combined with a decline in productivity, a slowdown in post-war disinflationary forces (due to the tightening of post-war economic capacity in Europe and Asia) and the oil supply shocks were the ingredients that led to high inflation and stagnant economic growth – stagflation.

After a decade of haphazard economic initiatives (e.g. price controls) and ambivalent US monetary policy, Paul Volker – who became chairman of the US Federal Reserve in 1979 – significantly raised short-term US interest rates, starting one of the greatest post-war recessions. It was this dramatic change in interest rates that crushed inflation helping the US Federal Reserve regain credibility. 

Why did the US Federal Reserve wait so long to combat inflation? With the memory of the Great Depression still fresh in the minds of many policy-makers, US economic policy was targeted at maximizing employment, and inflation was not seen as a primary economic threat. It was widely felt that aggressively combating inflation would tip a teetering US economy into another depression. Meanwhile, countries like Germany that were familiar with the pain of hyperinflation were quicker to combat inflationary pressures. (This highlights how the collective memories of a society shape political willpower and can lead governments to create erroneous economic policies.)

For the United States, combating inflation early in the 1970s by slowing economic activity would have been political suicide. It took a decade of inflationary pain before policy-makers and the public were willing to accept that inflation was as much a threat to the economy as deflation and unemployment.

The 2008 collapse of the global financial system has parallels to the inflationary experience of the 1970s. Throughout the late 1990s and early 2000s, many policy-makers were aware of the growing threat that concentrated financial intermediaries, leverage, derivatives exposure and skyrocketing real estate values posed to the financial system. It was no secret that these elements posed massive systemic risks. However, the political will-power did not exist to do anything. As these elements of the economy had yet to cause severe economic pain, it was very difficult to get politicians, businesses and consumers to accept the preventative measures that needed to take place. Preventative measures would have slowed economic growth and prosperity – all to safeguard the economy from threat that, at the time, was theoretical and intangible. 
Similar circumstances exist with homeland security, cancer prevention, driving behavior, etc. It is extremely difficult to mobilize a population to willingly experience current pain (financial, lifestyle, effort, etc.) in exchange for reducing a potentially larger theoretical future pain.

Today, the US dollar remains a free-floating currency not backed by gold or any other commodity. Instead of being backed by gold US banknotes are backed by the full faith and credit of the US government. Currency value is predicated on the faith that governments won’t print more than what is necessary to keep up with real economic growth. However, with the largest fiscal and monetary expansion in US history currently occurring, combined with the collective global memory of an extremely painful recession/depression, the risk of inflation over the medium/long-term is very high. 

Income Investing

This Morning’s Dividend Declarations

Cincinnati Financial (NASDAQ:CINF) declares $0.63/share quarterly dividend, in line with previous: Forward yield 2.09%

bebe stores (OTC:BEBE) declares $0.06/share quarterly dividend, in line with previous: Forward yield 4.69%

Global Ship Lease (NYSE:GSL) declares $0.25/share quarterly dividend, more than double the $0.12 per Class A common share announced on January 12, 2021, as a result of subsequent fleet growth and success in rechartering: Forward yield 6.71%

WhiteHorse Finance (NASDAQ:WHF) declares $0.355/share quarterly dividend, in line with previous: Forward yield 9.13%

Viatris (NASDAQ:VTRS) declares $0.11/share quarterly dividend: Forward yield 3.13%


MSCI Webcast: Foundations of Climate Investing

MSCI Webcast: Foundations of Climate Investing


How has climate risk been priced into equity markets?

How can we model climate risk in preparation for net-zero targets?

What are the Climate Paris Aligned Indexes and how can they help investors seeking a net-zero strategy? (MSCI)

EU urged to end ‘doom loop’ with tougher climate finance rules

European Union policymakers faced a call on Wednesday to break a ‘climate-finance doom loop’ by making banks hold up to three times more capital to cover risks from fossil fuel activities.

Finance Watch, which campaigns to make finance work better for society, has written to European Commission President Ursula von der Leyen, urging the EU to toughen capital rules for banks and insurers involved in environmentally damaging activities.

“The longer the European Union waits, the higher the chances mount that it will face a financial crisis induced by the climate crisis,” Finance Watch said in the letter. (Reuters)

Future shock. Absent decarbonization shock treatment, humans will be wedded to petroleum and other fossil fuels for longer than they would like.

Future shock. Absent decarbonization shock treatment, humans will be wedded to petroleum and other fossil fuels for longer than they would like. Wind and solar power reach new heights every year but still represent just 5% of global primary energy consumption. In this year’s energy paper, we review why decarbonization is taking so long: transmission obstacles, industrial energy use, the gargantuan mineral and pipeline demands of sequestration, and the slow motion EV revolution. Other topics include our oil & gas views, Biden’s energy agenda, China, the Texas power outage and client questions on electrified shipping, sustainable aviation fuels, low energy nuclear power, hydrogen and carbon accounting. (JP Morgan)

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