The Good, The Bad, and The Ugly - Edition #36 August 2021 - Richardson Wealth
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The Good, The Bad, and The Ugly
Edition #36
August 2021
I am done. I am publicly coming clean. I have given up my addiction. I am going
cold turkey. I am finished… kaput… done. At this point you may be worried that the
Suite 4700
fellow looking after your money had some horrible debilitating addiction. I did, but I 525-8 Ave SW
am cured by going back to the basics. Calgary, Alberta
T2P 1G1
During covid, my privilege and job was to help navigate 140 families through the
Tel. 403.355.6060
largest economic shut down since 1929. In isolation, all I could do to help with that Fax 403.355.6109
mission was to read, read, read, look at daily global covid graphs, and listen to the www.RichardsonWealth.com
news channels everywhere. It is the latter addiction that I have broken. You heard it
here. I am not watching the news any longer. I have broken my addiction to reading Brad Gustafson, B.Sc., CIM®, CFP®
Director, Wealth Management
news even when in the washroom (TMI). I am taking down my Ian Hanomansing
Portfolio Manager, Investment Advisor
and Lisa LaFlamme posters from my bedroom wall. Maybe I will put up my old
Partridge Family and Farah Fawcett posters. For my younger clients: please ask
your parents who all those people are. They will explain.
The news is just too darn depressing. My goodness, I was starting to dream about Covid. As always, I am going to
concentrate on my non-press data and research that are fact, not fear-based, that the press does not have access to.
That is where the real “signals” reside instead of the background noise.
I am going to give you the reasons why I am breaking this addiction in the hopes you will do the same for the sake of
your investing futures.
Since we were young, we were all taught to be good little girls and boys. In other words, we were taught to conform. It is
why you are not reading this newsletter in the nude on your back deck. If feels a lot more comfortable to wear clothes
and conform and follow the crowd.
Today, social media has picked up the baton from your parents and has taken conforming to the next level. If you do not
agree with the opinions of the social media echo chamber, you are assumed to unenlightened, uniformed, and in some
cases, a horrible person. Social media, and media in general, has moved far beyond passing an opinion and getting you
to conform and has now become a judge and jury that can end companies and your career. We are quickly moving to a
society where you are guilty until proven innocent. We are moving to a society where free speech means you can say
whatever you want as long as you agree with the social media hordes and our political leaders.
This is all very, very dangerous for any free society. Like your ancestors who died defending this free country, I feel
strongly that you should be able to be free to act, think, and speak as you wish as long as you do not harm others or
yourself. Good debate and differing opinions are how great policy and societies are built. In history, great societies are
torn apart when one opinion is imposed on the entire population. As a scientist, phrases like “this is an unanimously
accepted scientific fact” makes me shiver. There is no such thing as a fact all scientists agree on. I can introduce you to
scientists who think the world is flat. The very definition of science is the exploration of many opinions.
This is not a political publication however, sometimes I wish it was. So, what does this all have to do with investing?
I teach a behavioral finance course. I would recommend that you read as much as you can on this topic as it controls
everything in the real estate and investing world. Behavioral finance is the study of how the emotions and biases of
investors control the investment world. Social media and the evening news pump the gas pedal on two biases namely
following the herd and confirmation bias.
August 2021 2
Following the herd and listening to the herd on the news or the investment world will take us over the cliff with them. No
one ever became successful by following the herd. In the herd resides fear. No good decisions in life are made from the
basis of fear. The media is selling the crack cocaine of fear. In their defense, they have to. If they did not, we would not
watch or click or read their article. There have been many “good news” periodicals in the United States that have gone
bankrupt as no one subscribes to a good news newspaper.
Confirmation Bias occurs when our opinion or thesis on a topic is reinforced by only reading material that agrees with
our views. Social media, google, and many other sites feed our confirmation bias. Algorithms watch what we read every
day and feeds us only information that agrees with us so we will read more and more and more. Then, advertisers will
pay the site to be included in what you are reading. It feels warm and fuzzy to only read authors we agree with. So, what
could be wrong with this bias? The danger is that when we only read points of view that agree with us, it will send us
down an internet “rabbit hole” that closes our minds to any other thoughts and opinions. This is why Democrats think
that Republicans are not enlightened, and Republicans thinks Democrats are naïve. Both think the other group is nutty.
A closed mind will make very bad decisions as they will never have all the prudent information. In fact, the confirmation
bias and need to be “right” has even led to global wars and millions of deaths.
As your investment advisor, I cannot follow the press, the herd, and cannot wear blinders. I have to read all opinions
and stick to a set of investing rules that I have learned has worked for centuries. In the good times you may think I am
old fashioned and not enlightened because I do not gamble with your money on the flavor of the year and buy
companies that have no earnings and may never earn a dime. In the bad times you will be happy I stuck to sound
investing principles.
These two biases are the reason I have assembled an investment board to help me pick which of the 68,000
investments your money should be invested in. We all read a ton, and all have different opinions and debate a lot
without throwing horrible labels at each other. We do get upset with each other once in a while as the board holds many
political views. However, that is how good decisions are made.
For the rest of our lives, we will be surrounded by people predicting the next apocalypse du jour.
Here are some of their quotes:
(1) “There are signs that the world is coming to an end.”
(2) “A vast flood will engulf the world February 20”
(3) “Gas is about to impregnate the atmosphere and possibly snuff out all life on the planet”
Here is who said each quote:
(1) 2800 B.C.: Words written on an Assyrian clay tablet
(2) 1524 A.D: A prediction by a German mathematician and scientist named Johannes Stöffler. This quote was
believed by so many people that the boat building business boomed and Count Von Igglhleim constructed a 3
story arc. 1524 ended up being a drought throughout Europe. Oh well, it is always good to have a spare boat on
hand. It worked for Noah.
(3) 1910: A French Scientist named Camille Flammarion stated this quote in a New York times interview after he
had discovered that the tail of Halley’s Comet contained a poisonous gas called cyanogen. The public rushed to
purchase gas masks and whiskey sales went through the roof. Rooftop comet parties were held.
August 2021 3
Here is a small sample of just some of the predictions I have been told during my life that will put us in danger:
(1) 1966:Oil will be run out in 10 years.
(2) 1968:The Russian weather machine is destroying our weather and causing the deep snow.
(3) 1970’s:
Global nuclear holocaust will level the planet.
(4) 1970:North America will ration water by 1974 and food by 1980.
(5) 1970:Scientist and ecologist Kenneth Watt proved that by the year 2000 there will not be any more crude oil.
(6) 1970:Killer bees.
(7) 1970:Harrison Brown from the National Academy of Science in Scientific American published with graphs
proving we would run out of all metal reserves by 1990.
(8) 1970: Harvard scientist and biologist George Wald stated civilization will end in 15 years.
(9) 1970: Scientist Paul Ehrlich predicted death rates in 10 years due to running out of food will be 200 million
people per year.
(10) 1970: Peter Gunter, a Texas State scientist, stated by 1975 widespread famine will engulf the entire world by
2000.
(11) 1970: UFO’s (that one is back now).
(12) 1971: Satellites show a new ice age by 2000.
(13) 1974: The hole in the ozone will cause depletion of the atmosphere.
(14) 1977: Department of energy says oil will peak in 1990.
(15) 1980: Acid rain will kill all life in global lakes.
(16) 1989: New York City west side will be under water by 2000.
(17) 2000: In Y2K, computers were going to stop operating and planes were going to fall from the sky.
(18) 2004: Britain will be Siberia in next 10 years.
(19) 2005: Manhattan will be under water by 2015.
(20) The Maple Leafs will never win the Stanley cup again. Oops that one actually did come true.
I can keep going for 20 pages if you wish, but I think you get the picture.
Look, I have actually had nightmares regarding the covid deaths around me. So, my intention is not to disrespect any
family who lost someone due to covid. I cannot imagine that kind of pain. Covid was a horrible event where many
families lost loved ones. However, this was an event that was not predicted in the press. The surprise events are always
the ones that hurt us. As my grandpa taught me “you cannot get run over by a train that you can see coming.”
“My life has been full of terrible fortunes, most of which never happened”
- Michel de Montaigne
My profession is no different. Business and investment press are fear-based. Of course, they are! It is easier to raise
money and get us to read their articles and not change channels if we are scared. In fact, many studies prove that as a
society, we think that negative people are more erudite.
Today, you are getting hit with the investment headlines:
(1) The stock market will crash due to inflation and rising rates. We are going to get hyperinflation:
I will cover this one at the end of this newsletter.
(2) The Delta variant will cause another market crash:
I don’t have a clue if that is true as the last time I looked in the mirror, I noticed I am not a virologist.
(3) The Canadian election will end the economy:
History shows this may affect the stock market for a few months. However, long-term the stock market rises the
same no matter who is in power.
(4) The Reddit, Robinhood, and GameStop fiasco has broken the stock market:
Reddit is worth $1.8 billion. Just the Royal Bank of Canada is worth $183 billion and is only the 11th largest in
the world. Come on. Reddit is a pimple.
August 2021 4
(5) The stock market is overpriced:
No one knows if that is true or where we are in the cycle or if this is a typical cycle.
However, the truth is that there is a lag time between a stock increasing and the ability of the company to lower
operating costs with automation and increase its prices to consumers that are getting raises due to inflation.
Trust me when I say that there is about to be a shortage of workers and higher wages.
The real truth is no one knows what will happen next, including me and Warren Buffett. However, we both know
200 years of stock market history and that every time a disaster comes along, it is an opportunity. Over the last 20 or so
years, the S&P 500 produced an average annual return of around 6% per year. But, if we missed the best 20 days in
the market over that time span (because we embraced a doomsayer’s opinion) and then reinvested later, your return
would shrink to 0.1% per year. But heh… why let some pesky facts like this get in the way of scaring people?
So, bottom line, my best caring advice to you, from the heart and from 30 years of watching families, is:
(1) Stay positive:
History has shown that humans have an unlimited ability to overcome horrific events. Many of you, along with
me, survived a mullet and platform shoes and bell bottoms in the 70’s. I am sure we will survive what is
happening today. I hate to make the woke mob’s heads explode, but we live in the best country in the world for
many, many, reasons. People are not immigrating to Russia or China. 500,000 people per year are immigrating
to Canada en-masse for a reason.
(2) Be careful what you read:
If you read one article that agrees with you, please immediately read another article that does not. Read. Read
all opinions, especially the ones you do not agree with.
(3) Be patient and open minded:
Please allow others around you to have opinions. Respect them, and hear them out, without shutting them
down or giving them horrible labels that they do not deserve. Labelling another person is a weak mind’s attempt
to end a debate by knocking their opponent off balance.
(4) Encourage freedom:
Of thought, and speech. That is how we grow together.
(5) Think for yourself:
Do not, under any circumstances, follow the crowd; unless you are at an exit and someone yells “fire!” or if you
are bald like me and everyone is moving into the shade.
When fear in society or the stock market reaches the maximum, resist the urge to capitulate and sell when the
market crashes as it inevitably will. When stocks are cheap, that is the lowest risk time to invest and stay
invested. It just feels like a high-risk time.
In the good times, resist the FOMO bias (fear of missing out) and do not take on too much risk during irrational
euphoric booms, such as what we are seeing today.
The other day, an Italian artist named Salvatore Garau sold an invisible sculpture for $18,300 and there were
multiple bidders. I would say that is a sign that there is a bit of excess FOMO in the system. I wonder how you
insure an invisible statue. Ha Ha.
Enough said. Soap box removed.
So, along the theme of thinking for yourself, here is the unvarnished good and bad news so you can draw your own
conclusions as no human, including me, truly knows what is next.August 2021 5
The Bad News:
We cannot talk about bad news without looking at the truth regarding government debt at all levels of government.
A recent study by the Fraser Institute bears the following facts:
(1) The federal and provincial government debt has doubled since 2008 to $2 trillion.
It is now 91.6%, the size of the Canadian economy. Last year, debt was 65.2% of the Canadian economy!
(2) Provincial, municipal, and federal government debt in Canada is $3.5 trillion dollars, or $115,777 per Canadian.
Ontario has the highest debt at $119,464 per person followed by Quebec at $114,248 and British Columbia at
$108,441.
(3) The interest cost to service our federal debt has risen 59.4% in the last 12 months to $35.2 billion dollars.
(4) Our yearly federal government operating deficit is now $167.8 billion per year (revenue minus expenses).
(5) We now have the 25th highest gross total debt (as a share of the economy) of the top 29 developed countries in
the world. Yes, we are the 5th highest in the world. We are 4th in the G7. Many politicians have told you our
ranking is better than that. That is true if you include the $488.1 billion in the Canada Pension Plan and QPP as
an asset. However, the CPP pool is not an asset of the federal government, and you cannot use that asset to
operate government. My grandma used to wash out my mouth with soap when I told a white lie.
Should we introduce that rule in parliament perhaps?
I get a small shiver up my spine when the government insinuates that CPP is their asset when you are the ones
who paid into it.
Government at all levels have moved from spending our children’s future to spending the future of our grandchildren.
Enough said.
We saw this “government inflating a bubble” show in 1989 in
Japan. It ended in several decades of tears.
I have always hated sequels.
(Source: MRB Partners) (Source: MRB Partners)August 2021 6
For you technical analysts, there is always a lot of bad news and some bearish (downward market) signals in the
leading indicators we watch:
(1) The stock/bond ratio peaked April 29.
(2) The value stock/growth stock RSI peaked on March 8.
(3) The silver/gold ratio peaked Feb 25.
(4) S&P household durable goods stock composite index has dropped almost 10% (this is a $2.4 trillion piece of
GDP).
However, with so much government stimulus in the system, do these traditional indicators really mean anything?
Despite being value investors… stocks are still expensive everywhere. Even the Oracle of Omaha, Warren Buffet, is
having a hard time finding stocks on discount. Want some proof? Here’s a chart blatantly labeled; “stocks are historically
expensive”.
(Source: MRB Partners)August 2021 7
Currently, growth stocks are trading at 27.3x earnings and value stocks are trading at 17.1x forward earnings. A spread
of 10 valuation points between value and growth is in the 98th percentile extreme based on the past twenty years (chart
below), meaning growth stocks are still very expensive when compared to value stocks.
(Source: Richardson Wealth, Connected Wealth)
This can be seen even further when you look at the U.S. tech sector compared to the rest of the United States stocks.
When you add dividend yields to the
valuation spread, improving economic
growth, improving earnings growth, and the
inflation outlook, these factors all favour
value stocks as opposed to growth stocks
in the foreseeable future.
As a result, over the past several months,
we reduced your growth stock exposure
and move to more value-based
investments. We have always been in the
camp where it is best to invest in
companies with great track-records, solid
earnings, cash flow, and above all else, are
not trading at nosebleed levels.
(Source: MRB Partners)August 2021 8 We have also lowered your United States content and have moved to cheaper companies in Europe and emerging markets. When comparing U.S. stocks to the rest of the world, their prices are trading at a huge premium when compared to their foreign counterparts. This may lead to a reversal as those value stocks abroad report post-pandemic numbers and is the reason why we have shifted to a larger foreign content and emerging markets tilt. Either way, we are working hard to protect your money by only investing in high quality companies and own some short bonds for air bags in your financial car. Your portfolios will fluctuate during these times of excess capital in the stock market. So, when comparing your month-to-month statements and even year-over-year return figures, please remember that the only index that we need to be concerned with is how you are doing against your written financial plan. We cannot get caught up in the fever around you as that only brings on the temptation to risk money you need to get some that you will never need. I have never met a wealthy pessimist. Also, I cannot make a good investor out of someone who is fundamentally afraid of the future. So, let’s jump to the good news. (Source: MRB Partners)
August 2021 9
The Good:
Canada is now among the global leaders when it comes to individuals with at least one dose of the vaccine. Here we
are compared to the U.S., U.K., and the poster child of the vaccine rollout: Israel.
Our percentage of people with at
least one dose is starting to flatten
out now as the demand for the
vaccine is tapering.
However, it has done so at a much
higher rate than what we have seen
in our southern neighbors who are
currently filling baseball stadiums
and hockey arenas like it’s 2019
again.
(Source: Our World in Data)
Though demand is tapering for the
first dose, this allows extra vaccine
capacity to be used on people who
are looking for their second jab.
Take a look at the fully vaccinated
chart. I’m not sure which chart is
more parabolic, Canada’s second
doses or the Dogecoin prices from
February.
(Source: Our World in Data)August 2021 10
With this vaccine rollout and the continued reopening of the economies in Canada and the United States, the job
numbers are continuing to trend in the same upward direction. Taking a look at US employment data for June, Non-farm
payrolls rose by 850,000, which was better than the expected forecasts of 720,000. Not to be ignored, this was partly
due to the better-than-expected private payrolls, which rose by 665,000. The re-opening of the economy was a key
driver in this, as over half of private payroll gains were from the leisure and hospitality sectors. It appears the sector is
ramping up employment for everyone to book those long-awaited vacations!
(Source: Richardson Wealth, Connected Wealth)
When you get through all the foolishness and background noise, the success of the recovery will come down to jobs.
The stats here look stellar.
(Source: Richardson Wealth, Connected Wealth)August 2021 11
Lately, many of you have likely been reading about dire inflation predictions causing similar problems to the post World
War 2 era. Here are my thoughts on this that I recently shared with a friend:
I certainly hope that we do get inflation. At present, the government is deathly afraid of spiraling deflation (due to an
aging consumer, high unemployment, automation, etc.) which would cause massive unemployment and a situation out
of their control. The governments of the world that are out of ammo are already fighting the war against deflation by
lowering interest rates, increasing stimulus, and even using helicopter money (mailing checks to people's houses). The
press forgets that this fight is not over as even today the Government of Canada is buying $2 billion of bonds per week
to fight deflation. The fed is buying $120 billion per month to keep interest rates low to avoid deflation. These are crazy
numbers we have not seen before, so it is obvious the fed is praying for inflation. For if they see out of control inflation,
they can raise interest rates and I can collect a higher rate on your bonds. However, if they see deflation, how could
they possibly lower rates any further? They are out of powder.
The real truth is that inflation indicates a resurgence of the economy which is what we all want. Also, I wish authors
would discuss where we are in the inflationary cycle and keep it in perspective… The story is that rising inflation and
interest rates cause the economy, stock market, and bonds to collapse. The 10-year treasury bond rate is 1.3% at time
of writing. The 60-year average is greater than 6%! Interest rates and inflation have a very long way to go before they
do damage. It may take decades.
I have managed money through rampant inflation before.
I have already taken the steps I am comfortable with in this stage of the cycle:
(1) Inflation is precisely why we are stock investors, purchasing shares with sustainable dividends.
Jeremy Siegel in “Stocks for the Long Run” (the bible for stock market data) proved that for the last 74 years:
(a) Stocks rose 10% per year.
(b) Inflation only rose 3% per year.
(c) Stock dividends historically have risen 9 times higher than inflation.
(2) I have inflation hedges in your portfolio such as resource shares.
To protect that call, I have them producing a dividend of 6%.
(3) I have shortened your bond maturities to protect against higher rate changes.
(4) I have added high yield 5% bonds that have shorts and puts attached to them to reduce volatility.
(5) As interest rates rise, you may see me shift in the conservative part of your portfolio to real return bonds (my
research is complete there) and eventually maybe even guaranteed investment certificates. I can shop for those
at 15 different financial institutions to lock in your interest rate when the time comes. However, if I used these
investments too early, I would hurt your family.
The above is just my opinion, and no one actually knows what will really happen going forward. If I told you in 2020 that
we would have a pandemic killing millions, but the stock market would rise, and real estate would boom, would you have
believed me? Will my timing be perfect? Likely not. Will I be correct all the time? Of course not. Will I do my best? You
can count on it.
The only thing I can guarantee is no one on my investment board, including me, have our heads in the sand regarding
inflation.
As always it is a great day to be alive and invest.
Sincerely,
Brad Gustafson, B.Sc., CFP®, CIM®August 2021 12 The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Assumptions, opinions, and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. Richardson Wealth Limited is a member of Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.
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