The Economy June 2009

Greater Fool - Garth Turner
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Where’s money safe?

A worthy question to ask on the day when General Motors goes into bankruptcy and Canada’s officially declared in recession. If nothing else, we’re one confused nation.

This past weekend media stories of bidding wars and escalating home prices mixed with dire predictions of where a $50 billion deficit will lead us. Government tax credits and cheap rates encourage people to spend, while household debt soars to a new $1.3 trillion high. A thousand people apply for an entry-level office job in just two days, while the geniuses who lost billions running the public pension plan get chunky bonuses.

Abnormal times. The country’s largest bank bleeds money, while the stock market soars. Most people expect life to return to what it was a year or two ago, but fail to understand that cannot happen. It’s now evident we could have $100 oil, rising interest rates, inflation and higher taxes at the same time as chronic unemployment and industrial collapse.

And how can things end fairly, when terrified politicians lavish $1.4 million on each and every autoworker job – with no guarantee any will exist in a year? Governments are more involved in the running of the economy than at any time since the 1930s. And that turned out well.

Meanwhile, our population’s aging fast, with incredibly predictable results. Climate change is upon us - anything but predictable. We’re adding more debt in a year than an entire generation accumulated. And families have done next to nothing to mend their ways since the world almost ended at Thanksgiving.

We’ve had a housing bubble, an equity bubble and a commodity bubble. And after Bernie Madoff, can anybody trust anyone anymore?

Where’s money safe?

Here are seven suggestions.

1. Cash. Those who warn of a currency collapse, hyperinflation or people buying houses with pieces of money are financial posers. None of these things will happen, certainly not in the next decade. Cash money will be the only form of wealth you can be sure of, so have as much of it as possible. Banks are fine, but do not exceed your insurance limit. Online banks are a leap of faith. A safe in the cold air return is not.

2. TFSA. The government, in a move it will regret, now allows you to completely avoid paying tax on investments, so long as they are in a TFSA. Just created this year, these accounts allow you to transfer in $10,000 a year per couple, and invest the money in any asset, free of tax on any amount earned. If you don’t have one, you don’t deserve to have money.

3. Bank preferreds. Moan all you want about the banks and their vulnerability, but the fact is no government on earth is going to let another major bank go down. That makes these among the safest places to invest – but not in the volatile common stock. Instead, bank preferred shares are more stable and come with an income stream, currently paying around 6%, or five times the rate of inflation.

4. Tax-deductible mortgage. If you have investments, and a mortgage you service out of after-tax dollars, you’re not paying attention. Sell the investments, pay off the mortgage, re-mortgage the house and buy back your investments. Now you have a tax-deductible mortgage, with the distinct advantage of being able to write off all interest charges from your income. Also consider an RRSP mortgage, which I have referenced here previously.

5. Oil. This is the energy economy, and the oil age. We can pave the country with windmills and crank out hybrids, but we’ll never diminish the appetite for gasoline, diesel, NG, propane, heating oil or electricity – at least not until there is a crisis. Between now and then, oil will soar, taking many other commodities with it. Demand from Chindia alone is enough to double crude in the near future. Integrated oil companies, energy mutuals or trailers in Fort Mac are considerations.

6. RRSP. Much in disfavour now, this last great tax shelter is a gift. A contribution in kind allows you to invest without money. The RRSP homebuyer’s plan allows you to leverage up a downpayment in just 60 days using government money. An RRSP loan at today’s rates is a no-brainer, using the refund to pay down the borrowing. And a leveraged meltdown strategy lets you get cash out of an RRSP or a RRIF without paying tax.

7. Universal life. Now that over 70% don’t have any pension plan, it makes sense to over-fund a UL policy. You can invest this money in a sheltered growth account, then structure payments to last the rest of your life – all tax-free, since they come from the proceeds of a life insurance policy. Or, you can wait for the wonks who run the CPP to lose it all.

8. An advisor. If you think bonds are safe or buying two condos is diversifying, you need an advisor. If you fear getting Madoffed, you need to know this: Almost all advisors in Canada just buy stuff for you, which remains in your name. This is totally different from BM’s clients, who handed over cash which disappeared into a fund the guy ran himself. Reality is, most people who fail financially are do-it-yourself investors who even think reading a blog is worthwhile.

I mean, imagine.