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Be prepared for troubling path of minority government

MARTIN PELLETIER Financial Post Martin Pelletier, CFA, is a portfolio manager at Wellington-altus Private Counsel Inc. ( formerly Trivest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed p

Markets seem to be calling the election of another minority Canadian government a nonevent, but investors should be quite worried that there will be a profound impact on our way of life if we continue on our existing trajectory, especially if our country's oil exposure is no longer able to come to the rescue as it has in the past.

It's extremely disappointing that a large part of Canada is not yet willing to recognize our rapidly deteriorating financial position.

This shouldn't come at a surprise, given our affinity for taking on household debt. More troubling is that all of this debt is being supported by the Bank of Canada and money printing, otherwise known as Modern Monetary Theory (MMT).

There are some who argue that other countries are doing the same thing, so why not us, but they're completely ignoring both the magnitude and depth of our particular situation.

Consider this, according to National Bank Financial and the International Monetary Fund, the Liberal federal government last year had the largest fiscal deficit as a percentage of GDP in the entire Organisation for Economic Co-operation and Development (OECD). And they've just been handed a pat on the back to keep on doing it.

Taking on debt is not always a bad thing if deployed correctly, but the COVID-19 crisis is being used as a means to spend vast amounts of money on climate change rather than focusing on getting the economy back on proper footing. For example, United States President Joe Biden last week announced that by 2025 — just a little more than three years from now — he wants the entire U.S. power complex to be completely free of carbon.

Now that Justin Trudeau and his climate-change agenda beat out the cost-of-living crisis as the clear No. 1 issue with voters, especially in the Greater Toronto Area, it wouldn't be surprising to see him go all-in and triple down on his green policies with support from the NDP.

We already saw hints of this in Trudeau's last fiscal update.

I calculated that the Liberals' targeted spending on green investments was nearly 150 per cent of what they budgeted to spend on dealing with the COVID -19 economic recovery (aid, income programs, etc).

Think about that for a second: Climate-change policy is overriding concerns about the recent rise of the coronavirus variant and rocketing daily living expenses.

As a result, countries, including our own, are going to have to adjust and learn to live with COVID-19 without shutting down even as less money is made available to help offset the supply/demand imbalances that are sending prices sustainably higher, thus, making the situation even worse. Put the two together and you have a terrible scenario: stagflation.

Meanwhile, central bankers and governments such as Trudeau's are fighting this narrative tooth and nail, because they by no means want to inhibit their climate-change agenda by having to redirect fiscal spending toward helping Main Street.

We also expect central bankers undertaking MMT to continue telling us that there is no actual inflation or cost-of-living problem at all, which works great as long as we keep drinking the Kool-aid (without looking at the price of it, of course).

For example, a story in the

Wall Street Journal said the

U.S. Federal Reserve uses a gauge from the Dallas Fed that throws out the top 31 per cent and bottom 24 per cent of personal consumption expenditure (PCE) price changes so that they are magically on track with their year-over-year target.

Perhaps policy-makers could use a dose of Goodhart's law, which states that “when a measure becomes a target, it ceases to be a good measure.”

It wouldn't surprise us to see the same kind of nonsense from the Bank of Canada and the newly elected Liberal minority government. That said, Trudeau, for the time being, doesn't have to worry about it, since he has been given another mandate for the status quo. All of which is why we're recommending that investors get prepared for what lies ahead.

A first step is to own some energy stocks, which have been recently selling off over the past few days, as an inflation hedge. The Canadian sector has consolidated and is stronger than ever, and will return capital to shareholders via share buybacks and debt repayment instead of putting it in the ground due to the likelihood of further prohibitive federal policy.

I also recently did two things for the first time ever: I locked in my home natural gas and power prices for five years, and bought some gold in client portfolios.

Many people will be in for a nasty surprise over the next few winters because of oil and gas supply challenges, similar to the ones currently facing Europe.

As for gold, history has shown that it does much better during the early stages of inflation than the later stages and excels during stagflationary environments, so we dipped our toes in last week.

Finally, if your U.S. dollar positions are short, now could be a great time to look at buying more to protect against a weaker Canadian dollar should it disconnect from its historical relationship to oil. Overall, it's a great time to be a contrarian and start hedging against the escalating risks of the status quo. Many Canadians may be OK with betting our government's balance sheet on climate change, but that doesn't mean you have to bet yours as well.

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2021-09-22T07:00:00.0000000Z

2021-09-22T07:00:00.0000000Z

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