Budget Day In Canada

Today is budget day in Ottawa, and by now the government has announced the largest deficit budget in Canadian history. Strangely, for those of us who have been paying attention, there is little criticism of this planned deficit, even by those who have previously railed against any deficit by the Feds.

So what's going on?

The truth is, both the country and the world economies are at a place unseen by anyone alive. The major financial institutions all around the world are in deep trouble, due to collapsing confidence in financial instruments, mostly brought about by the US subprime collapse, but certainly exacerbated by a serious of other financial failures, the likes of which haven't been seen since the Crash of 1929.

What governments all of the world are trying to do is to replace private spending, which is almost at a dead standstill, with government spending, to trigger a rebirth of economic confidence in consumers, (and probably more importantly, in bankers).

Seldom before during my lifetime have I seen such evidence of the transient nature of what we know of as "the real world" or how vulnerable that world is to a collapse of belief. Students of economics will always tell you that the "real" value of anything is what a willing seller and a willing buyer agree it is. The logical extension of this is that there is no "objective" value to anything, all economic values are relative, and depend upon the confidence of buyers and sellers in the marketplace. Once confidence is seriously damaged, or even destroyed, it is extremely tough to restore it to its proper place.

But this is precisely what governments are trying to do with massive deficit spending and building programs. The whole economy of the world is somewhat based on a house of cards supported ultimately only by our belief in it. If that belief is fundamentally flawed, then we really are in for a serious collapse. If the system merely needs to be "tweaked" by better regulations and public policy, then it may perhaps come back sooner rather than later.

What does this mean for investors?

It means a rough ride is getting rougher all the time. There's little point in trying to say that the stock market will be volatile... that would be more than a little redundant after the past couple of years. Real estate values will continue to slide... but nobody can tell you with any confidence how much they will slide.

I still believe that your best investment bet is in mortgages against residential property.... because no matter what happens in the world economy real people still need to live in real property, and will pay to keep their homes. Even if there is double digit unemployment the vast majority of people will continue to be employed, and will continue to pay their mortgages to stay in their homes.

We are recommending lenders be more cautious than ever in their second mortgage investments, with the result that the absolute maximum loan to value in private mortgages these days is 85% for people with otherwise excellent credit, and 65-75% for so called equity loans. This isn't a reflection of paranoia, but rather of useful prudence given the uncertainty surrounding property values in the near future.

In other words, if we have to foreclose we need to be aware of the potential for loss created by the current market conditions, and therefore lend more cautiously than in a strongly expanding marketplace, such as existing in the past five years or so.

The balance to this is that we receive far more applications these days from people with better credit scores than ever before... because if private lenders are being more cautious, institutional lenders are as well. The range of risk represented by private lending is much less exposed today than it was previously, simply because there is less competition for the loan opportunities.

So if you want to maintain a good return on investment, then invest in debt... residential mortgages.

And returning to the budget... let's hope that the Finance Ministers from around the world are able to right the ship and get the world economy back on track.