My economic predictions

From reading and listening to multiple sources I have an understanding of what will happen to the economy in the next few years.

Right now, the recovery from the 2008 Great Recession hasn’t produced any real income growth and true unemployment is much higher than stated when you consider the workforce participation rate is the lowest since the 1970’s.

I believe we are actually in a depression and that the recovery has only benefited the holders of assets (stocks, bonds, real estate etc.) basically the rich have got richer and the middle class and poor have gone down.

This period of economic expansion is the 2nd longest on record and we are due for another recession.

However, the Federal Reserve in the US is not ready for another recession. They have desperately been trying to raise interest rates now, without pricking the bubble doing so, so that they have some ammo to lower rates when the next recession happens.

Normally to spur a recovery from a recession, the Fed will lower interest rates 3-4%, encouraging borrowing to get the credit cycle going again.

But right now they are only at about 1%. They can’t lower 3-4%.

They should have raised interest rates years ago, but Ben Bernanke instead did QE 1, 2 &3 that pumped a bunch of money into the system.

They missed the boat, their chance to raise rates to normal is basically gone.

Now the economic indicators are showing declining growth, getting ready for a recession.

Raising rates into economic weakness will trigger the next recession.

All that money Helicopter Ben printed didn’t go into the real economy, instead it went into blowing bubbles in stocks, bonds, real estate, fine art, etc.

The real economy is doing quite poorly.

My time frame for the next recession is late 2018 to early 2019, give or take.

I expect the trigger for the next recession to come from corporate bonds. More specifically, US Shale oil debt. The US shale oil industry hasn’t made a dime in profit and is actually losing billions of dollars to maintain. They have hundreds of billions in debt coming due in the next few years, with no way to pay it back. I doubt investors will want to roll-over the debt, when the industry hasn’t made any profit. Basically, the industry is running a Ponzi scheme of corporate debt.

There could be other triggers, the worst being a war with North Korea.

But if nothing catastrophic happens, I see shale oil bonds as the first domino.

When the recession happens the central banks of the world will not have the resources to fight it this time and will need to be bailed out themselves.

This will be done by the International Monetary Fund (IMF) with printing trillions of world money, SDRs (Special Drawing Rights).

SDRs are given to each country by the IMF in proportion to the size of their economies. Their value is determined by a formula including the US dollar, Euro, Yen and now the Chinese Yuan. Countries can trade SDRs for other currencies, eg. China can trade US dollars for other countries SDRs.

This flood of money will have a huge inflationary effect on the world and especially the US dollar.

Most Americans have no idea how privileged they are being able to just print money to buy real stuff and the world just accepts it. The rest of the world needs to make stuff to trade for US dollars so they can buy other stuff.

Once the SDR replaces the US dollar as world reserve currency, all those US dollars will go back to America, causing a tsunami of inflation. Americans will have to actually sell things to be able to buy things from other countries. But the US factories left years ago and aren’ t coming back.

Unfortunately, most US citizens will be in for a terrible financial shock. 2008 will look like a trip to Disneyland in comparison.

You can prepare by buying gold and silver in private storage.

At home and in the bank are not safe.

Do not trust the banks, the banks will be closed possibly for months and you will not be able to access safety deposit boxes.

Bank machines will limit how much money you can withdraw at a time.

All western countries have now passed bail-in laws. Your bank account will be used to bail out the banks.

You should have emergency rations and some cash on hand from now on.

If you are someone who has cash when the banks are closed, you will be able to buy things at insanely low prices as people sell everything to be able to raise cash.

At first, all the money printing will not cause inflation. After seeing their retirement account shrink to nothing, baby boomers are going to save everything and the real economy will continue to contract.

It won’t be until the psychology of the masses changes and they feel they have enough money saved to be safe again that they will begin to spend again.

And once that spending starts to expand the economy (2020-2025?) inflation will be a raging beast and uncontrollable at that point. Central banks will have to raise interest rates like crazy.

People who have jobs won’t be able to borrow nearly as much for mortgages, the supply of money chasing houses will go far down.

And at the same time, way more people will be foreclosed on because they will not be able to afford mortgages when their rates reset. Sellers will far outnumber buyers and demand for housing will go way down.

This will be a perfect storm to buy rental real estate cheaply.

Just as demand for rental real estate will be skyrocketing.

I believe that the stock market will not be as safe and people will not trust it for a while. It may take decades for a recovery to nominal values.

Where you can easily make $30 per hour

My last trip to China, I was surprised by the opportunities to make money teaching English.

I have been there multiple times now, since my wife is Chinese.

But this past trip, I was approached multiple times on the street asking if I was an English teacher.

One woman approached my wife and I, and offered me $30 per hour to teach English. We asked when did the class start? She said in 20 minutes!

Turns out her regular teacher flaked on her and she was desperate.

We were on vacation and I didn’t really want to work, but I thought what the hell, I will check it out, I had never done this before.

The woman had just started a new school and had new kids to teach. Asked what she wanted me to teach and it was ridiculously basic. There was no reason a Chinese person with basic English couldn’t teach this to a Chinese child.

But it is all about the prestige of having a genuine foreigner teach your child English.

Your passport will dictate your level of prestige and how much money you can expect.

People from western English speaking countries could expect to earn the most.

I met a fellow from Africa teaching English, but I don’t think he was making anywhere what they were offering me.

I was under the impression from previous trips to my wife’s hometown that I could make $1000/month which may be a lot compared to the locals salaries, but it is a waste of time compared to my salary back home.

The key is which city you go to. My wife’s hometown is a second tier major city, population of 6 million.

First tier cities such as Beijing, Shanghai, Guangzhou, etc. have lots of foreigners and you probably won’t make as much.

But second tier cities, like the capitals of the different Chinese provinces, there are far fewer foreigners and your prestige value will be much higher.

You should apply for a work visa if you plan on going. I didn’t have a work visa, but they were quite happy to pay me under the table.

That job actually never happened for me because the kids flaked too. So any Chinese visa officers reading this, I didn’t work and didn’t break my visa.

How to live rent free

First you need to find a great deal on a place with at least two bedrooms preferably close to public transit.

You will rent the whole home and are responsible for paying the whole rent.

How do you pay no rent when you are responsible for paying all the rent?

Rent out all the rooms to individual roommates.

You can live in the living room.

Often you should be able to pay the entire rent for the home from the rent your roommates are paying you.

You can let the landlord know you are the principal renter but you will have roommates.

You can divide the total rent for the home by the number of rooms, and charge each roommate that, or charge more for larger rooms or rooms with an en suite bathroom.

You shouldn’t let your roommates know what you pay in rent. It is none of their business.

Some will say this isn’t fair, you should divide the rent equally, and pay your fair share.

This perspective ignores all the risk you are taking.

What if all your roommates leave and you have to pay for the entire home yourself? You should be able to easily with all the money you have saved in your bank account living rent free.

What if your roommates wreck the place? You are responsible for the damage deposit.

What if the roommates don’t pay you on time? This happened to me a lot. The landlord will evict all of you if you don’t pay.

Besides, the living situation is not equal, one roommate will have the larger bedroom, and you are in the living room with no privacy.

Also, the roommates are getting a fair deal for a room or else they wouldn’t rent it from you.

You will need to set some rules with your roommates limiting visitors, time in the bathroom, kitchen, sharing the fridge, etc.

This may seem extreme to some people, but when you are starting out with little savings, this is one way to get ahead quickly. Most people are living far beyond their means. When you are just starting out in an expensive big city you cannot expect to have your own place right away, or you will burn all your money in rent and be poor forever.

The idea is not to do this forever, sharing one kitchen and one bathroom with 3-4+ people will try your patience. But the more you will sacrifice the faster you will get ahead.

We did this for a couple years and saved up a down payment to buy our own home.

Why are Vancouver house prices so high?

I think most residents might end up blaming rich foreigners for outbidding locals for houses.

I don’t see that as the initial cause, however, they have certainly had an affect on the high end of the single family house market.

However, the vast majority of homes in Greater Vancouver are bought by locals willing to pay huge sums for housing enabled by extremely low interest rates that allow them to leverage their income to buy million+ dollar homes.

Foreigners account for a small percentage of the number of homes bought. I see them doing this for two reasons.

  1. They saw that house prices were going up and jumped on the bandwagon, speculating (correctly so far) that the price will keep going up. Basically investing in a tangible asset, like buying gold.
  2. They come to live here as a permanent resident as well, because the word on the street is that the Canada Revenue Agency (CRA) will turn a blind eye to them hiding their world income.

So they can live in Canada as millionaires, pay less taxes than refugees, and the government refuses to enforce the law because it is easier and more fruitful to chase local small business owners, who provide a greater return on investment for CRA auditors per hour than trying to fight millionaires with lawyers and going all over the globe trying to prove someone’s world income.

I can’t blame the rich permanent residents too much, even though they are breaking the law. If I could get away with not paying income tax would I? I don’t know if I can answer that honestly, because I haven’t actually had the opportunity.

I do blame the government and the Canada Revenue Agency. They know about the problem, and deliberately choose to ignore it. Probably because these millionaires are giving political contributions (bribes). But that is only speculation.

Middle class ends up paying all the taxes again.

Back to housing, wealthy foreigners have out-bid locals for the most expensive houses. And that certainly has had a ripple effect through the market. But locals are overpaying for the majority of homes. Why?

Interest rates and lack of supply.

They aren’t building any new houses close to Vancouver. Almost all the land is already built on, any available land is going to condo towers. Despite all the towers going up, new condos are apparently not keeping up with population growth.  Basic economics 101, lower supply increases prices.

Interest rates are near all time lows after the great recession. Europe and Japan have experimented with interest rates below 0%. But weird things happen at that point (you pay the bank to keep your money?!)

Interest rates have started going back up again in the USA. They are trying to get them back up again before the next recession hits so they have the ability to lower them again, crazy as that is.

When interest rates go up, the bank will lend people less money for mortgages based on their income. This means less money will be chasing homes, which will bring the prices down.

You can see this is already starting to happen in the Vancouver region, especially at the high end of the market.

However, when the next recession hits, the Bank of Canada will lower interest rates back to 0% and if Vancouverites still have their incomes, they will be able to borrow more money from the bank again. And house prices may come back up again.

But these extremely low interest rates will not last forever. My parents once paid 18% on their first mortgage. Imagine your term ends and you went from paying 2% interest to only 6%. Can people afford to pay triple their mortgage payments?

Once the interest rate climb begins these spectacular home price appreciations will start to drop just as dramatically. People who bought at the top will be underwater on their mortgage (owe more than their house is worth). And the difference between here and the USA in 2008, is that Americans could simply walk away from their mortgages. Canadians who overpaid will be stuck with the debt even if the bank forces them to sell their house because they broke the terms of the mortgage by being too underwater. (Read the fine print).  People could be left hundreds of thousands in debt with no house to show for it.

New homebuyers though will finally have an opportunity to buy at more reasonable prices.

How to buy a car

  • 1. Determine your budget

This is how much cash in hand you have to purchase your vehicle.

Not how much you can afford each month. You should never go into debt to buy a depreciating asset. Car payments are the major reason the middle class has no savings.

0% interest is not free lending. If you pay with cash on a new car, they would give you a discount of thousands of dollars. This is the real price. The 0% interest is a marketing ploy.

You shouldn’t spend more than 5% of your net worth on your vehicles (depreciating assets). This means to buy a $5000 car, the value everything you own, minus all your debts should be $100,000.  Brand new $30,000 car? Your net worth should be $600,000.

My personal rule is lower, I aim for 3%. I know this is unfathomable for most people, but most people have no idea how much compounded interest of debt steals from your future prosperity.

2. Determine what you are looking for in a vehicle

Are you commuting a long distance?

Is fuel economy most important to you?

How many passengers will you be driving usually?

What is the most passengers you will need to be able to take on occasion?

Is safety your biggest concern?

Do you need to park often on the street in small spaces?

How much cargo capacity do you need?

Use this information to determine what type of vehicle would work best for you, a compact car, mid-size sedan, hatchback, mini-van, SUV, etc.

3. Determine 1-3 exact make/models, year and odometer range that are best for you

If your budget allows for a new car, you can google “best SUV* of 2017” (*whichever type of vehicle you’re looking for)

Then you can google “Volvo XC90* vs.” (*whichever make/model is determined from your previous search)

Then you can go to different dealerships and test-drive and compare.

However, since most people do not have a million dollar net-worth, and cannot afford to trade compounded years of retirement for a new car, I will devote the rest of this post to discussing how to buy used vehicles.

Go onto Craigslist and search used cars put your maximum budget +/- 20% in the minimum and maximum field eg. $5000 max budget, put $4000 minimum to $6000 maximum.

Look to see what vehicles of your chosen type are available in that price range.

Why put a maximum higher than your budget? Because we are going to look for a deal. You want to see what a fair priced car is at your budget + 20% and then wait until you see this ideal car priced low at your budget. Then you know you have a deal. This could take months depending on how good a deal you determined to get.

Research the different vehicles, google “Toyota Sienna* 2007 reliability”

Do this for each of the three make/model selections you have made.

You may find different variances/options of the same vehicle with the same make, model and year with very different reliability history. One type of engine or transmission may be known to have issues while the other variant has no issues at all. You can use this info to screen out the vehicles to avoid.

In the past, I have tried to find a vehicle with just over 100,000 km and then sell it before it gets to 125,000 km. (I kept it 3 years and drove very little.)

I have also found a car at a good price with under 70,000 km and then resold it with less then 100,000 km.

Psychologically, crossing 100,000 km on the odometer changes the value of the car in people’s minds. Same with 200,000 km.

With my most recent vehicle, a 2005 Volvo XC90, I purchased it with 225,000 km. The reason I chose this is because the vehicle had completed the entire maintenance schedule and all major expensive repairs and replacements had been done. The engine should easily last to more than 300,000 km based on reviews and speaking with a mechanic, and only minor maintenance will need to be done while I own this vehicle.

4. Wait for a deal

Once you know what make/model year combinations you are looking for keep checking Craigslist for a deal.

Car dealers will generally not give you a deal. Selling cars is a zero sum game, your loss is their gain. Dealing with private sellers will generally always give you a better deal than a middleman.

When you find a car you are interested in, call the seller and ask the following questions:

Confirm the make, model and year.

Confirm which engine, and option package it is. Remember to avoid the bad engines you found in your research.

Confirm the mileage (odometer).

Why are you selling the vehicle? (Do they sound suspicious? Does it sound legitimate?)

If they say they are selling it for a friend or family member you should be cautious. Generally, you should only be dealing with the legal owner of the vehicle.

Is it a rebuilt car? Generally, I would always avoid rebuilt vehicles, especially if you are transporting a family. Safety is always compromised.

Has the car been in an accident? This isn’t an automatic veto. If it was a minor fender bender, a couple thousand dollars damage or less, then you could still consider it. Anything more than that and I would pass.

5. Check out the vehicle

If the seller passes all your questions, ask when you can go view the vehicle.

Go with a friend (preferably someone who knows a little about cars).

Don’t bring the cash with you on the initial visit for your safety.

Ask to see all documentation for the vehicle, ask to check the seller’s id is the same as the documentation.

Ask for all repair receipts. If they have no evidence, assume no work has been done. If work was done at a dealership you could call and ask for confirmation of work done if they don’t have the receipt.

Things you want to look for:

Signs of accident repairs they haven’t mentioned, such as ‘spray over’, spray paint under the body of the car where it shouldn’t be. Body panels that don’t line up.

Little scratches and dings are your call, if it was previously undisclosed, and is excessive, you could ask for a discount, you tell them you want X hundred dollars taken off the price.

What is the general condition of the car? You are trying to determine if it was well taken care of. Is it dirty and messy inside? Probably a bad sign.

Check the interior for damage.

Test all the lights, power windows, mirrors, radio, all buttons, with your friend.

Check the oil dipstick, is the oil dirty and black, or is a golden color? I once checked out a car that had no oil in it! I didn’t buy that one.

Check the tires for unusual wear or bulges indicating a problem with the steering or alignment.

If it looks great, try to hide any excitement and really focus on finding flaws, you want to be able to negotiate the price lower later.

Turn on the engine, listen for any strange noises.

Test drive the vehicle, take it on both city streets and highway.

See how it accelerates.

Listen for weird noises, you may find some rattling, determine it is something inside the vehicle.

Pay attention for anything strange when you make turns. Make both left and right turns.

Tell the owner you want to test the brakes. With no cars behind you on an empty stretch of road bring the car up to speed and then hit the brakes hard. (Warn the passengers first!) See how the car responds.

6. Get a pre-purchase inspection!

If everything still seems good, ask the seller if you can take the car to a mechanic of your choosing for an inspection.

This could cost $150, don’t skip this step! If you don’t do anything else, you must do this. Even if you are buying a used car from a dealership, get an independent inspection!

I would recommend taking the car to the same make dealership if possible.  eg. Take a Volvo to a Volvo dealership. Any repairs they quote will be a higher price than other mechanics usually, and you can use this to negotiate down the price later. If it is the same dealership that has been servicing the vehicle, they can tell you its service history too. Ask for a printout for your records.

Call a mechanic and ask to schedule a pre-purchase inspection at a time that works for you and the seller. Make sure the mechanic knows you are paying for the inspection. And you should be the one to pick up the vehicle when the inspection is finished, it is your report.

The report will tell you exactly what is wrong with the vehicle and you can ask what the approximate cost is to repair each item.

You can then take this to the seller to negotiate the price lower by the cost of the repairs. Unless the necessary repairs were previously disclosed by the seller, you should be asking for the full cost to be deducted from the price.

Only exceptions you should make are for routine maintenance items and consumable items, such as transmission flush, oil change, tires or an empty tank of gas. You can certainly try to negotiate on these, but they shouldn’t be deal breakers for you.

7. Get the repairs done first

Take the money you negotiated down the price of the vehicle and get the needed repairs done first. Safety first, enough said.

8. Enjoy your car and watching your bank balance grow

You now know exactly what you got, you know it’s not a lemon, and you know you got a great deal.

And instead of paying a car payment each month, in a couple of years if not months you will have thousands of dollars back in your bank account. And you can sell this car and get an even better one with 5% of your growing net worth.