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Are stock markets overvalued? Yes and no and maybe…and don’t worry about it


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A long time ago, back in 2008, a co-worker at the company I was then at talked himself out of buying Apple stock because it had risen to $100 a share or so, double what it had been a few years prior. I felt for the guy, he really wrestled with the decision, he’d done his homework, and loved the company. He would hover tormentedly over his keyboard trying to hit the “buy” button, but despite the ever-more theatrical anguish, he couldn’t do it. Too expensive was too expensive and he took a pass.

I was fortunate to move on and lose touch with the guy before Apple’s stock took off to $700/share over the next few years; based on his inner turmoil at not buying at $100 he must have been wailing like an air raid siren at seven times that. Then it got “worse” – Apple stock split 7 for 1, the price was adjusted to $100, and has now risen back up over $300/share. A stock that seemed overvalued in 2008 went on to increase in value 20-fold in the next dozen years. Is Apple stock overvalued now?

Hope you’re not asking me, I haven’t the foggiest idea. By some yardsticks it likely is but it was in 2008 as well. 

Now, that’s a crazy growth stock, one of the world’s biggest success stories, so probably not a great example. But maybe we can glean something from looking at others that seem somewhat predictable for a number of reasons.

We could take airline or hotel stocks, which to my mind should be worth zero, but are not, so my mind is clearly wrong. I don’t see how their value can be ascertained when we don’t know at all what travel patterns will shape up as, and both these industries live or die based on utilization rates.

We could also look at blue-chip companies that are bought mainly for yield; are they overvalued? Well, companies bought for yield often are priced according to interest rate expectations, because that is the competition for yield seekers. We can now see that government bonds yield almost nothing, or less than nothing in some countries, so what is an appropriate yield level for a big stable dividend company?

Years ago, I unwisely did not put any money in big blue-chip stocks because their dividend yield was usually 2-4 percent, and I couldn’t see getting ahead by watching that snail move along (my chosen alternative, to chase growth stocks, was far more interesting, in the sense that a car bouncing down a mountainside is interesting). 

Now, many big blue-chip stocks are yielding 5-7 percent, an enormous gap to both the “risk-free” (haha) yield of government instruments and inflation expectations. So are these stocks undervalued?

That would seem incredibly hard to believe, given how the stock market has risen in the past month or so, in a world that remains incredibly unstable and drowning in debt. Unemployment rates are at levels that were unthinkable 6 months ago, and there is potential widespread devastation amongst small businesses (and larger ones for that matter – Volkswagen reported about a month ago that they were hemorrhaging cash at a rate of $2.2 billion per week).

It can all drive you crazy, but it can help to focus on some friendly realities that exist in the stock market. There are investments that hold up in the very long term. The Motley Fool investor website recently listed 3 Canadian stocks that have paid dividends continuously for over a century: Bank of Montreal, Imperial Oil, and BCE (aka Bell Canada). 

Value shmalue. If you’re investing to help yourself retire one day, pick a handful that have impressive dividend histories, reinvest the dividends, and don’t get too rattled by the news. It might be boring, but far better to be bored and rich than broke and wild-eyed.

For more stories, visit Todayville Calgary.

Terry Etam is a twenty-five-year veteran of Canada’s energy business. He has worked at a number of occupations spanning the finance, accounting, communications, and trading aspects of energy, and has written for several years on his own website Public Energy Number One and the widely-read industry site the BOE Report. In 2019, his first book, The End of Fossil Fuel Insanity, was published. Mr. Etam has been called an industry thought leader and the most influential voice in the oil patch. He lives in Calgary, Alberta.

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Federal government’s ‘fudget budget’ relies on fanciful assumptions of productivity growth

Published on

From the Fraser Institute

By Niels Veldhuis and Jake Fuss

Labour productivity isn’t growing, it’s declining. And stretching the analysis over the Trudeau government’s time in office (2015 to 2023, omitting 2020 due to COVID), labour productivity has declined by an average of 0.8 per cent. How can the Trudeau government, then, base the entirety of its budget plan on strong labour productivity growth?

As the federal budget swells to a staggering half a trillion dollars in annual spending—yes, you read that correctly, a whopping $538 billion this year or roughly $13,233 per Canadian—and stretches over 430 pages, it’s become a formidable task for the media to dissect and evaluate. While it’s easy to spot individual initiatives (e.g. the economically damaging capital gains tax increase) and offer commentary, the sheer scale and complexity of the budget make it hard to properly evaluate. Not surprisingly, most post-budget analysts missed a critically important assumption that underlies every number in the budget—the Liberals’ assumption of productivity growth.

Indeed, Canada is suffering a productivity growth crisis. “Canada has seen no productivity growth in recent years,” said Carolyn Rogers, senior deputy governor at the Bank of Canada, in a recent speech. “You’ve seen those signs that say, ‘In emergency, break glass.’ Well, it’s time to break the glass.”

The media widely covered this stark warning, which should have served as a wake-up call, urging the Trudeau government to take immediate action. At the very least, this budget’s ability—or more accurately, inability—to increase productivity growth should have been a core focus of every budget analysis.

Of course, the word “productivity” puts most people, except die-hard economists, to sleep. Or worse, prompts the “You just want us to work harder?” questions. As Rogers noted though, “Increasing productivity means finding ways for people to create more value during the time they’re at work. This is a goal to aim for, not something to fear. When a company increases productivity, that means more revenue, which allows the company to pay higher wages to its workers.”

Clearly, labour productivity growth remains critical to our standard of living and, for governments, ultimately determines the economic growth levels on which they base their revenue assumptions. With $538 billion in spending planned for this year, the Trudeau government better hope it gets its forecasts right. Otherwise, the $39.8 billion deficit they expect this year could be significantly higher.

And here’s the rub. Buried deep in its 430-page budget is the Trudeau government’s assumption about labour productivity growth (page 385, to be exact). You see, the Liberals assume the economy will grow at an average of 1.8 per cent over the next five years (2024-2028) and predict that half that growth will come from the increase in the supply of labour (i.e. population growth) and half will come from labour productivity growth.

However, as the Bank of Canada has noted, labour productivity growth has been non-existent in Canada. The Bank uses data from Statistics Canada to highlight the country’s productivity, and as StatsCan puts it, “On average, over 2023, labour productivity of Canadian businesses fell 1.8 per cent, a third consecutive annual decline.”

In other words, labour productivity isn’t growing, it’s declining. And stretching the analysis over the Trudeau government’s time in office (2015 to 2023, omitting 2020 due to COVID), labour productivity has declined by an average of 0.8 per cent. How can the Trudeau government, then, base the entirety of its budget plan on strong labour productivity growth? It’s what we call a “fudget budget”—make up the numbers to make it work.

The Trudeau fudget budget notwithstanding, how can we increase productivity growth in Canada?

According to the Bank of Canada, “When you compare Canada’s recent productivity record with that of other countries, what really sticks out is how much we lag on investment in machinery, equipment and, importantly, intellectual property.”

Put simply, to increase productivity we need businesses to increase investment. From 2014 to 2022, Canada’s inflation-adjusted business investment per worker (excluding residential construction) declined 18.5 per cent from $20,264 to $16,515. This is a concerning trend considering the vital role investment plays in improving economic output and living standards for Canadians.

But the budget actually hurts—not helps—Canada’s investment climate. By increasing taxes on capital gains, the government will deter investment in the country and encourage a greater outflow of capital. Moreover, the budget forecasts deficits for at least five years, which increases the likelihood of future tax hikes and creates more uncertainty for entrepreneurs, investors and businesses. Such an unpredictable business environment will make it harder to attract investment to Canada.

This year’s federal budget rests on fanciful assumptions about productivity growth while actively deterring the very investment Canada needs to increase living standards for Canadians. That’s a far cry from what any reasonable person would call a successful strategy.

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Alberta government should create flat 8% personal and business income tax rate in Alberta

Published on

From the Fraser Institute

By Tegan Hill

If the Smith government reversed the 2015 personal income tax rate increases and instituted a flat 8 per cent tax rate, it would help restore Alberta’s position as one of the lowest tax jurisdictions in North America

Over the past decade, Alberta has gone from one of the most competitive tax jurisdictions in North America to one of the least competitive. And while the Smith government has promised to create a new 8 per cent tax bracket on personal income below $60,000, it simply isn’t enough to restore Alberta’s tax competitiveness. Instead, the government should institute a flat 8 per cent personal and business income tax rate.

Back in 2014, Alberta had a single 10 per cent personal and business income tax rate. As a result, it had the lowest top combined (federal and provincial/state) personal income tax rate and business income tax rate in North America. This was a powerful advantage that made Alberta an attractive place to start a business, work and invest.

In 2015, however, the provincial NDP government replaced the single personal income tax rate of 10 percent with a five-bracket system including a top rate of 15 per cent, so today Alberta has the 10th-highest personal income tax rate in North America. The government also increased Alberta’s 10 per cent business income tax rate to 12 per cent (although in 2019 the Kenney government began reducing the rate to today’s 8 per cent).

If the Smith government reversed the 2015 personal income tax rate increases and instituted a flat 8 per cent tax rate, it would help restore Alberta’s position as one of the lowest tax jurisdictions in North America, all while saving Alberta taxpayers $1,573 (on average) annually.

And a truly integrated flat tax system would not only apply a uniform tax 8 per cent rate to all sources of income (including personal and business), it would eliminate tax credits, deductions and exemptions, which reduce the cost of investments in certain areas, increasing the relative cost of investment in others. As a result, resources may go to areas where they are not most productive, leading to a less efficient allocation of resources than if these tax incentives did not exist.

Put differently, tax incentives can artificially change the relative attractiveness of goods and services leading to sub-optimal allocation. A flat tax system would not only improve tax efficiency by reducing these tax-based economic distortions, it would also reduce administration costs (expenses incurred by governments due to tax collection and enforcement regulations) and compliance costs (expenses incurred by individuals and businesses to comply with tax regulations).

Finally, a flat tax system would also help avoid negative incentives that come with a progressive marginal tax system. Currently, Albertans are taxed at higher rates as their income increases, which can discourage additional work, savings and investment. A flat tax system would maintain “progressivity” as the proportion of taxes paid would still increase with income, but minimize the disincentive to work more and earn more (increasing savings and investment) because Albertans would face the same tax rate regardless of how their income increases. In sum, flat tax systems encourage stronger economic growth, higher tax revenues and a more robust economy.

To stimulate strong economic growth and leave more money in the pockets of Albertans, the Smith government should go beyond its current commitment to create a new tax bracket on income under $60,000 and institute a flat 8 per cent personal and business income tax rate.

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