Wellington-Altus was founded in April 2017 to revolutionize wealth management in Canada by delivering unprecedented levels of advisor support and embracing innovative technologies that fuel independence and success. This approach has set the firm apart from competitors, and with an AUA increase of more than $20 billion since 2020, has solidified its position as one of Canada’s fastest-growing wealth management companies.

“Our journey has been extraordinary from day one and surpassing $30 billion AUA in such a remarkably short span is a testament to our vision and unwavering dedication to advisors,” said Shaun Hauser, Founder & CEO of Wellington-Altus. “Wellington-Altus is a firm built by advisors for advisors, and I am unbelievably proud of our progress and the trust that leading teams and their clients continue to place in us.”

“We also know that we could not have achieved this level of success without the grit and dedication of our people, and I am grateful to every member of the team who has helped us get to where we are today—and rest assured, we are just getting started,” added Shaun.

With more than 110 advisor teams, over 820 employees, 53 offices across the country, and many accolades to its name, Wellington-Altus is built on the foundation of a strong culture of partnership. Its unique framework includes more than 70% of shares being held internally, which has seen the firm emerge as a top destination for talent, more than doubling its headcount since 2019.

“The accuracy of our instincts, the strength of our business model and the strategic decisions we’ve made along the way are reflected in our accelerated growth and this $30 billion AUA milestone,” added Charlie Spiring, Founder & Chair of Wellington-Altus. “As we celebrate this remarkable achievement, we remain laser-focused on the future of this great firm and the exciting opportunities that lie ahead, including our next medium-term goal of reaching $50 billion AUA.”

About Wellington-Altus Financial Inc.

Founded in 2017, Wellington-Altus Financial Inc. (Wellington-Altus) is the parent company to Wellington-Altus Private Counsel Inc., Wellington-Altus USA Inc., Wellington-Altus Insurance Inc., Wellington-Altus Group Solutions Inc., and Wellington-Altus Private Wealth Inc.—the top-rated* wealth advisory company in Canada and one of Canada’s Best Managed Companies. With more than $30 billion in assets under administration and offices across the country, Wellington-Altus identifies with successful, entrepreneurial advisors and portfolio managers and their high-net-worth clients.

*Investment Executive 2023 Brokerage Report Card.

Media Inquiries:

Kristy Kenny

Senior Manager, Marketing Communications

Wellington-Altus 

647.977.2069

Kristy.Kenny@Wellington-Altus.ca   

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Those who fail to learn from history are condemned to repeat it. – Sir Winston Churchill

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The Ghost of Arthur Burns

U.S. Federal Reserve Chair Jerome Powell, deeply mindful of Arthur Burns’ missteps and inspired by Paul Volcker’s tenacity, is fully cognisant of the historical significance of his role. I have consistently argued that Powell would benefit from studying William McChesney Martin’s tenure as the first post-Second World War Federal Reserve Chair in the 1950s. Martin adeptly navigated through a period of fiscal dominance, a pattern that is emerging once again. As Sir Winston Churchill implied [1], focusing on the wrong historical period can lead to policy errors and financial turmoil.

British economist John Maynard Keynes, speaking at the 1944 Bretton Woods conference, cautioned the U.S. about the perils of a fiat currency [2], particularly with the dollar as the world’s reserve. He predicted the temptation for governments to rely on money printing instead of tax increases or spending cuts, which could spur inflation or deflation and jeopardize economic stability. Keynes pointed to a recurring theme where nations fall into fiscal recklessness, devalue their currency, and decline, as seen with the Roman and British empires. The U.S., as the primary global powerhouse and reserve currency issuer, must manage its fiscal and monetary strategies prudently to avoid the fate of its predecessors.

The delicate balance between government spending and foreign investor confidence in financing U.S. debt is crucial. If government expenditure surpasses economic growth, it could result in fiscal dominance. In such a scenario, if foreign investors become reluctant to support growing U.S. debt, the government might need to resort to unconventional methods like debt monetization to finance expenses and prevent default.

Drawing lessons from Japan’s experience in recent decades is essential. Since the late 1980s, the Bank of Japan (BoJ) has printed money to purchase government bonds, effectively funding government spending by increasing the money supply. This approach resulted in a decade of secular stagnation and deflation, highlighting the risks that central bankers and Wall Street tend to overlook.

Churchill’s prophecy that those who disregard history are bound to repeat it is unfolding before us like a Shakespearean tragedy. In this era of fiscal dominance, it serves as a stark reminder of the importance of learning from past mistakes to avoid similar pitfalls in the future.

Amid the COVID-19 crisis, the Federal Reserve’s activation of Section 13-3 of the Federal Reserve Act signified a shift toward a more subordinate role relative to the Treasury, with fiscal policy taking precedence over monetary policy. In response to threats of deflation, economic stagnation, and financial collapse, the Federal Reserve might need to keep interest rates low to ensure that foreign buyers continue to finance the U.S. deficit. The Congressional Budget Office’s latest report, which shows interest payments on debt surpassing three per cent of gross domestic product (GDP) and projects a persistent fiscal deficit of six per cent until 2034, underscores the urgency of addressing the deficit—whether through investor financing, debt monetization or spending cuts.

Recent global economic shifts, including the BoJ’s interest rate hikes, China’s economic maneuvers, and the repercussions of sanctions against Russia raise a critical question: who will buy U.S. debt? The real danger lies not in inflation but in the potential failure of a U.S. Treasury bond auction. Over the past four years, my view has been that the Federal Reserve will need to lower rates to forestall a financial crisis, as inflation is not the foremost long-term concern. It has always been true that markets left to their own devices are inherently deflationary.

We are Out of Options

The spectre of fiscal dominance looms when a government’s financial strategies unduly dictate the central bank’s monetary policy, a situation often precipitated by towering government debt that handcuffs the bank’s efforts to keep inflation in check. This dynamic is playing out as the Federal Reserve endeavors to foster a hospitable climate for foreign investment in U.S. treasuries by suppressing interest rates and managing the dollar’s value. This shift towards fiscal prominence over monetary policy invites scrutiny over the central bank’s ability to simultaneously quell inflation and help finance America’s burgeoning deficit.

The geopolitical situation between Ukraine and Russia has jostled the global economic order, casting shadows of doubt over the U.S. dollar’s hegemony as the primary medium of exchange. The unprecedented measures of freezing another nation’s central bank assets and the spectre of confiscating treasury securities in European vaults are fraught with peril. Drawing from lessons of the past, we must be mindful that the use of the U.S. dollar as a tool of conflict could undermine confidence in the U.S.’s capacity to attract essential foreign investment for its debt.

The urgency for the U.S. to finance a significant portion of its debt—amounting to 38% over the coming two years—underscores the need for strategic actions reminiscent of historical interventions like the Plaza
Accord [3]. In a world where global investors scrutinize every potential volatility, and geopolitical dynamics shift with the wind, the appeal of U.S. treasuries could wane. The increasing allure of gold, bitcoin, and some countries’ pivot away from fiat currencies is a testament to the changing tides of investor sentiment.

In a scenario akin to the ‘Dutch Disease,’ where a powerful currency unwittingly erodes the nation’s trade balance and economic diversity, the U.S. finds itself grappling with the consequences. The forward leaning industrial policies rolled out under Presidents Donald Trump and Joe Biden are aimed at countering this imbalance, but time is needed for these seeds to sprout. The interim puts the onus on the Federal Reserve, which may need to consider reducing interest rates to bolster the economy’s multi-faceted growth.

The U.S.’s reliance on the dollar’s reserve currency status has facilitated a pattern of persistent debt accumulation, a dangerous game that not even Keynesian wisdom could fully safeguard against. As Keynes cautioned at Bretton Woods, no empire, America included, is immune to the pitfalls of fiscal imprudence. Rising concerns over the long-term viability of the U.S.’s fiscal strategy and borrowing habits point to the necessity of a coordinated and calculated response akin to the Plaza Accord of 1985. This could help modulate the dollar’s strength, ensure affordable currency hedging for U.S. Treasury buyers, and reignite the export sector’s vigor.

The Quest for a Soft Landing

The Federal Reserve’s pursuit of a “soft landing”— tempering inflation without triggering a recession—is a tightrope walk between maintaining price stability and fostering economic growth. Cutting the federal funds rate to two per cent might be one step towards bringing the six per cent deficit down to more traditional levels. But we must heed Churchill’s cautionary counsel and recognize that even with a 2.5 per cent GDP growth, a booming private sector is not guaranteed. A paradoxical economic condition, where the private sector suffers a recession amidst ostensibly positive GDP growth, is a distinct possibility.

In 2024, the U.S. faces the formidable task of taming inflation while contending with an anticipated $1.6 trillion deficit. The post-pandemic spending surge has led to significant economic imbalances, and a lack of consensus prevails within Congress and the Federal Reserve on the path forward. The situation’s complexity is compounded by the risk that aggressive rate hikes and liberal fiscal policies may not achieve their objectives, a reminder that not learning from historical fiscal lessons can lead to repeated failures.

In future, the focus should not be solely on the timing of the Federal Reserve’s initial rate cut, but rather on when the yield curve (comparing three-month to 10-year rates) reverts to normal, or smoothly un inverts to bolster the banking system and private sector economic growth. Given the federal funds rate and the length of time it takes for monetary policy effects to materialize, the belief that a single 25-basis point rate cut will spark credit expansion, inflation and economic progress is misguided. A significant rate reduction is necessary to rectify the inverted yield curve to ensure a desired soft landing.

Killing Two Birds with One Stone: A Freely Floating Yuan

Secretary Yellen’s recent visit to China aimed to tackle trade imbalances stemming from its massive production and market inundation with cheaper goods. The simple solution would be market-driven valuation of the Chinese yuan. Allowing the yuan to appreciate would make Chinese exports pricier, thus addressing trade imbalances and curbing overproduction. Additionally, this move could attract foreign investment in U.S. Treasury securities—effectively hitting two birds with one stone.

The idea of China freeing the yuan for unrestricted trade and adopting global GDP measurement standards is gaining attention. It’s a concept that’s been waiting in the wings for over a decade, potentially aligning China with advanced economies without needing agreements like the Plaza Accord.

The elegant yet simple solution of allowing the yuan to float to devalue the U.S. dollar is not currently expected. This move, coupled with the adoption of western GDP accounting, has the potential to usher in an era reminiscent of the post-Second Word War economic boom. It could help alleviate concerns about deflation and secular stagnation, enabling economies to grow their way out of high debt levels. By the mid-1970s, debt to GDP had declined to 37 per cent.

While China has traditionally been cautious about such adjustments, fearing a situation like Japan’s post Plaza Accord downturn, recent economic developments like the real estate bubble burst, may prompt a reassessment.

In a time that calls for structural shifts, investors need to stay nimble and embrace change to navigate U.S. debt refinancing. A freely traded yuan could have a positive impact not only on gold and bitcoin but also on global risk assets, global trade, and Chinese equities. Re-evaluating China’s undervalued stocks in a potential deal could signify a shift. As has been widely said, the true measure of intelligence is the ability to adapt to change.

The 1950s: A Case Study

The 1950s stand out in history as a period marked by fiscal dominance, significant investment in innovation—like the transistor—and strong economic growth. These factors contributed to low inflation and remarkable stock market gains. The S&P 500’s total return soared by 488 per cent from 1950 to 1960, with an annual average growth of over 19 per cent, a performance rivaled only by the secular bull market of the 1990s, which saw an 18 per cent annualized return. The 1950s represents an overlooked robust bull market era.

Reflecting on this historical period, we see parallels in today’s landscape of fiscal dominance, where government spending significantly influences economic direction. The U.S. faces the dual challenge of preserving its currency’s value while promoting economic growth, and it must draw on past experiences to adeptly maneuver through the complex interplay of fiscal and monetary policies.

In summary, the 1950s offers valuable lessons for current policymakers tasked with fostering innovation, managing debt judiciously, and ensuring economic stability. This era demonstrated that fiscal dominance need not impede economic growth and innovation; rather, it can complement them. By embracing these historical lessons, the U.S. can avoid the pitfalls that have ensnared former empires and set a course for sustained prosperity.

Investment Strategies for Today’s Economic Climate

In an economic climate resembling the 1950s, risk assets such as the S&P 500 have historically shown robust performance. This is evident in the often-overlooked bull market of that decade. Despite present uncertainties— volatility, innovation, demographic shifts, and global conflicts—1950s trends could re-emerge.

Objective evaluation of current economic data—tax revenue, full-time employment growth, and sales figures—indicates that the private sector may be decelerating. A 2.5 per cent GDP growth rate does not necessarily reflect a thriving private sector. The perceived economic expansion might be superficial, buoyed by extraordinary government outlays, rather than indicative of the private sector’s vitality. As such, conventional assessments of the economy’s health warrant scrutiny.

Post-pandemic, the U.S. economy is operating to a new beat, rendering the Federal Reserve’s traditional economic tools outdated. Current fiscal policies are central to stimulating demand and shaping business cycles, as evidenced by Congressional Budget Office predictions that the budget deficit will hover around six per cent of GDP until 2034. The economy’s path will hinge on the sustained and effective application of these fiscal measures. Independent of political leadership, the U.S. is likely to persist with its industrial policy direction, which could lead to scaled-back fiscal spending and modest growth. Nevertheless, lower interest rates could foster an environment conducive to private sector expansion.

Globally, we are in a phase of reflation, with central banks reducing rates and alleviating concerns about inflation. By the end of 2025, the federal funds rate is predicted to level off at close to 2.5 per cent. It is a misconception that the global economy can withstand high interest rates without inciting a financial crisis. My projection for the S&P 500 by the end of 2025 is 6,000. Should it surpass this benchmark prematurely, it may signal an excessively optimistic market, necessitating strategic recalibration. The demand for gold and bitcoin is likely to remain robust, and oil to trade between $70 and $90. Predictions suggest a decrease in fiscal expenditure and interest rates, mirroring the patterns of the 1950s. It would be wise for investors to favour companies with steady growth, as the difficulties faced by cyclical businesses have shown up in their earnings reports. Investors should concentrate their attention on leading companies the “winners” of the current era.

In the words of Sir Winston Churchill, understanding historical patterns is essential to navigating the present economic challenges and seizing opportunities effectively.

[1] In 1948, during a speech to the House of Commons, Churchill paraphrased philosopher George Santayana and said, “those who fail to learn from history are condemned to
repeat it.” This quote has been widely associated with Churchill ever since.
[2] Fiat currency: government issued currency that is not backed by a commodity (such as gold).
[3] Plaza Accord: 1985 agreement between France, Germany, Japan, the United Kingdom and the United States to correct trade imbalances by depreciating the U.S. dollar compared to the yen and deutsche mark.

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The 2024 Federal Budget, tabled on April 16, 2024, provides a mix of expected measures and a few surprises. In line with the announcements leading up to Budget Day, Budget 2024 outlines a multitude of measures targeted at housing affordability and the cost of living. The big question was how the government was going to pay for those measures. Budget 2024 delivers the answer with an increase to capital gains inclusion rates.

Fiscal Outlook

Budget 2024 projects deficits of $40.0B for 2023-24; $39.8B for 2024-25; and $38.9B for 2025-26. As a percentage of Gross Domestic Product (GDP), the federal debt is expected to be 42.1%, 41.9%, and 41.5% for those years, respectively.  

Four Key Takeaways from Budget 2024

1. Increased capital gains inclusion rate
2. Expanded tax shelter on the sale of a business
3. New and ongoing housing affordability measures
4. Updates to previously proposed changes to the Alternative Minimum Tax

Quick Facts:

• No change to personal or corporate income tax rates.
• Capital gains inclusion rate increased to 66.67%.
• No change to the principal residence exemption.
• No wealth tax introduced.
• Multiple housing and affordability measures.
• More changes to the AMT.

Changes to the Capital Gains Inclusion Rate

Since 2000, Canadian taxpayers have been required to include 50% of realized capital gains in their taxable income. The proportion of a realized capital gain, which must be included in taxable income, is commonly referred to as the capital gains inclusion rate.

Budget 2024 has proposed an increase to the capital gains inclusion rate from 50% to 66.67% for corporations and trusts. This increased capital gains inclusion rate would also apply to individuals with realized capital gains that exceed $250,000 in the tax year.

Budget 2024 states the enhanced capital gains inclusion rate would be effective June 25, 2024.

Budget 2024 also provided information on specific items that will not be impacted by the proposed increase in the capital gains inclusion rates, including:

• The Principal Residence Exemption;
• Capital gains earned in registered accounts such as RRSP, RRIF, TFSA, FHSA, or RESPs; and
• Pension income or the capital gains earned by registered pension plans.

Budget 2024 states that capital gains realized prior to June 25, 2024, will have the 50% inclusion rate apply. Capital gains realized on or after June 25, 2024, would be subject to the 66.67% inclusion rate. It does not appear that the $250,000 threshold will be pro-rated for 2024, meaning the full $250,000 threshold will be available for capital gains realized on or after June 25, 2024.

Budget 2024 estimates that this tax measure will add $19.4B to federal revenues over a five-year period starting in 2024.

While no specific legislation regarding this proposal has been provided at this point, Budget 2024 has stated that “additional design details will be released in the coming months.”

Expanded Tax Shelter on the Sale of a Business

Lifetime Capital Gains Exemption:

The Lifetime Capital Gains Exemption (LCGE) is a tax provision which allows individuals to shelter a portion of the capital gain realized on the disposition of Qualified Small Business Corporation Shares (QSBC Shares) and Qualified Farm or Fishing Property.

The amount of capital gains that can be sheltered from tax in relation to the disposition of these specific types of assets is limited to the LCGE. Currently, the LCGE is $1,016,836. This limit has historically been indexed to inflation on an annual basis.  

Budget 2024 proposes to increase the LCGE to $1.25M. This increased limit would apply to dispositions that occur on or after June 25, 2024, and would be indexed to inflation starting in 2026.

Canadian Entrepreneurs’ Incentive:

Budget 2024 introduces the Canadian Entrepreneurs’ Incentive. This measure would provide a reduced rate on capital gains arising from the disposition of qualifying shares, up to a lifetime maximum of $2M. Where the conditions are met, the capital gains inclusion rate would be one-third (33.33%), instead of the two-thirds (66.67%) proposed in Budget 2024. This measure would effectively cut the tax rate on capital gains that qualify in half, starting for dispositions occurring on or after January 1, 2025.

The $2M lifetime limit is phased in over time. The first $200,000 will become available in 2025, and an additional $200,000 will be added to the limit annually until 2034.

To qualify for the Canadian Entrepreneurs’ Incentive, both the shares being sold and the individual shareholder must meet certain criteria. The criteria for shares resemble those for the LCGE: they are shares of a small business corporation at the time of disposition, the corporation is a Canadian-controlled private corporation at all relevant times, and more than 50% of the corporation’s assets were used primarily in an active business carried on in Canada throughout the 24 months preceding the disposition. However, professional services corporations, corporations that primarily derive value from the reputation and skill of a single or several employees, consulting and personal care services businesses, and businesses operating in certain industries – financial, insurance, real estate, food and accommodation, arts, recreation, and entertainment – do not qualify for this incentive. In all cases, the shares must be disposed of for fair market value.

The individual looking to claim the Canadian Entrepreneurs’ Incentive must also have:

• Invested in the corporation when it was first capitalized (i.e., a founder);
• Held shares for at least 5 years prior to disposition;
• Held shares representing more than 10% of the votes and value of the corporation throughout the ownership period; and
• Been actively engaged in the business on a regular, continuous, and substantial basis throughout the 5 years preceding the disposition.

The proposed $250,000 threshold for the capital gains inclusion rate discussed above applies in addition to the Canadian Entrepreneurs’ Incentive, as does the LCGE. In other words, for qualifying dispositions, the first $1.25M in capital gains would be sheltered by the LCGE, and then one-third of the next $2M in capital gains, half of the next $250,000 in capital gains, and two-thirds of the remaining gains would be included in income.

Housing Affordability

Increasing housing affordability is one of Budget 2024’s main areas of focus, particularly for first-time home buyers. Budget 2024 introduces a number of measures aimed at addressing the housing crisis.

Enhancements to the Home Buyer’s Plan:

The Home Buyer’s Plan (HBP) is a program that allows eligible home buyers to withdraw from their Registered Retirement Savings Plan (RRSP) to fund a home purchase. Under the HBP, the withdrawal is not taxable, provided it is repaid into the RRSP over a period of 15 years, beginning in the second year following the year of the withdrawal. Budget 2024 proposes two enhancements to the HBP:

1. Increasing the Withdrawal Limit: Budget 2024 proposes increasing the maximum HBP withdrawal from $35,000 to $60,000. This measure would apply to withdrawals made after April 16, 2024.
2. Temporary Repayment Deferral: Budget 2024 also proposes temporarily deferring the 15-year prepayment schedule by an additional three years, to begin five years after the year in which the withdrawal was made. This measure would apply to withdrawals between January 1, 2022, and December 31, 2025.

Increased Amortization on Newly Built Homes:

Budget 2024 proposes to amend the Canadian Mortgage Charter and change the mortgage insurance rules to extend insured mortgage amortizations for first-time home buyers purchasing new builds to 30 years, up from the current 25-year maximum. These new insured mortgages are to become available to first-time homebuyers beginning on August 1, 2024. The government has indicated that it will consider allowing 30-year insured mortgages to become available more broadly based on supply and housing inflation.

In addition to the proposals intended to assist buyers, Budget 2024 introduces several measures aimed at increasing housing supply or reducing demand:

Secondary Suite Loan Program:

Budget 2024 proposes to launch the secondary suite loan program, which would allow homeowners to access up to $40,000 in low-interest loans to add secondary suites to their existing homes. More details will be announced in the coming months.

Other Incentives for Increasing Supply:

Budget 2024 includes a number of other proposals with the goal of creating incentives for developers, builders, and existing homeowners to create additional housing. Some are in the form of accelerated deductions, such as the Capital Cost Allowance for rental projects, the elimination of GST for certain new apartment projects, increasing the annual limit for Canada Mortgage Bonds, and low-cost loans for building apartments. Other measures target short-term rentals and underused housing.

Reducing Demand:

Budget 2024 introduces some new proposals and enhancements to existing proposals aimed at reducing housing demand. Some include a ban on foreign home buyers, anti-flipping rules, and reducing international student intake.

Updates to the Alternative Minimum Tax (AMT)

The AMT is an alternate tax calculation, done in parallel to the regular tax calculation, intended to limit taxpayers’ ability to lower their tax bill through tax preferences (i.e., exemptions, deductions and credits). AMT is paid only where it exceeds the regular tax otherwise payable.

The 2023 Federal Budget proposed significant changes that would broaden the base income on which AMT is calculated and increase the AMT rate from 15% to 20.5%. Notably, the 2023 Federal Budget proposed to include 30% of capital gains from donations of publicly listed securities in the income calculation for AMT purposes (the AMT base). Such gains are not included in income under the regular tax calculation. In addition, only 50% of non-refundable tax credits, including charitable donation credits, could be used to reduce the AMT otherwise calculated. In the consultations following these proposals, the charitable sector raised concerns that these proposed changes would disincentivize significant charitable donations because of the AMT impact.

Budget 2024 proposes additional changes to the AMT rules:

• 80% of the charitable donation tax credit could be claimed instead of the 50% proposed in the 2023 Federal Budget;
• Employee ownership trusts would be fully exempt from the AMT;
• Guaranteed Income Supplement, social assistance and workers’ compensation payments can be fully deducted;
• Certain credits that are disallowed under the AMT could be carried forward (i.e., federal political contribution tax credit, investment tax credits, and labour-sponsored funds tax credit); and
• The federal logging tax credit can be fully claimed against AMT.

Budget 2024 does not revise the 30% inclusion of capital gains on donated publicly listed securities in the AMT base.

The main thrust of the proposed 2023 AMT amendments remains unchanged: a broadened base, a higher AMT exemption amount, and an increased AMT rate. Capital gains are still proposed to be 100% included in income (the AMT base) for purposes of the AMT calculation.

Other Items:

Qualified Investments for Registered Plans:

Individuals in Canada can utilize several registered plans to facilitate various savings goals. These registered plans include accounts such as RRSPs, RRIFs, TFSAs, RESPs, RDSPs, FHSAs, etc.

Such registered plans are only able to invest in qualified investments. These qualified investments include over 40 types of assets and generally include common investments such as publicly traded securities, mutual funds, and corporate and government bonds.

Budget 2024 “invites stakeholders to provide suggestions on how the qualified investment rules could be modernized on a prospective basis to improve the clarity and coherence of the registered plans regime.”

Budget 2024 highlights several items for consideration, including:

• Whether annuities should continue to be considered qualified investments
• Whether rules for qualified investments could promote an increase in Canadian-based investments
• Whether crypto-backed assets are appropriate to be considered qualified investments

The balance of the issues highlighted by Budget 2024 appears to be aimed at further restricting the definition of “qualified investments” rather than expanding it. However, few details have been provided at this time.

Stakeholders have been invited to submit comments during the consultation period, ending July 15, 2024.

Employee Ownership Trusts

The 2023 Federal Budget introduced new rules to facilitate the use of employee ownership trusts (EOT) to purchase a business. The 2023 Fall Economic Statement then announced a temporary tax exemption on up to $10M of capital gains realized on the sale of shares to an EOT. Budget 2024 provides additional details on the exemption, including who qualifies and under what conditions. The exemption can be shared among multiple individuals, but the maximum exemption cannot exceed $10M. The exemption would apply to the qualifying disposition of shares occurring between January 2024 and December 31, 2026.

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“There are no heroes; in life, the monsters win.” – Sansa Stark, Game of Thrones

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We are at a pivotal moment in history, one that former U.S. Federal Reserve Chairman Alan Greenspan might liken to a historical juncture, where the intertwined narratives obscure the uniqueness of our era. As we contend with a world that echoes the tumult of epics like War and Peace or Game of Thrones, we are in the midst of a “Fourth Turning”—a period of intense demographic, technological, and structural change that recurs approximately every 80 years.

Greenspan’s warnings of “irrational exuberance” resonate in today’s climate of innovation and speculation. Assessing asset values in these times is challenging, especially with the potential for prolonged contractions, as seen in Japan’s lost decade. His insights are vital as we face an economic mirage sustained by deficit spending, which may offer a semblance of growth but ultimately serves to impede it, luring investors into regrettable cycles following ephemeral rallies.

Seismic shifts are reshaping our global financial landscape. Debt has climbed to levels not seen since the Second World War, sparking a re-evaluation of the Bretton Woods system [1]. In these times of transformation, Italian philosopher Antonio Gramsci’s words resonate, “The old world is dying, and the new world struggles to be born; now is the time of monsters.” This reflects the uncertainty surrounding traditional financial structures, stirring debates on “de-dollarization” and the exploration of alternatives to the U.S. dollar as the reserve currency of choice.

As we venture into uncharted territory, the spectres of uncertainty emerge, embodying the unpredictable essence of this transition. Often, we are misled to believe that Bitcoin and artificial intelligence (AI) are monstrous entities that threaten the established order. As I have reiterated on numerous occasions, risk is inherent. Investors face the peril of failing to acknowledge that throughout history, groundbreaking innovations have been unfairly branded as monsters.

The world is facing a critical juncture, which mirrors past historical turning points. As we navigate the Fourth Turning, characterized by seismic shifts in the global financial landscape, we must address the challenges and opportunities presented by emerging technologies like AI and Bitcoin, while acknowledging the risk embodied in our extreme levels of debt. Yes, the current global economy is reminiscent of an installment of Game of Thrones.

We’ve Seen This Before

Central to this transition period is the need to manage debt levels, which have reached historic highs, and the potential impact on the global financial system. As the world reevaluates the role of the U.S. dollar as a reserve currency, the appeal of safe havens such as gold and Bitcoin intensifies. This period presents critical questions about our economic future and offers astute investors a chance to profit from these generational changes.

AI and Bitcoin represent beacons of innovation, signaling a technological renaissance reminiscent of the transformative breakthroughs of past decades that have reshaped the global economy. Investors must acknowledge the progressive impact of AI and Bitcoin on the economy—the launch of ChatGPT-4 is just the beginning of this journey.

Current computing and internet infrastructure traces back to the late 1940s and 1950s, and the introduction of a digital currency was first proposed by American economist and statistician Milton Friedman in the 1990s. Today, we are witnessing Bitcoin’s evolution into a traditional store of value and asset class, despite being controversially labelled a “monster” by many.

The roots of AI can be traced back to the 1930s when American mathematician, electrical engineer and computer scientist, Claude Shannon introduced the concept of machine learning. Nearly a century later, the introduction of ChatGPT, a large language model, is the catalyzing force that unleashed this innovation that will reshape the world. In line with any major theme, capital tends to initially flow into foundational elements; for AI, companies like NVIDIA have set the benchmark. However, themes evolve over time.

A typical evolutionary process for high-tech innovation goes through several stages. The ‘infrastructure’ phase will shed light on fundamental components of AI development, such as semiconductor firms, cloud services, and data centres. Subsequently, the ‘revenues’ phase will showcase businesses utilizing AI for expansion, particularly in software and IT services. Finally, the ‘productivity gains’ phase will exhibit how AI can enhance efficiency across various industries, potentially revolutionizing labour-intensive sectors ripe for automation.

Just as the printing press, which challenged existing power structures and ways of disseminating information, was once labelled a “monster” by those wary of its disruptive potential to the established order, Bitcoin and AI now find themselves facing similar scrutiny for their potential to reshape our economic and societal landscapes. As Antonio Gramsci’s quote suggests, periods of significant change often give rise to fear and skepticism, with new innovations being viewed as monstrous before they are fully understood and integrated into the fabric of society.

With the resurgence of populism, staggering global debt, China’s evolution, the rapid advancement of AI, and the growing acceptance of Bitcoin, the “monsters” of today are increasingly woven into various sectors, setting the stage for a significant transformational era.

Bubbles and Greenspan’s Philosophy

Greenspan’s philosophy that central banks should “respond patiently and responsibly” to market and economic shifts offers a perspective on our current technological wave reminiscent of other eras that preceded secular bull markets—and speculative bubbles. The full implications of today’s advancements are still unfolding. Moreover, as Greenspan states, monetary policy works with a lag, and central bankers need to be forward looking—a skill they currently seem to have lost:

“Because monetary policy works with a lag, we need to be forward looking, taking actions to forestall imbalances that may not be visible for many months. There is no alternative to basing actions on forecasts, at least implicitly. It means that often we need to tighten or ease before the need for action is evident to the public at large, and that policy may have to reverse course from time to time as the underlying forces acting on the economy shift. This process is not easy to get right at all times, and it is often difficult to convey to the American people, whose support is essential to our mission. [2]”

We face fiscal policies characterized by wartime spending levels, driving inflation that seems resistant to traditional remedies like interest rate hikes. With refinancing needs for debt obligations and interest payments in countries like Canada and the U.S. consuming significant portions of budgets, the recklessness of such policies becomes apparent. It suggests we may be witnessing the end of an era of extreme progressivism in fiscal policy, as indicated by the potential missteps of modern monetary theory.

The private sector, laden with decades of debt, faces a moment of truth. The illusion of perpetual “free lunches” fades as we confront the reality of austerity and the prospect of higher taxation. Central banks’ aggressive rate hikes, while aimed at curbing inflation, risk precipitating a credit crisis and causing undue harm to sectors not responsible for inflationary pressures. Greenspan emphasized the importance of central banks acting with foresight to anticipate and mitigate imbalances that may not become apparent for months.

Recalling the pre-COVID-19 world and the drastic adjustments that ensued, we yearn for growth above two per cent and controlled inflation—objectives that remain tantalizing, yet elusive. Past monetary policies left us in a liquidity trap, where growth was hampered by excessive debt, and concerns about western economies mirroring Japan’s stagnation loomed large. Now the shoe is on the other foot, with liberal fiscal policies and rising debt.

The forces of deflation and secular stagnation— propelled by debt, digitization, demographics, and globalization—are intensifying. We see declining birth rates and an aging populace. The cessation of extreme fiscal policies could mirror post-wartime economic transitions of the past, historically associated with negative growth impacts.

Internationally, China’s era of debt-driven growth, not unlike Japan’s in the past, seems to be waning. This will likely have significant ramifications for economies like Canada, which became dependent on sectors tied to China’s former growth model. Canada must also navigate domestic policy effects on its real estate market and its stance on commodity markets. As Canadian investors witness tensions between the Bank of Canada and Prime Minister Justin Trudeau’s government, the cautionary signals for foreign investment become increasingly evident, necessitating a judicious reassessment and strategy.

Populism’s rise post-2008 Global Financial Crisis and the persistent swell of income inequality add further risks to global stability. Japan’s about to end its era of negative interest rates. Europe’s struggle with debt and the profound repercussions of the Russia-Ukraine conflict add complexity to an already intricate global economic tapestry.

What Should Investors Do?

As we navigate these turbulent times, it is crucial to remain vigilant and adaptable, embracing the transformative potential of AI and Bitcoin while carefully managing the risks associated with debt and speculative bubbles. By doing so, we can position ourselves to thrive in the face of the “monsters” that will shape our economic future.

Secular growth is a beacon in our navigation of this complex landscape. As central bankers realign their strategies—taking a page out of Greenspan’s book—we expect a transition towards rate cuts to foster growth once inflation seems tamed. The notion that the global economy can sustain higher interest rates is, in my mind, a fallacy. With global debt awaiting refinancing, the short end of the yield curve appeals more for investment. We find ourselves in a reflation cycle set to run until the end of 2025.

However, caution is warranted as cyclical stocks appear overextended. Oil is likely to oscillate between $70 and $90, much to investors’ chagrin. As AI’s economic influence expands, its impact on equities will follow suit. Both gold and Bitcoin are expected to rally, while highquality banks seem to have reached their pricing zenith. The full ramifications of the commercial real estate crisis remain uncertain, casting a shadow over investments in regional banks. The excessive cash levels in money market funds indicate a market still underweight in equities. My preference leans towards U.S. secular growth names, particularly the NASDAQ-100, and I anticipate a ‘risk on’ rally extending to the end of 2025, in line with the political cycle.

As rate cuts begin, we’re likely to see a rekindling of interest in risk assets, with a preference for the large U.S. indices over Canada’s commodity-heavy S&P/TSX Composite Index. Nevertheless, certain Canadian companies stand to benefit significantly from the burgeoning technological wave, despite the index’s heavy slant towards banks and energy.

Peering into the future, we project a downward shift in interest rates by the end of 2025, with the federal funds rate and the Bank of Canada’s overnight rate potentially aligning at around 2.5%. Yet, historical patterns suggest the risk of a dip below the two per cent mark. With the private sector teetering on the brink of recession, our targets for the S&P 500 are set at 5,400 for 2024 and 6,000 the following year.

Investors should remain alert to any signs of “irrational exuberance,” which could temporarily skew market perceptions. In such instances, it might be prudent to adopt a defensive stance, consolidate holdings, and raise cash. Greenspan’s insights underscore the necessity of responding to economic cycles with both foresight and agility in this era of complexity and transformation. As we navigate these changes, let us heed the lessons from the internet bubble of the 1990s and remember, as Sansa Stark poignantly observed in Game of Thrones, “The monsters always win,” a metaphor for the relentless nature of innovation and economic evolution.

[1] Bretton Woods system: An international currency exchange system based on the U.S. dollar’s convertibility to gold which arose from the Bretton Woods Agreement of 1944.

[2] Remarks by Chairman Alan Greenspan, At the Annual Dinner and Francis Boyer Lecture of The American Institute for Public Policy Research, Washington, D. C. December 1996. “The
Challenge of Central Banking in a Democratic Society.”

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