I’ve been getting numerous emails from readers looking for Smith Manoeuvre or leveraged investment advisors in their area.  The problem is, I don’t know any, but I’m wondering if you could help me out?

Are you a Smith Manoeuvre advisor?  Or, do you know any Smith Manoeuvre advisors in your area?

If so, please contact me via email with the following details:

  • Full Name.
  • Contact Information (phone/email).
  • Advisor/Financial credentials.
  • Areas that you service.
  • Investment/Mortgage products that you can provide.
  • Years working as a Smith Manoeuvre advisor.
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  1. pete smith on February 28, 2009 at 11:58 am

    I wouldn’t do smith maneouver in this environment

    my friend just got divorce because he did SM and his partner didn’t like it and the fact that he lost so much money!!!

  2. Grant on the Rock on February 28, 2009 at 1:19 pm

    Actually Peter this is probably the best time in the last 10 years to do a SM because of all the bargains out there. Look at any of the big Canadian banks and notice their stock prices have fallen 50%-100% in the last year or 2. It’s too bad your friend and his ex couldnt see this through but it just makes sense that if a couple are going into this they have to be on the same page or you can forget about it. I mean you said it all right there, HE did the SM and his partner did not like it, done before it even started, just my 2 cents.

  3. CanadianFinance on February 28, 2009 at 2:03 pm

    I agree with Grant on the Rock. It’s unfortunate, but they shouldn’t have started a SM because they weren’t both on board.

    There are certainly quite a few bargains, with a bit of concern about there dividends not being cut.

    Even at the previous prices, and losses since, it would have been advisable to hold on to them and not lock in the losses on paper… they will eventually hit their highs again. As long as the dividends are paying more than the interest it’s not too hard to wait.

  4. Tommyboy on February 28, 2009 at 2:13 pm

    I agree – this is the BEST time for an SM – I just started my own. Some of the benefits are high yields (due to depressed stock prices), and low cost of borrowing from the bank.

    It doesnt matter what happens to the stock value – the point of the SM is to have dividend-producing stocks that supplement your mortgage. The only danger (which has been happening) is if a company decreases or ends it’s dividend.

    I am in need of some assistance, too, though. I have 2 income-funds in my portfolio. What’s the tax implication?

  5. wx_junkie on February 28, 2009 at 4:50 pm

    I agree with those who are saying this is an excellent time to start. I will be starting ours in April (that’s when my new mortgage will close, buying out my existing mortgage).

    I certainly had some convincing to do with my wife, especially since I lost quite a bit over the last 2 years on borrowed $$, but I’ve been able to convince her that with a long-term window like we have (25+ years to retirement), we’re quite safe. She told me not to tell her what the portfolio value is over the next while while the economy tries to recover. I’m not going to try and pick the bottom, I’m just going to invest now, knowing that bargains are out there everywhere.

  6. Sampson on February 28, 2009 at 5:14 pm

    I have to disagree that this is ‘the best time’ to start. Maybe its just me, but I’m feeling like there is a lot of uncertainty when it comes to future interest rates.

    Certainly the numbers (% return vs. % interest) are on the surface – the most balanced in favor of the SM, but there are two issues. (1) Canadian Finance already mentioned the high possibility companies will cut dividends, and (2) from my meager understanding, all the capital injection by governments will very likely result in a period of above average to extremely high inflation in the near to mid-term.

    I just see a huge risk for those borrowing a lot, buying companies who eventually cut dividends, then interest rates pushing or exceeding double digits.

    Personally, I’ve been tempted to start the SM – but in all honesty, I’d rate do in an environment where the % yield to interest rate % was small, but the economic environment more stable and certain.

    When you are lending away your house, its better to bank a constant 0.5% return for many years, vs. +5% one year, then -5% then next.

  7. Tron on February 28, 2009 at 7:30 pm

    While there are certainly risks with any investment, one can limit this risk by setting stop losses or even trailing stops on your position. I am currently speaking to a Mr. Rob Smith (Fraser’s son) on Vancouver Island on setting up the SM. One of the things we need to determine is how much risk my wife and I comfortable with. whether it’s 5 or 10% or 50%, I will ensure there is protection in place. I plan to set up the SM now, but whether or not I start investing at this particular moment, will depend on further analysis of the sectors involved.

    Ps. I will contact Mr. Smith and ask his permission to post his conact info here.

  8. DAvid on February 28, 2009 at 11:18 pm

    The Smith Manoeuvre Financial Corp was one resource, but today serves a blank page. Possibly an update coming soon?



  9. FrugalTrader on March 1, 2009 at 8:55 am

    DAvid, I believe that Mr. Smith took down his listings for SM advisors a little while back.

    Sampson, I think that there is always risk for leveraged investors. The key is to think over the long term (30+ years) rather than shorter term anomalies.

  10. paul s on March 1, 2009 at 9:26 am

    Sampson…pay off your mortgage…no risk

  11. DAvid on March 1, 2009 at 11:20 am

    Smith’s list on http://www.smithman.net disappeared about a year ago. I thought to allow SMFC to take that part of the business…..


  12. Sampson on March 1, 2009 at 11:38 am

    Hey FT,

    I agree that leveraged investing always has risks and the time horizon should be long term. The question in these particular times is whether those risks are heightened and would you be better off deferring the SM until things settle down. I certainly acknowledge that there are also increased potential for capital gains starting now.

    Paul, there’s only so much one can pay off before you have to save/invest again ;)

  13. Jared on March 1, 2009 at 12:01 pm

    This is a great idea… I have been looking for a list of Potentail Financial advisors to help with the setup of the Smith Manoeuvre

  14. The Reverend on March 1, 2009 at 3:37 pm

    I tend to agree with Sampson that I think we’re going to see a sharp increase in interest rates in the next few years once we come out of this recession. Its quite possible the interest rate increases will be faster than the dividend increases at banks (they will probably be cautious to raise their dividends given the difficult positions past increases have put them in today).

    All purely speculation, however I’m taking the current low interest rate environment to focus on reducing debt, not take on more.

  15. The Nemesis Enforcer on March 1, 2009 at 8:56 pm

    Equities are destined to fall even lower over the next year. We may see a couple of bear market rallies here and there, but for now “Buy and Hold” is a losing proposition. Don’t take my word though. Look at the greatest investor of all time (Warren Buffet’s) latest newsletter to Berkshire shareholders. Inflation is pretty much inevitable at this juncture. The fundamentals of most stocks have changed. The way to make money going forward is to buy those assets where the fundamentals have not changed. I’m talking gold, silver, grains, Crude Oil and oil companies, and certainly Uranium. Yes they have all taken a beating recently. But when things do turn around in the world economy, these will be the first things to rise. Read my lips though, DO NOT use leverage to invest right now. Before you invest in anything, pay down your debts as much as possible and lock in long term debts within the next 12-18 months at the lowest possible rates. If you want to invest, short US long Term Government bonds. This is the last major bubble set to burst. An easy way to do this (even within your RRSP) is to purchase Horizons Beta Pro HTD.TO ETF (2X inverse of US 30 Treasury Bonds). Careful with this vehicle though as it can lose you money if you get in too soon. I’d give it until July/August before I’d nibble in. Don’t get me wrong, the SM is a fantastic long term investment strategy under normal circumstances. If this were an ordinary recession and “sale” on Stocks, I’d say go all in. These are not normal times, and although many of us (including myself) have seen our portfolio’s down by 40% or more, there is still much worse to come.

  16. The Nemesis Enforcer on March 1, 2009 at 9:04 pm

    Further to the above, here’s the link to Berkshire’s letter:


  17. Alex on March 2, 2009 at 1:36 pm

    If your time permits, would you mind explaining for our readers how to report on TAX forms all transactions made for SM including capital gain/loses. What supporting docs need to be sent to CRA.

  18. paul s on March 2, 2009 at 6:10 pm

    Congrats to you. You have no debt, and you pay for everything with cash. Buy some GICs then.

  19. financePHI on March 2, 2009 at 8:52 pm

    Like Alex, I would also like to know more about how you can report these as gains and losses on your tax forms. Great article!

  20. Sampson on March 3, 2009 at 3:19 pm

    Paul, I’ve got plenty of debt, and I’m stuck in mortgages that cap annual top-ups – GICs have never matched inflation – so is real RISK of loss of purchasing power over time.

    One thing about the SM that doesn’t seem to get mentioned often enough is that you can reduce your interest rate risk by holding your mortgage portion at a fixed rate, and obviously the loan portion is linked to the prime rate.

    I wonder if you own a home? Financially, you’re probably better renting, banking the difference in rent vs. mortgage and investing in GICs. – In everything, risk has always been linked to reward. For those comfortable with the SM – and when it works, their reward is a mortgage that is paid off sooner.

  21. Jared on March 11, 2009 at 10:04 pm

    Are you going to post this list?

  22. DAvid on March 12, 2009 at 11:30 am


    Maybe it’s a very short list……..


  23. Roo on May 8, 2009 at 12:59 am

    QUESTION for Newbie SM:

    I need help as I am lost at the beginning when the end makes perfect sense.
    When first set up with a LOC of 75% (House value x 75%) – Mtg = LOC. If my LOC is $80,000 do I take all $80,000 and immediately invest it? Then as I pay my mtg and say the principle paying down is $275/month it is this amount that is transferred to the LOC and then I pull it out for investing?

    So a question comes to mind is if my LOC is $80,000 then I will have over-extended my LOC and so I am S out of luck? Do I tell the broker that he is to increase my LOC by $275 every month above the $80,000?

    Should I start my initial investing with $75,000 of the LOC and then continue as per normal and have my broker increase my LOC accordingly?

    Huge thanks whoever can help.

  24. Roo on May 8, 2009 at 4:19 pm

    Thanks Frugal.

    If I read correctly, once the mtg and LOC are set up, the LOC is only accessible to me when I start to pay down my mortgage?

    i.e $500 principle paid down and now $500 LOC available to me to invest.

    So ideally it is best to have a high mortgage balance so that I can have access to a equally high LOC.

    * I was thinking that if I was set up with a LOC right from the start (say $80,000) that I could use that amount immediately to invest AND THEN as I pay down my mtg principle my LOC would increase in equal size?

    Please confirm the top info and questions, but please do comment on this *. maybe I just need a good understanding from my Broker about what I do and how I have access to for this LOC.


  25. FrugalTrader on May 8, 2009 at 4:58 pm

    Roo, a readvanceable mortgage works exactly the same way as a mortgage + HELOC, except that the HELOC credit limit increases as you pay down your regular mortgage.

    The formula is:

    Home value x 80% – mortgage balance = heloc available

    As you pay down your mortgage, the heloc available increases instead of staying static like a regular setup.

    So in your case, if initial LOC available is $80k, the available room will increase by $275/month.

  26. cannon_fodder on May 8, 2009 at 5:55 pm


    Yes, you can take the entire LOC balance and invest right away. Then each time you pay down your principal you can reborrow that amount and invest it (after paying for any interest charges, of course).

    So, if you wanted to get into the market in a big way, you would have the opportunity to do that. If you decided to invest in dividend producing equities, it would probably take a good 3 months before you see a good portion of dividends coming your way.

  27. Jatinder on May 12, 2009 at 10:19 pm


    I’m in the process of starting SM but bit bogged down about accounting part. Know any accountants/advisors in Ottawa/Orleans area.

    Anyways, I plan to start few Canadian DRiPs with OCP/SPP and invest in those using my investment loan. For those who don’t support OCP/SPP or are bit hard to get by, I plan to buy stocks from a broker and then transfer the share certificates to DRiP account (with TA), will it still make my loan deductible. Any accounting problems?

    I plan to keep doing this for the whole duration of my investment plan. What happens if I do options to buy stocks?

    Any input welcome!

    • FrugalTrader on May 13, 2009 at 9:48 am

      Jatinder, I don’t think there will be any problems with an investment loan and purchasing stock via DRIP/SPP. Just make sure to keep a clear paper trail.

      When options are bought sold, I believe they are considered capital gains/loss. The rules state that the investment loan must be used to generate income. Even though we know that some capitals gains trading is ok, I’m really not sure about options as they don’t have the potential for income.

      Again, you should contact an accountant to help you out with the details.

  28. Ed Rempel on June 23, 2009 at 10:24 pm

    Hi Pete Smith, Reverend and Nemesis,

    Do you still think that March was a bad time to start the SM? We’ve had a nice relief rally since then.

    Our belief is that the #1 quality necessary for investing in equity investments is faith – in humans, markets, long term results and the ability of companies to adapt to market conditions. Our experience is that those that have faith in the markets tend to make money, while those fearful of markets tend to continually miss buying opportunities and end up only feeling safe buying at market highs.


  29. KenS on December 9, 2009 at 10:26 pm

    After having paid off the mortgage on three successive houses BEFORE finding the Smith Manoeuvre (rats!), I’m working on the back-end process.

    The Smith Manoeuvre obviously does what it says it is going to do…take ‘bad’ (non-deductable) debt and turns it into ‘good’ (tax deductable) debt. As a late observer of this blog, the issues seem to be:
    1. Is ANY debt good?
    2. If tax deductable debt is good, is now a good time to invest, and if it is…
    – invest where and in what?

    To answer #1, I think that if you are truely on a “Million Dollar Journey” (I’d suggest that for those of us on the WEsT Coast, it should be 2 or 3 Million!) that the only way to get there is by judicial use of debt…tax deductable if at all possible!

    I think #2 is the Million Dollar set of questions though.

    While some people still have unwavering faith in the US economy, I’m afraid the damage done to their system by being almost constantly at war, and the recent Trillions of dollars of bailouts has not just made their Dollar worth less, I’m afraid it will soon found to be worthless.

    One of the USA Doctors of Doom (Peter Schiff) suggests getting out of US investments, but that there is always a bull market somewhere, and China (as does Jim Rogers) seems to be it for the forseeable future. He suggests investing in gold to preserve current value, and in any ‘stuff’ that China’s growing economy might need for income growth.

    Any thoughts on investment specifics?

  30. Ed Rempel on December 10, 2009 at 11:41 pm

    Hi KenS,

    We agree with your #1, but we think that gold is the next bubble to pop. Gold is a high risk, speculative investment and unsuitable for leverage strategies such as the Smith Manoeuvre.

    Why do so many people think the US is doomed, anyway? The cost of the war and bailouts are not that large compared to their economy. Even if it did, we are not going back to the gold standard. If the US dollar stops being the main global currency (unlikely any time soon), it will be replaced by the Euro or some basket of currencies.

    The gold bug arguments are unable to value gold, other than a comparison to a previous bubble or some vague currency argument. Gold has risen many times higher than inflation, which is all the return we should really expect from gold.

    Gold is a purely speculative commodity. Since hardly any is actually used up, there is no real supply/demand story. We could close all the gold mines for 100 years and still have lots. Therefore, with no real fundamentals and since gold is no longer a currency, there are few limits on the upside or downside – other than the “greater fool theory”.

    The gold rhetoric is popular because gold keeps going up and people like to chase performance. Fake demand is being created by ETFs and trend-followers. When it starts falling it will plunge. The last time gold rose like this was in 1980, when it fell 43% in 2 months and did not recover until this latest bubble.

    The returns of the stock market are far more reliable long term and have been surprisingly consistent. Anyone considering the Smith Manoeuvre should stick with solid, proven investment strategies and avoid speculation.


  31. KenS on December 14, 2009 at 2:24 pm

    Hi Ed:

    Thanks for the suggestion but a comparison over the past 15 years or so of my net RSP portfolio (professionally managed) and the price of gold shows a pretty significant variation (in favor of gold).
    The books I’ve been reading (“Austrian” school of economics) suggest the similarities between the current and previous US government interference in the economy and the so called ‘dirty thirties’ is very similar.
    Gold has been a safe haven for value, and the basis of value in the US money supply up until 1971. Since then the government has found the printing press to be much to easy a solution to the problem of buying votes or belt tightening…they have out done themselves and all previous historical increases in the past couple of years with bailouts of various companies that are ‘too big to fail’, but should have.
    These days BIG money can be created with the click of a few keys, no printing presses needed. With no ties to ‘real’ relatively rare things (i.e. gold, silver), it is too easy to take the easy road to re-election.

    Unfortunately, the global currency is the US dollar held in reserve by most nations, I’m afraid they/we are going to find they have made a mistake.

  32. Ed Rempel on December 15, 2009 at 12:07 pm

    Hi KenS,

    If gold was at $500 and you were arguing grounds for a rise to $600, your argument may hold some water. But virtually every argument for gold rising contains no concrete valuation methods – just arguments on why it should rise forever.

    Past returns are always higher for any sector in a bubble. The recent price rise or the bubble high in 1980 don’t tell us anything about where the price will go.

    Gold is only a PERCEIVED store of wealth. There is no actual tie, since it can’t be converted to actual currency, will never be currency again, and we have hundreds of years of supplies above ground today. If people stop perceiving it as a store of wealth – which will happen as soon as the price falls – then it is no longer a store of wealth.

    There is huge risk in gold, since it is purely a speculative plan. Last time it rose like this, it plunged 43% in 2 months and took 30 years to recover. That is definitely a possible scenario again.

    My basic point is that gold is highly speculative and is unsuitable for a leverage portfolio such as the Smith Manoeuvre. If you really believe in gold and are an extremely aggressive investor, then a 3-5% allocation should be the maximum.


  33. Duncan Macpherson on December 23, 2009 at 3:47 am

    I wouldn’t put my money into US stocks right now. I also wouldn’t buy gold at the current levels either. Both have seen significant increases over the last 12 months. Silver, Agricultural stocks and oil/natural gas are still very depressed and due for a rally. If the economy recovers, these commodities will also increase before other asset classes. If the economy stalls and we start to see inflation, these “real” assets will rise in value relative to the reduced purchasing power of Fiat currency. Win Win! The US dollar is likely to rally in the short term because of the amount of negativity surrounding it! Everyone (including myself) is a bearish on the US dollar, so perhaps that in and of itself is a good contrarian indicator. But be careful! The dollar’s long term trend is only going down. Bernanke’s can’t inflate his way out of this problem and foreign investors are already looking for other safe havens for the money. When they stop buying Treasuries, nothing the US can do will save their currency from total collapse. On the flip side, Canada’s financial system is strong and we’re seeing major inflow of foreign capital. As Canadians, if we were to simply on to hold cash we’d do okay as our currency will likely see further strength and global purchasing power as commodity prices rise. We’ll certainly see short term hesitation to raise rates as doing so will further strengthen our dollar against the greenback and hurt our manufacturing sector. But as the Canadian economy improves, in spite of the decreased purchasing power of our neighbours to the South, we’ll be forced to increase rates sooner and more rapidly than anticipated. As a result, I’d be very cautious about using leverage as an investment strategy at the moment. Borrowing will become more expensive and saving will become more attractive. Equities (other than resource based stocks) will likely fall in value as we’ve seen before in high interest environments. Longer term, the old fashioned pay down debts and save for a rainy day will pay off in droves.

  34. KenS on January 2, 2010 at 4:01 am

    Thanks Ed and Duncan:
    Commodities seem to be the investments of choice and since Canada has (relatively) lots of them. If this is an appropriate venue, which stocks would you suggest (with no blame to you if they don’t work out) in the minerals (silver, gold, platinum, uranium, coal, etc.) , oil/gas, agriculture areas?

  35. Ed Rempel on January 23, 2010 at 4:03 am

    Hi Ken,

    We have different view. Commodities was the place to be and people tend to always think trends will continue, but taking a long term view of investing and looking for value is what works.

    In the short term, who knows what will happen, but the global and US markets are only just over 1/2 recovered, so there is a lot more room to recover. Investing now is still relatively cheap (especially if you look for the undervalued sectors that have not recovered much yet).

    If you think long term instead of short term, investment choices become far more clear.

    In general, our fund managers are seeing far more value in many areas other than commodities – health care, some financials, technology, emerging markets (other than China) and other out-of-favour sectors offer more long term growth potential.

    Mostly, it is the momentum-based fund managers and amateur investors that are buying commodities now, while value managers are finding more value in other areas.


  36. Duncan on January 23, 2010 at 2:22 pm

    I’m a firm believer in the Austrian school of economics. I have no idea what the markets will do in the short to medium term, but I’ve a pretty good idea of where world markets are going long term with the amount of money being printed world wide. In every situation in the past, this has always led to increased inflation. If you believe the real enemy is the elusive myth of deflation, then I can understand your view of seeing so many “undervalued” sectors. No doubt Healthcare is a safe bet moving forward, but you must ask how the fundamentals have changed? With the bloated and ridiculous Health Care reform agenda floating in the US congress, one way or another health care will be forever changed. I look to invest where the fundamentals have not changed. I also wasn’t aware that eating food or putting gas in my car was trend following? You stated that amateur investor and momentum traders are buying commodities right now? I didn’t realize that Jim Rogers, George Soros, Peter Schiff and Marc faber who are all heavily into commodities were amateurs? Perhaps you know much more than all of their years combined? You must be a very wealthy man indeed if you’ve outperformed their track records?! Bottom line is this. Use your common sense and don’t try to speculate on what the markets will do or what sectors will perform the best. Buy assets where the fundamentals haven’t changed. World population is growing and the supply of food is growing. Asia is the largest buyer of automobiles that rely on a finite resource called Gasoline to operate. Copper, silver, zinc, coal will always be in demand longer term. If world economies recover, so will the demand for these resources. Either way inflation is going to put the price of commodities higher. Buy the commodities in the short term where the prices haven’t increased significantly. Hold onto any gold, and buy more on the pull backs. But most of all, do your homework! Never rely only on an advisors advice. They always think they know best, yet so few saw the recent crash and many are deluding people to believe in a fast recovery. Pure Hollywood fiction and far removed from the reality of our global situation!

  37. Ed Rempel on January 23, 2010 at 11:42 pm


    My point is that your view is the trendy view. I have literally heard your viewpoint probably 100 times in the last year – almost word for word. That means your viewpoint is built into current prices.

    For example, my personal opinion is that the price of gold already discounts double-digit inflation – which is extremely unlikely. If inflation rises but to less than double-digit, then gold will likely fall.

    Millions of investors throughout the world have known for several years about the growth of China & India and how that will impact commodities. That is probably already priced into current prices.

    I’m also a big believer in checking facts with numbers. You say that high spending has always led to inflation. When did that happen? Not in the last 30 years. The bailouts of 1987, 1998 and 2002 did not cause inflation. In 1974, inflation was already rising for other reasons.

    There are powerful forces that have kept inflation low for the last 15 years that all remain in place – globalization, free trade and technology – and the demographic effect of aging baby boomers is still coming. Plus, all the central banks are committed to keeping inflation low. Belief that inflation will rise sharply is everywhere, yet I see inflation above 3% as extremely unlikely. It would mean that all the world central banks are unable to control it.

    Also, I ran a correlation analysis and the common belief that gold is correlated to inflation is false. Gold has consistently fallen during times of higher inflation and is strongly negatively correlated to inflation. Gold is a purely speculative vehicle. It has risen when inflation is low and there is speculation of high inflation, but it falls during actual inflation, since the speculation of higher inflation is not there.

    US debt is not out of control. It is back up to where it was 15 years ago (% of their economy) and about 1/2 of what it was in the 1940s at the end of WWII. Our view is that the US growth will be stronger than expected (not hard because expectations are low), the debt will come under control – and the speculation of rampant inflation and commodity prices will turn out to be grossly exaggerated.

    Bottom line – the best growth opportunities are always in the areas that are out of favour, where future growth is not already built into current prices. Each boom is different. The tech boom of 1995-99 was replaced by the commodities boom of 2002-7. The next boom will likely be something else?

    Following the herd will not let you see the new trends or the next boom.


  38. duncan on January 24, 2010 at 1:01 am

    I’m a little confused with your logic? You say that the growth of India and China is already baked into the price of most commodities, yet most classes are still far from their all time highs before the crash? And if the economy does heat up faster than most people expect, as you indicated you personally believe, then based on what happened to commodity prices the last time the world economies were firing on all cylinders,prices should retrace if not exceed their all time highs? That’s not to mention the increased demand for a western lifestyle as Asia’s middle class grows; ergo beef, wheat products and gasoline dependant products.

    There’s no doubt that gold has risen very quickly and has all of the aspects of a bubble. I personally would not buy gold at these levels, but am holding on to the gold that I do own and am not selling. If there are significant pull backs in the short term, I’d buy more. But I’d first look to other more attractive assets like natural gas, silver, and uranium that are still way below their highs. Uranium is a no brainer as Europe alone has plans for 8 reactors over the next several years which will only increase demand of this finite resource. Another fantastic inflation hedge that’s grossly undervalued is Canadian farmland. You can still by an acre of fertile farmland in Saskatchewan for around $400.00! They can’t make more land, and as the world population grows and inflation continues to erode purchasing power, that land and the food grown on it will only rise in value. It’s the farmers who’ll drive the Rolls Royce’s in the next decades, not the investment bankers, especially as the baby boomers retire and the next wave of investors with far less in net worth create a major “trimming” of jobs in the financial sector.

    You mention this “growth” in the US economy, yet I don’t see where it’s going to come from? For years, container loads of ships have sailed into port to America and unloaded their cargo. They then return to their country empty! The US outsourced most of it’s manufacturing years ago, so they would have to start building factory’s and training people to before they can begin hiring people and producing output. This would take time and they’d be competing with Asia where the infrastructure, people and output are already in place. Maybe the IT sector can pulls them out of the recession? It’s doubtful, as India has more qualified IT professionals than all of North America combined and they work for a fraction of what a US firm would have to charge. Finally, with the US involved in two expensive “endless” wars and spending incredible amounts on Health Care reform, pension benefits (as the majority of their working population is approaching retirement) and every expanding Government programs, they only have two options; raise taxes or continue quantitive easing and monetize the debt. Raising taxes doesn’t win votes, so my guess is they’ll continue down the path of least resistance and open up the flood gates until they’re further afloat in excess liquidity.

    If you follow the padded numbers of GDP and the CPI, then you’ve been hoodwinked into believing that inflation has been low and can be contained under a central banking system. Considering consumer spending accounts for about 70% of US GDP, I’d be very cautious of numbers showing “growth” in the economy when all that growth really amounts to nothing but consumption. The US trade gap with China is incredibly wide, and for all of the bashing of China for keeping the Yuan artificially low, their worst fear would be if China actually did strengthen their currency as it would raise prices on almost all goods imported into the US and have a rapid inflationary effect. The US has been able to play a very good shell game for many years with their reserve currency status. But foreign nations are finally waking up to the fact that they’re trading their widgets for IOU’s. As “sovereign” nations start to default on their obligations, I believe many will turn inward and reduce their US dollar reserves.

    I’ll get you the numbers on the US debt situation when I have a bit more time tomorrow, but I know with 100% certainty that it’s far, far higher as a % of their economy. And if you take out CONSUMPTION, which accounts for nearly 70% of what the governement numbers report as their “economy” the numbers are absolutely staggering. I’ll also touch on your statement that inflation has been kept in check after past bailouts. First of all, let me ask you something very simple that anyone can answer. Did $100,000 in the US buy you more or less goods in 1987 than in 2010? Certainly some items such as computers and electronics have evolved and come down in price, but what about groceries? Housing costs? Schooling? Health care (if you’re in the US)? I bet if you average out the numbers, you’ll see that “real” inflation is far higher than what was reported in the numbers year over year?

    Your last point makes no sense at all “…the best growth opportunities are in areas that our out of favour…” So we should have invested in US textile companies, betamax, large video rental store chains, and print only newspaper companies? Buy low sell high right? Problem is, often when you buy low, it goes even lower. The trend is often your friend, yet you must see further than the trend and stay the course when it reverses. Look to where the fundamentals haven’t changed and invest your money there. The real next bubble forming is the US Carry trade and treasuries. I don’t see how anyone can say that commodities are in a bubble when they’re still WAY off of their all time highs?!

  39. duncan on January 24, 2010 at 4:09 am

    Peter Schiff predicted this recession as early as 2006. Please see this youtube video. Worth watching and further reinforces my point.


  40. Duncan on January 24, 2010 at 5:13 am

    You made the statement that “US debt is not out of control. It is back up to where it was 15 years ago (% of their economy) and about 1/2 of what it was in the 1940s at the end of WWII.”

    This is totally incorrect (where do you get your statistics please?)
    The real numbers can be found here:


  41. Ed Rempel on January 26, 2010 at 4:11 am

    Hi Duncan,

    My point is that anything that is widely known will not move markets.

    For example, you and millions of other investors believe that commodities will rise because of demand from China. Are you waiting to buy commodities until then or do you already own commodities exposure? So, if growth happens as most people expect, that supports TODAY’S price, not a future rise.

    Commodities may not be at their highs, but most are still up a lot this decade. Commodities are not like equities that usually rise in the long term. Rising demand alone does not increase commodity prices, only if supply cannot keep up. Demand is expected to rise, but so is supply. There were some large gains initially because supply was behind, but huge increase in demand may or may not lead to higher commodity prices.

    The question is: will the future turn out to be even better for commodities than your rosy forecast or will it be somewhat lower? Today’s price reflects all widely-known information. If the future is great, but slightly less than expectations, then commodities may well fall.

    Another example is farm land, which you mentioned. Again, I have heard this from quite a few people. I recently talked with a guy that bought farm land 3 years ago for $1,000/acre and just sold it for $1,500. That’s a 50% rise in 3 years. It would normally take 15 years for that much of a rise. The farm land boom has already happened as well.

    The biggest gains will be in a sector where the future turns out to be quite a bit better than today’s expectations. If you focus on that and try to find information that is not widely known, you can find bigger opportunities.

    The US economy still has many areas to grow. Most of the cost of a product is marketing. When I used to work in the mattress business 20 years ago, a high-end mattress set cost $250. We sold it to stores for $500 and the stores sold it for $1,000 (sometimes more). So 75% or more of the money is in marketing, packaging, distribution, retail, etc. From my experience, less than 25% of the money for manufactured products goes to manufacturers. The US dominates in most of the other areas.

    They still dominate the world in financials, health care, retail (staples & discretionary), technology & telecom and real estate and utilities are usually local in each area. So, they can still dominate the world in 8 of 14 sectors.

    The advantage the US has is their innovation. Whatever the next big thing is, they will probably be there.

    The US may or may not be successful the next decade, but the expectations are low. We are investing there because the belief in the fall of the US is rampant and we believe vastly overdone.

    I use the same US debt figures from Wikipedia. Look at the 2nd graph showing debt as a % of GDP. The red line is public debt. You will see it is still lower than 15 years ago and about half of where it was in the 1940s. Both those times, they came out of it with little problem.

    I think the massive number of articles predicting a debt crisis in the US and the collapse of the US dollar are extrapolations of recent trends, but the stimulus programs will stop. I think the articles are also political pressure to try to encourage Obama to cut spending.

    Anyway, the panic about the US that is rampant seems to us to be hugely over-exaggerated.


  42. KenS on January 26, 2010 at 1:35 pm

    Hi Ed & Duncan:
    Ed, what if the next bubble is the US dollar itself?
    I agree with Duncan. Statistics are not being measured the same way they were in previous decades. From money supply and inflation to GDP, things are being excluded for political convenience and both sides of the house are doing it.
    For example, (from Wikipedia), if we are talking US government debt here, are we talking about “on or off balance sheet”…
    Although not included in the figures reported by the government, the U.S. government has moved to more explicitly support the soundness of obligations of Freddie Mac and Fannie Mae, starting in July via the Housing and Economic Recovery Act of 2008, and the September 7, 2008 Federal Housing Finance Agency (FHFA) conservatorship of both government sponsored enterprises (GSEs). The on- or off-balance sheet obligations of those two independent GSEs is just over $5 trillion.[16] The government accounts for these corporations as if they are unconnected to its balance sheet…
    …Ed, you speak of past trends as being no guarantee of future directions but consider the possibility that the once powerhouse US economy may be a major trend that has run out of steam (or cheap oil if you believe Jeff Rubin – Why Your World Is About To Get A Whole Lot smaller).
    The Austrian school of economics believes that investments are built on savings. Relatively speaking, the U.S. has none. The government is being reduced to buying its own debt instruments through banks it lends the money to. Consumer and Government debt are at all time highs and individual savings (the true strength of an economy) are being spent on consumables, not invested in companies that make real things that improve the economy.
    Check the manufacturing location of most of those consumables and you will find off shore (mainly China) labels. They (Chinese) have savings, granted, not a lot per person but there are a LOT of them. Their money is undervalued, the US is WAY overvalued.

    Ed, I hope you are right but I doubt it and I think the ‘recovery’ we are seeing is just the bailout money working its way through the system. If the money supply “printing press” gets turned off things will quickly grind to a halt. If they keep spinning then look out for hyper inflation in the US.

  43. Duncan on January 26, 2010 at 2:36 pm

    You’ve hit the nail on the head. All we’re seeing so far is the stimulus money working its way through the system. Proof of this is all over the headlines. The latest indicator that we’re nowhere close to a real recovery is the fact that the US Gov’t are extending the $8000.00 home buyers credit and expanding the terms of the program. Why would they do this if the economy was picking up steam? The strength in the US dollar at the moment is simply due to deleveraging. There’s a huge carry trade and the recent statements from China regarding tightening credit and slowing their economy has the institutions repatriating their dollars and getting out of riskier assets. The long term trend is only going to be down for the dollar though. For all of the talk to the contrary, the US Fed wants a weak dollar and their policies speak louder than their words in this regard. Either way, commodities will be the first asset class to increase if the world economy either improves or not. As most are priced in US dollars, their intrinsic value will rise as the US dollar loses purchasing power. I wouldn’t want to own any US dollars for the long haul. At least commodities will always be worth something. Shares in a publicly traded company can quickly become worthless if things go South. Commodities are the logical and least risky investment of choice for the next few decades.

  44. Duncan on January 26, 2010 at 2:53 pm

    I see from your posts that you’re a contrarian investor? I get the fact that it’s often wise to go against the herd and I myself have done this on numerous occasions. But I do believe that logic and fundamentals are the better reason to invest in anything. Markets are irrational and change on a heartbeat, so in the short to medium term, who knows (or cares?) what happens unless you’re day trading. I’m in this for the long haul (20+ years) and don’t care what happens on a day to day basis, unless I see major changes developing that rattle the core of my investment strategy.

    I fully agree that the States biggest asset is their ability to innovate. Unfortunately though, due to increased regulations and an increasingly litigious society it’s becoming harder for those innovations to be brought into fruition. But who knows, policy can quickly change and they could still come out on top. My point is that whether the US economy picks up or not, it doesn’t matter if you’re in commodities. They will rise with or without the US! One thing is for certain though, that the long term trend for the dollar is down. Commodities will never be worthless, can you say the same for shares of a corporation?

  45. Ed Rempel on January 27, 2010 at 1:15 am

    Hi Duncan,

    No, I’m not really a contrarian.We research and invest with the world’s top investors.

    If you take the top investors that beat their indexes over long periods of time, most are value investors. Value investors rarely buy what is currently popular, since there is usually little value there.

    We get to hear the opinions of these All-Star Fund Managers regularly. They are very different from the average fund manager working for a big institution and usually very different from currently popular opinions or those in the media.

    What I hear makes me a big optimist. I have faith in free enterprise, free trade, human ingenuity and the stock market. I don’t foresee anything dire for the U.S.

    The issue with commodities is that, by definition, a commodity is an item without unique characteristics. Oil or gold or wheat from one supplier is the same as from the next, so the only way to compete is on price. Unless there is a permanent shortage of supply. commodities will have low prices long term.

    Your comments about corporations are true, but don’t really apply to the stock market. I would suggest you read the recent article on MDJ about the Risks of the Stock Market.


  46. Duncan on January 27, 2010 at 2:04 am

    I wonder if you could share the news that makes you optimistic about the US economy? Isn’t Canada in a much better position moving forward? Do you believe in the way GDP is measured and understand how the government silently let’s inflation run rampant and publicly pretents to fight a mythical beast called “deflation”? Doesn’t the huge trade deficit with china sound the alarm bells? I’m a huge believer in the free market and human innovation. I’m also someone who believes in reading past the headlines and official reports and looking at the fundamentals. It’s really not complicated yet so many are blind to the inevitable fact that a society without real savings and that measures it’s economy by how much it’s people consume is destined to fail. It’s no different than you or I living on credit and having our foreign friends pay our bills on return for IOU’s. Real US debt if you take into account unfunded liabilities such as pension payments payable is close to $50 Trillion dollars! I’m not against equities in general, I just think commodities are the sure bet moving forward. I’d buy shares in Canada and China before I’d touch anything in the US. We’re in a W shaped recovery and I believe the markets will retest their lows by around June. If you like value, sit on cash and remain liquid. The bargains will get much , much cheaper very soon. The consensus at the Vancouver World Outlook Conference this year mirrors my opinions. Let’s talk later this year and compare our strategies then?

  47. Ed Rempel on January 29, 2010 at 10:45 pm

    Hi Duncan,

    Definitely let’s talk later this year. Our view is that the markets a year ago were in “Irrational Pessimism” (see article on this site), so why would we go back to that?

    Every loss of 30% or more in the history of the S&P500 had a gain of more than 30% within 1-2 years, except the 2009 was only +27% after 2008’s -37%. The stock market has always been resilient.

    If you noticed my recent articles on “Stock Market Risks” on this site, the general view of investors is that the stock market is far more risky than it actually is. In actual fact, other than in the 1930s, the S&P500 has fully recovered from every calendar year decline within 4 years and 88% of declines were fully recovered in 1-2 years.

    So far, we have seen a large recovery that we expected that was a realization that we are not going off a cliff, but the real recovery has not really started yet. The economic news is mostly good, with GDP back to positive and most companies showing good earnings and beating expectations.

    Do you remember the market 10 years ago? The US was a world-beater with large surpluses, at the centre of a technology boom, and DOW was going to 35,000 (book). Those exaggerated expectations were to high and built into the market at the time, which lead to the only decade (other than the 1930s) ever with not growth in the US market.

    Now the expectations are the opposite. The US is widely expected to collapse, the dollar will crash, the twin deficits will result in hyper-inflation, China will pass it soon and the US will lose its place as the main world currency. Now the expectations are so low that if the US merely survives, it will shock everyone.

    Oil prices were about $10/barrel and gold was about $250/oz. with no prospects of rising.

    Ten years ago, the bar of success was 20 feet high for the US and inches high for commodities. Today it is 6 inches off the ground and almost impossible not to outperform for the US, while the expectations are 20-feet high for commodities.

    You saw the US debt figures on Wikipedia. The US debt is about the same as 15 years ago and about half of what it was in the 1940s. Both times they paid it down with a few years of surpluses. You can’t add debt of government-controlled organizations like Freddie Mac & Fanny Mae without including their assets. Actual debt is manageable so far.

    The only issue with the trade deficit is the currency. Since everyone already knows about it and the US dollar has already fallen, is this not already built into today’s price for th US dollar?

    I can’t see how inflation can happen. If we have pressures, the Fed will raise rates to keep inflation low. So our view is that inflation will definitely remain low. The only question is whether the will have to raise rates to keep it low. If they do raise rates, that will tend to push the US dollar up – not down.

    The fear of inflation seems to discount the facts that the US continues to import tons of goods at very cheap prices, has continually new and cheaper technology and demographics supporting lower and lower inflation.

    The supply of commodities will eventually catch up. No matter how much demand increases, commodity prices should fall back to normal, unless there is a real permanent shortage. Higher demand leads to higher supply which means the longer term price of commodities should remain low. This is in sharp contrast to the current expectations that commodity prices will continue to rise into the stratosphere.

    Chasing the out-performers of the recent past is not good investing. We made a killing in the last year by going much more aggressive at the bottom of the market, when the huge recovery was obvious to anyone with faith in the economy and humans.

    Today, the global and US markets are only a bit over half recovered. The low-quality stocks have recovered a lot, but the high quality stocks have hardly moved. The main recovery is still to come.

    Remember, what actually happens does not affect the market. What affects the market is what actually happens COMPARED TO EXPECTATIONS. The US will almost definitely beat expectations, while it is hard to see how commodities can possibly match the expectations of continued double-digit growth.


  48. Duncan on January 30, 2010 at 12:45 pm

    Markets a year ago we’re oversold due to forced and massive de-leveraging world wide. The US dollar rose in value during this time as all of the dollars invested abroad were re-patriated as foreign assets were sold off.

    All I’m seeing so far is a statistical recovery. GDP numbers came in at 5.7 % recently. Sounds impressive right? I think we need to look a little deeper into those numbers though. First, over 60% of this growth came from inventory rebuilding. Digging deeper, you can see that inventories had dropped below sales, so a replenishment was required. Increasing inventories add to GDP, while sales from inventories decrease GDP. I’m not suggesting that businesses building inventories is a bad thing, however that growth will only continue if sales grow. To this point, if you examine the consumer spending data, you’ll see that it actually declined in the 4th quarter both annually and from the previous quarter. US domestic demand also declined from 2.3% in the third quarter to just 1.7% in the fourth quarter. That does not bode well for signs of economic strength.

    Imports also fell over the 4th quarter which is strange considering that in a heavy inventory rebuilding cycle, a portion of the goods that businesses need to build their products come from overseas. These falling imports have the effect thought of an increase in the statistical GDP number based on how GDP is calculated.

    Finally, the impact of stimulus spending in the US accounted for 90% of the growth in the third quarter. In addition, there was a major decline in labour input in the fourth quarter(contracted by .50%). Such a decline has never coincided with a GDP this good.

    Unemployment rose (hundreds of thousands of jobs were lost) in the fourth quarter. Sales taxes and income tax receipts are still falling. It’s hard to be serious in believing in a real recovery with unemployment still rising!

    The US has tried to borrow it’s way out of debt to “stimulate” economic growth. As a nation that’s transformed over the years from manufacturing to a service based economy, they no longer create tangible products on a large scale to the degree of other nations do. As a result, all the stimulus money has done is buy them a little time creating even higher debt levels that will be even more difficult to reign in.

    Let’s look at the US Debt figures a little deeper. In the 1940’s when debt was at all time highs as percentage of GDP, the US ended a world war and all of the “baby” boomers, went back to work. The US at that time was the world’s major manufacturer and surpassed the UK in economic might. Because they had a huge domestic manufacturing base and the population to work in those (at the time) very well paying jobs, their economy took off and they were quickly able to pay down the debts. Flash forward to the last decade, and the US economy has turned from production to hyper consumption. In the eighties, they were still a creditor nation. Now, they are the world’s largest debtor nation. The debt numbers also do not include all of their unfunded liabilities like social security and medical care for the elderly. If you add in these numbers, the real debt number is close to $50 TRILLION!!!! Certainly much higher than anytime in the past, and it’s growing far more quickly than any real economic growth.

    I’ll tell a story to explain why the trade deficit is a far greater problem than many realize and why the US dollar will eventually experience a total collapse.
    Imagine 4 people stranded on an island, three chinese workers and one millionaire American. They come to an agreement that they’ll each assign tasks to one another to sustain themselves. They agree that three of them will hunt, harvest and prepare the food while the fourth, the American millionaire will eat all of the food, leaving them just enough scraps left over to sustain themselves after he dines. In addition, the American agreed to issue each of them IOU’s for every meal that will entitle them to a portion of his wealth at some future date when they eventually get off the island. This goes on for some time and the American spends his days lounging and eating on the beach while the other three toil and labour to prepare food for him. One day though, the American has a heart attack and dies. At first, the other three panic, realizing that their IOU’s could now be worthless as the payee is no longer able to make good on his promise! But in the mean while, they’re still stuck on the island and life must go on. They agree to alternate between each other to share the work load so that all of them get a little recreation time and the opportunity to relax on the beach. They also now have more food, that they equally distribute among one another and enjoy better nutrition and a better quality of life. Years pass, and they eventually forget all about the American. His paper IOU’s were used to start campfires and have long been burned. They no longer need him, and realized that their life on the island was actually far more rewarding without him anyway!

    Do you think my story’s a little far fetched? Maybe a little, but isn’t this exactly what China and the rest of the world have been doing for some time now? Trading their real goods that they’ve worked hard to produce for IOU’s in the form of treasuries (keeping their own currency and thus global purchasing power artificially low)? to say that the world can’t function without the US consumer is like saying farming can’t continue without locust infestations! Consumption of scarce resources in return for paper IOU’s does not bode well for long term productivity.

    I end with a question. Can you please explain what sectors of the US economy will fuel a future sustained recovery? And what durable advantage to they have over other nations moving forward? Innovation and education are certainly two huge strengths I can think of, but the amount of regulation and red tape that exists in the US will likely force the best and brightest to export their knowledge to other nations where such barriers don’t exist. The way I see it is that US assets (real estate etc). will eventually go up in price after the dollar collapses, but it will be foreigners buying it up not Americans.


  49. Ed Rempel on January 30, 2010 at 11:21 pm

    Hi Duncan,

    Let’s just check at the end of this year to see how it went. That is only one year, which is a short period of time, but we are still confident in a continued recovery over the next year or 2 – just like it has from all previous declines.

    All the stats you mentioned are irrelevant, unless you can estimate to what extent they are already priced into today’s market prices. Since those are all well-known, I doubt any of them will affect the markets.

    The US still dominates in most sectors – retail, distribution, marketing, technology, telecom, health care & finance, and locally in utilities and real estate.

    A sector does not have to perform well to outperform – just better than expectations. For the US, expectations are so low, it is hard to imaging not beating them. For example, among the best-performing stocks last year were Ford (456%), Bank of America (124%), & Citibank (77%). These companies did not have awesome performance. They just survived and didn’t lose money – which was infinitely higher than was expected of them.


  50. Duncan on February 1, 2010 at 5:14 pm

    I do agree with you that there are certainly opportunities in many sectors in the US. The challenge however is “guessing” which sector, and specifically which companies will “outperform”. Long term, I’m bearish on the US economy for all of the reasons I’ve mentioned previously. I’d rather invest my money for the long run and not chase trends in the market place. That’s why I’m a long term commodities holder. If I’m 100% incorrect and the US economy rebounds beyond my wildest dreams, it will put pressure on the supply of commodities and the mining companies that “extract” them. Increased demand with a finite supply only leads to long term higher prices. I see it as a win either way.
    I wish only the best of luck to all investors in these uncertain times and hope we all at the very least preserve our capital moving forward!

  51. Cris on November 26, 2010 at 1:39 am

    So, any advice on how to find SM advisors?

    FrugalTrader, are you planning any updates for this post?

  52. Duncan on April 5, 2011 at 12:47 am

    Just a quick follow up as promised over a year later- If you read my past comments on this article, you can see my strategy has really paid off. ( I’m always happy to share my financial planning strategies to anyone who’s interested!) – Check my blog at http://dmacpherson.com

    What are your thoughts moving forward?

  53. LuBoy on April 28, 2011 at 2:19 pm

    Hello everyone,

    Pretty interesting article and comments, my congrats!

    I have some questions regarding a topic that seems to me somewhat similar to a SM strategy. My condo mortgage term is almost due; I wanted to sell it and buy a house. When I went to my FI to discuss my options, they recommended that I : (i) keep the condo as rental investment and renew the condo mortgage (ii) get a HELOC on the condo and use it to finance the downpayment of the house (iii) get a mortage for the house (purchase price – downpayment). The house will be my primary residence with a basement that I plan to rent as well. According to them, on the condo mortgage / HELOC combination, I can get tax deduction on both: the interests payment of the condo morgtage + the interest payment on the HELOC used to finance the downpayment of the house.

    1. Does this arrangement make sense for you? What advantages / disadvantages / risks do you see on it? Can I really deduct interest payments on the HELOC following this strategy?

    2. They also offered two options for the condo mortgage / HELOC combination:
    a) Renew the condo mortgage and get a HELOC = 80% Condo Value – Condo Mortgage and then use it to finance the house downpayment. (mortgage rate ~prime – 0.85% and HELOC rate ~ prime + 1%)
    b) Get a HELOC for 80% Condo Value and use it to pay the condo mortage and then to finance the house downpayment. (HELOC rate ~ prime + 0.5%)

    What option would you pick and why? Why would I pick option b) over a) and pay 1.35% more on the mortage component? Am I missing something, perhaps some tax aspects?

    Off topic: For tax purposes on the investment property, I can deduct condo mortgage interest payments, mgtm fees and insurance from the rental income and have to pay taxes on the outstanding balance. However, as I am paying the condo mortgage, the interest payment gets reduced and so the tax deduction, which leaves me paying more taxes every year. Any suggestions on how to optimize this? Perhaps by taking option b) on the condo mortgage / HELOC combination (see question 2)

    Thanks a lot in advance,


  54. Ed Rempel on May 1, 2011 at 1:43 pm

    Hi LuBoy,

    If you borrow against your condo to buy a home that will be your principal residence, the interest is NOT deductible.

    This is one of the most common errors made by people with rental properties. Just to be clear, interest is deductible because of the purpose for which the money was borrowed, not what was used as security or the type of loan.

    The extra amount you borrow to buy your home will not be deductible, since the purpose of borrowing is to buy a principal residence. Whether this amount is a mortgage or a credit line. does not affect whether or not it is deductible. A mortgage will be at a lower rate.

    The first question is whether or not keeping the condo as a rental is a good idea. It will likely make you some money over the years, but generally condos don’t make very good rental properties. Older, multiple unit buildings are usually much better investments.

    This also depends on what you would do otherwise. Having a rental vs. not having one is probably better. If you are looking at the Smith Manoeuvre, there are multiple ways to do it. If you have a rental, you can do the SM on both. Or if you don’t have a rental, you could use the extra equity and possibly an investment loan to invest a similar amount, except in the stock market instead of keeping the rental. The stock market has far higher long term growth (6 times higher return in the last 30 years), so this strategy could give you far higher returns without the hassle of being a landlord.

    The second question is, if you keep the condo, how should you structure it? I would suggest:

    1. Since your mortgage is coming due, refinance it with a readvanceable mortgage that allows multiple mortgages and credit lines.
    2. Keep your existing balance as a mortgage portion. This amount needs to be kept separate, since it will be the only tax deductible amount.
    3. Borrow enough for the 20% down on your home against the condo, and then make that amount a separate mortgage portion.

    As for rates, the prime -.85% is probably the best mortgage rate now, but you can get the credit line portion at prime +.5%. The prime -.85% is only in 5-year closed mortgages. You should only lock in for 5 years if you are quite sure that you will not need to refinance or want to sell for at least 5 years. The 1-year fixed is also a good option. We are getting 2.64% today.


  55. David Kwan on November 9, 2011 at 6:23 pm

    Hi Ed,

    I see you’re quite active helping reader of this blog and I have a question.

    I am getting a $80k non-automatically readvacement HELOC from HSBC at P+.75, also with a $352k variable-close mortgage at P-.79 mutures in 2016 (very recent renewal) biweekly payment of $700 which around $400 gets into the principle.

    Here is my plan,
    I moved into a new house in a new community, corner lot, with raised basement. So, we got lots of sunshine. So, I am thinking of putting the HELOC into a microFIT project, which going to cost me about $65k. Since local hydro company (Hydro Ottawa in my area) guarantee to buy my generated electricity at $.802 per kW for the next 20 years.

    So, with the investment of $65k, I will get about $880 per month (or 1.35%/month or 16%p.a.), as business income. So, the cost of the project surely tax-deductible with no problem with the CRA. Since the 16% is not compounding, and so I have an additional thought.

    I will put the $880/month income towards any investment for additonal growth or income for the next 20 years or so.

    So I have the following questions:
    1) Does the general plan make sense?
    2) I understand I have to declare money from Hydro Ottawa as interest each year, rather than deferred. Does it make sense to use as SM strategy?
    3) With the additional investment of $880/month, does it matter now return of capital is part of the distribution since the “borrowed fund” is for microFIT project.

    Thank you so much.

  56. Ed Rempel on November 11, 2011 at 2:42 am

    Hi David,

    Interesting strategy. Does it make sense?

    Here is how I see it from several different perspectives.

    1. Tax – It appears that tax deductibility of the interest should be no problem. The MicroFIT project is essentially a business. You are buying equipment that probably would be worth nothing (or less because of the cost of removing it) at the end of 20 years, but the income is all business income, not return of capital (as far as I know). You are just receiving income for selling power.
    2. MicroFIT project – I’m not an expert on the MicroFIT projects, but anything with a 16% return must be high risk. You need to understand the risks before you proceed. We have met a few people that looked into them, so my knowledge is just indirect, but I have heard that some people could not go on the grid and received nothing, some received lower rates, the power created varied based on weather and the exact directness of the angle towards the sun, there were questions about the costs of insurance and maintenance, are you really going to stay in this home for 20 years, what control do you have with only one possible customer, and what is the cost of removing the obsolete equipment at the end of 20 years? My understanding is that the $880/month is not guaranteed and that there are various costs and risks that you should be aware of.
    3. Use as SM strategy? – You could enhance the strategy by doing it as an SM strategy. If you would get a readvanceable mortgage instead, then you could capitalize the interest payment, so that you do not have to pay the credit line interest from your cash flow. You could use that money to pay down your mortgage more quickly and reborrow to invest.
    4. Add Cash Dam – If you had a readvanceable, you could also pay the MicroFIT income onto your mortgage each month and also reborrow that to invest. This would convert most or all of your mortgage to tax deductible.
    5. Interest rates – The best rates we are getting today on readvanceable mortgages is prime -.65% on the mortgage (slightly higher than your rate) and prime +.5% on the credit line portion (lower than your rate). While the net interest cost in month 1 would be slightly higher, the benefit of converting your mortgage to tax deductible from both the SM and Cash Dam would easily make this worth it.
    6. Investment – How does the MicroFIT compare to other investments? Once you understand the full cost and risk, I expect you will find that your expected rate of return is quite a bit lower than 16%. It is also fully taxed as business income, so even if the return is 16%, if you are in a 40% tax bracket, you would pay 6.4% tax, making your net 9.6%. A long term average return on the stock market is 10-11% and capital gains tax would be only 2% (which can mainly be deferred many years into the future). In other words, even if the return is really 16% and risk reasonable, the after tax expected return is only slightly more than the stock market.

    Does that answer your questions, David?


  57. JG on December 21, 2011 at 1:31 pm

    Hello, Does anyone have a SM set up with Scotibank, I would like to know details about them letting capitalize the interest/if not how did you overcome this?
    Second part of the question is, as most banks would not let capitalize the interest, and provided you withdraw every month the amount due from the HELOC to say a chequing account and from there pay back to theHELOC, would there be any tax implications on this. Thank you.

  58. Ed Rempel on December 21, 2011 at 9:46 pm

    Hi JG,

    We have a few clients with SM at Scotia. It works, but requires more manual transactions each month than the readvanceable mortgages at several other banks.

    There are several types of their STEP mortgage that have different options, so you need to be clear on the options that you will have.

    The biggest problem was that you needed to go into the branch every month to get your credit line increased, but most of the setups today have an automatic credit line increase.

    The other issue is that you cannot invest directly from the credit line. Therefore, it may take manual transactions to invest monthly and the money to invest may have to be transferred to a separate chequing account.

    They don’t automatically capitalize interest, like the other banks, but you can get around this with “guerrilla capitalization” – which is essentially the strategy you mentioned. Pay the interest from your chequing, but then immediately take the money back by taking the exact same amount from your credit line to the chequing account.

    You need to be able to show that they money borrowed was the money that was used to pay the interest on the investment credit line. If so, then the credit line normally remains 100% tax deductible.


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