What is driving Canadian FIRE?
Everyone is affected by the FIRE economy in one way or another. FIRE is an acronym that stands for Finance, Insurance, and Real Estate. Together, these 4 industries are growing over five times faster than the general economy and represent about 1/5th of Canada’s total economic output. FIRE is especially important in BC. Although it employs just 6% of the province’s workforce, it generates 24% of the province’s GDP.
Other industries such as manufacturing and mining produce things of intrinsic value so their growth tends to be linear. But FIRE industries can scale more quickly. Finance and insurance products often involve derivatives, annuities, and other intangible products. Banks and credit unions can literally increase the credit supply through fractional reserve banking – essentially creating money without actually producing anything material. The real estate industry can unlock value from existing land assets with re-zoning and densification. These advantages inherent in the FIRE economy allow for faster expansion and exponential growth.
Another tailwind for FIRE is population growth. Our charismatic leader wants to welcome 341,000 new immigrants into Canada in 2020, more than from previous years. All of those people will need homes. Many will require a mortgage and insurance – further expanding the FIRE industries.
How to invest in the FIRE sectors
FIRE should continue to outgrow the general economy in the future. The most direct way to capture some of this growth is by working in one of these fields. I have some friends who work in finance and real estate. They are all making a decent living. 🙂 If you are just starting school or considering a career change, this can be something to think about. But for the rest of us, investing in FIRE businesses that pay dividends should pay off well in the long run.
How safe is playing with FIRE?
The risk of investing in the FIRE economy is a slowdown in these industries. However policy makers won’t let that happen easily. Instead of allowing markets to naturally go up and down, government officials have proven through their actions that they intend to accommodate perpetual economic growth. A real estate crash could drag down all other industries. No governing body wants to be responsible for a housing lead economic recession, or worse.
This is why the Bank of Canada lowered interest rates three times in March. It also embarked on an unprecedented bond-buying program to ease the flow of credit. Its balance sheet tripled to $392 billion by early March. There is no way the central bank will allow a pandemic wave to put out the FIRE.
However reducing interest rates encourages more borrowing. That’s exactly what folks are doing and it’s a big problem. Consumer credit is up 0.31% monthly in March. And mortgages grew by 0.49% monthly, and 5.3% annually. As the lockdown measures are slowly lifted Canadians will likely look for more money to borrow.
Our central bank doesn’t like it when we borrow too much. In recent years it has repeatedly warned Canadians that our high level of debt puts our entire economy in jeopardy. The latest alert came a week ago when household debt reached a record high of $2.28 trillion.
But what did policy makers expect? They’re the ones who made it more convenient and more affordable to get bigger loans in the first place. It’s only natural that people will respond to incentives.
Since the FIRE sectors are backed by policy makers, investing in them should be relatively safe. 🙂 Large chartered banks such as TD, Royal Bank (RY), and Scotia Bank (BNS) should perform well over time. Insurance company stocks like Great-West (GWO) and Sun Life (SLF) have been beaten up by the recent bear market and are starting to look attractive. REITs are a good way into the real estate market.
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Random Useless Fact:
The mechanical computer mouse was invented in 1972.
Wow! Everyday is a school day when I read your updates. I logged on thinking FIRE referred to Financial Independence, Retire Early…but instead discovered something new and interesting. As an immigrant with a large family, I have been carefully nurturing my tiny pot of stocks and was about to cut the floundering TD loose. Having read your great post, maybe I will now hold on to TD ….keep up the good work!
Thanks Fee. The big banks have been crushed recently. It has not been easy to watch. But maybe it’s a good thing as it allows us to buy them at a lower cost. The longer the stock market remains low, the bigger our potential profit will be when we retire and cash out. Last month TD’s CEO said they don’t plan to cut dividends despite the economic slowdown. Personally I think buying TD today with a 5.4% annual dividend yield is better than just about any other alternative out there assuming a long term investment horizon.
Haha, this was not what I was expecting when I clicked this link. I thought you were going to talk about FIRE (retire early). I have never heard of the other FIRE acronym.
I figure I would pass that torch to other FIRE bloggers now, and write about less known topics. 🙂 I remember when OG writers like you and I were talking about FI and early retirement before the FIRE movement became mainstream. Those were good times.
Haha I WAS?! I don’t remember. I guess it was labeled something different back then or didn’t have a label. Yeah, it has become very mainstream. Hah, “OG” writer. You made my day.
Thanks for educating me and other people about this. Much needed.
You’re welcome. 🙂