Sgt. Barnes


DOUG  By Guest Blogger Doug Rowat


There are investment lessons to be found in the most unlikely of places.

Take, for instance, the first 20 seconds of this rather intense scene from Oliver Stone’s Platoon.

As Sgt. Barnes helpfully pointed out to that young soldier, it’s often in one’s best interests to “take the pain” even when—and sometimes especially when—the world around is out of control.

And so it is with investing. Quietly absorbing discomfort, particularly major discomfort, is often the best thing for your portfolio results. And what’s the most frequent source of discomfort for investors? Volatility.

There are two main types of volatility. The first is the face-melting kind, which occurs infrequently, say, once every three to five years. Recent examples of this kind of volatility occurred during the European sovereign debt crisis, the surprise Brexit vote and, of course, the Covid-19 crisis. In fact, during the Covid crisis the CBOE Volatility Index (VIX), which measures the magnitude of price change (volatility) on the S&P 500, reached an all-time high of 82.7 in February 2020, eclipsing the previous 80.7 record set during the financial crisis. For some perspective, the VIX, as of this writing, is at about 17. Investors are most likely to make emotional, fear-fueled investment decisions during such periods. This kind of volatility basically amounts to a bullet wound to the chest.

The second kind of volatility is less intense, but occurs with more regularity. Every single year, for example, the S&P 500 experiences intra-year drops. The average intra-year decline over the past 40 years has been about 14%, but it’s sometimes as mild as only 3%. Investors are less prone to make emotional investment decisions during any one of these less-intense volatility periods, but the sheer frequency of them still makes poor investment decisions a constant risk. This kind of volatility amounts to a bee sting, but if you get enough bee stings…

Both types of volatility result in an onslaught of behavioural biases: loss aversion, recency bias, herd behaviour, overconfidence and so on. All of these biases can be combated through balance and diversification, infrequent trading, rebalancing, avoiding incessant media newsflow and seeking professional investment advice.

However, it’s impossible to avoid all the hardship that capital-market investing brings. Sometimes you just have to suffer. And this is difficult, especially when you don’t have assurances that all the suffering will be worth it in the end.

While I can’t guarantee the outcome after the next round of face-melting volatility, I can show you how the S&P 500 has soared past mountains of historical volatility over the last 10 years. It’s also useful to highlight that the S&P 500 continues to advance strongly throughout the current recession (a common occurrence for equity markets):

S&P 500 (blue line, LHS) vs CBOE Volatility Index (red line, RHS) – 10 years

Source: Federal Reserve Economic Data; shaded are – recession

And while I can’t guarantee the outcome after the next, and inevitable, intra-year market decline, I can show you that the vast majority of the time, despite these declines, the S&P 500 ultimately finishes the year in the black:

S&P 500 intra-year declines vs calendar year returns.

Source: JP Morgan Asset Management ; Intra-year drop refers to the largest market drops from a peak to a trough during the year; Returns don’t include dividends

Volatility is unavoidable, but if you give in to it (sell assets) every time it occurs, it will kill your performance. If you can endure the suffering that it inflicts, your portfolio will almost certainly come out the other side of it in a better place.

So, the next time the VIX spikes (and it will), think of Sgt. Barnes leaning over you and take the pain. He’s a horrible SOB, but he’s actually doing what’s in your best interests.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.



To the core

Just three more sleeps before B-Day.

Will Chrystia and Justin drop the hammer on housing? Nibble around the edges? Throw gas on the flames? The debate has been raging. Some bankers (RBC, BMO) are literally begging for a govy intervention to save people from themselves. Other financial heavyweights (TD, Scotia) argue things will self-correct, especially as Covid fades and a ton of new listings hit the market.

Realtors are lovin’ it. Buyers are disgusted. Prices have spiked wildly amid cheap money, WFH, aggressive nesting and now dollops of FOMO. What a wicked combination this has been. It’s historic. I thought I’d lived through the worst housing escalation ever in the late 1980s. Nope. This is far more intense and, maybe, destructive.

The facts are arresting. Shocking, even.

  • More properties changed hands last month than… ever. Over seventy-six thousand sales.
  • The average national house price is up 31.6% in one year. Nothing in history has come close. It sits at $713,700, so the average household cannot afford the average place.
  • The insanity is everywhere. For the first time, a real estate bubble is more suburban, rural, small-town than urban. This is completely new and socially disruptive. In Bancroft, Sooke, Owen Sound and Nanoose, Wolfville or Peachland they wonder what the hell hit them.
  • Levels of inventory have collapsed. The long-term average was five months. Now it’s less than two. Another record.
  • Leverage is off the charts. Cheap money and the delusional belief rates will never increase have seduced buyers into new territory. Almost a fifth of borrowers now have debts equal to 450% or more of their incomes.

So sales are up 76% over last year and houses cost a third more. Nobody saw this coming in March of 2020 when something called Covid-19 caused society to go into lockdowns, quarantines and restrictions unknown in modern history. A year later over a million of us got the virus, 23,500 Canadians have died and our biggest provinces are going dark as the third wave hits. Five million people are still working from home and public finances are shot. These are uncharted times.

Should government act? Or let the market run hot and possibly implode? Will the greater fool be the fool who follows, or the one who bailed?

It was interesting to read the latest missive from mortgage broker/blogger Rob McLister. “The fear is that the market is like a nuclear reactor running too hot, i.e. prone to an accident,” he says. “It’s not Chernobyl by any means, but a Chalk River-style partial meltdown could be in the cards if market imbalances take values much higher.” And he echoes what a certain pathetic blog has been yammering about for months now…

This is truly a once-in-a-generation nationwide aberration that’s leaving young buyers with fewer and fewer homeownership options. Buyer desperation has been growing by the week and it’s leading a record number of people to pay as much as lenders will approve them for.”

Meanwhile mortgage rates are plumping a little, which has spurred buyers into action. The stress test will get more onerous starting June 1st, which has accelerated buying intentions. Federal immigration quotas are about to expand, adding buyers. Building material supplies have crashed and prices bloated, spiking construction costs. And FOMO – fear of missing out – is at screaming pitch as news of the March housing stats spreads. In short, the melt-up that could lead to a melt-down continues.

Oh, and did we mention benchmark housing prices nationally rose by an annualized 37.2% last month? In Woodstock (birthplace of legendary bloggers) the price jump was 8% in March. Yup, that’s 96% per year. And it’s rutting season. What will April and May bring?

Outta control, of course. “The pace of Canadian home sales and prices is simply in uncharted territory,” says BeeMo’s Doug Porter. “Given the extreme market imbalance currently at play, almost entirely due to fiery demand, look for the record pace of price gains to spread far and wide beyond Ontario.” The old record for price hysteria – set in the late 1980s, “has been shattered.”

As mentioned, TD economists are cautioning against government diddling in the market (which rarely works), and instead saying it’s time for the Bank of Canada to throttle back on stimulus and start raising rates. “The quickest route to cooling this market and squeezing out speculation comes down to the interest rate channel, and therein lies the solution. Canada had one of the larger downward movements in mortgage rates relative to other countries, and the current monetary stance may no longer be appropriate for this segment of the market.”

Well, Monday could bring one of three outcomes. The feds do nothing of substance. The market roars. They can try to help newbie buyers with more incentives. The market roars. Or they can bring in a national spec tax, start taxing windfall equity profits on a graduated basis, increase minimum down payments, tighten debt ratios, encourage provinces to reform rules around blind auctions and end the tax-free raiding of RRSPs for real estate. But that’s not happening.

So, let it nuke.

About the picture: “I read your dog blog nearly every day,” writes Jane, “so I thought I’d toss you this photo of our 5-year old cockapoo, Charlie (or Chuckles as he is affectionately called). We weren’t looking for this designer faux-breed of a dog but a friend of ours knew of a young millennial couple who bought a cute little puppy before realizing just how much work puppies are. When they were expecting their first baby, the dog had to go. Chuckles settled right in with our family. People just need to have realistic expectations and not jump the gun. We like to call this photo “Covid hair, don’t care”.


Suck it up

When not doing my day job, I moderate comments on this blog and try not to throw up. It’s a challenge. Here’s a recent example.

April 14, 2021.
The beginning of the end. When two of the largest banks, JP Morgan Chase, and Wells Fargo, report earnings on the same day. Between these two banks, there is $5.1 TRILLION in assets, which is an astounding 23% of US GDP.
The world will be holding its breath to see those numbers because it will be a signal of what’s to come. And when the news of the ugly chain of corporate/personal defaults and the resulting massive holes in the big banks’ balance sheet hits…
Panic will set in… And global liquidity is going to start drying up… just like it did in 2008 when Bear Stearns and Lehman Brothers troubles became public. And stock markets will crash in a spectacular fashion… Hope everyone is liquid as of tonight. 14 hours from now may be too late.

Well, it’s April 15th now. Let’s review and see what happened. Bank of America hit a four-bagger. Revenue up 17%, underwriting fees tripled. Earnings were $5.1 billion, beating Street estimates of $4.3 billion.  More big gains at JPMorgan, Goldman and Wells. In total revenues were 50% above estimates and the beat on earnings was 82%. Equity trade is up. Bank deposits up. Loan loss provisions way down. “These are blowout numbers,” says my wizened buddy Ed Pennock.

Oh, and did you catch the latest US jobless claims? The lowest since the pandemic began. So the reopening trade continues, based not just on expectations and hopium, but on stats. Earnings season will be awesome. Up to four million Americans are being vaccinated daily. The unemployment rate has crashed. Biden is spending up a storm. Bond yields have tapered off again. Inflation is moderate. Consumers are juiced. Personal savings are at the highest point in decades.

So did you watch Jay Powell on Sixty Minutes a few days ago? The Fed boss was clear – the economy is fine; Covid will fade; the recovery is still in its baby stages; inflation’s no biggie; the central bank is not going to withdraw support any time soon.

Meanwhile, in case you missed it, here are some recent equity market scores. The S&P 500 has advanced 49% in a year. The Dow is ahead 44%. Bay Street has added 37%. The tech-heavy Nasdaq has returned 67%. People quivering in cash on the sidelines have actually lost money to inflation, if not also to tax.

Some folks worry P/E ratios are too high by historic standards (that is the relationship of a company’s stock price to its profits). They have a point. The numbers are elevated – but hardly a surprise. We’re at the tail-end of a global pandemic which triggered a deep recession, rapid loss of jobs, a crashing GDP and an earnings plunge. Now as the Q1 numbers stream in, mostly beating estimates, the ratios decline and stocks which seemed overvalued weeks ago now look fairly priced.

So, balanced and diversified portfolios returned more than 15% in 2019. They added just over 7% in 2020, the Year from Virus Hell. So far this year things are rocking and rolling quite nicely. Anything can happen, but most analysts look at the second half of 2021 and are forced to put on their shades. So bright.

In the entirely of my financial career, which now spans 35 years (yikes), I’ve seen the same movie repeatedly. Market advances are the norm. Market corrections are the exception. The economy expands far more often and substantially than it ever contracts. Crises are sharp and short. Recessions are rare and always brief. And now we know that pandemics always end.

But I’ve also learned fear is a far greater emotion than greed. Confidence is elusive and fleeting. Humans are more worried about losing what they have than eager to gain what they want. It’s why, eternally, grifters, spammers, charlatans and weasels use panic and scare tactics to flog their stuff – from doomer websites making money through clicks, to precious metals, cryptos, newsletters, proprietary research or ‘alternative’ investments.

Should you have fear now?

Sure, be afraid of the idiots around us who won’t get vaccinated. People who don’t understand what a stay-at-home order means. Be concerned about politicians making stuff up as they go along, or governments squandering a balanced future. Fret about polarization and detachment in society. The loss of responsibility. House lust, cats and Reddit.

But don’t worry about your wealth. Not if it’s in the right place. You know where that is.

Now, the daily cookie toss. Wish me luck.

About the picture: “My husband and I are big fans of your blog,” says Zandra. “I love all the great financial advice but I also love all the dog photos. Here is a great picture of our dog really showing off his crazy tongue! I would love to see my husband open his computer to read your blog and see our dog Kooper looking at him. Thank you for all you do!”


Mill Day

Enough clucking from the wrinklies in steerage about their fat real estate gains, dividend torrents, thirsty underwear and dangerous conservative urgings. Welcome to Millennial Wednesday here at GreaterFool. Today let’s muse on some of the things the kids are worried about, which means the oldies can spend this valuable time washing their Def Leppard T-shirts and swilling Rogaine.

First up, Patrick the urban dude. “I participated in your various surveys, so I understand the majority of your audience is much older than myself. I’m a 26 year old business professional (CPA by trade, but now working as a strategy consultant) living in downtown Toronto, and making a better-than-average pre-tax salary of just north of $100,000 with no assets and roughly $45k in my TFSA,” he reveals.

Like many younger audience members of your blog, I am renting a place for $1,350, which is a very good deal for the area that I live in. I made the choice to move downtown when I had the option of living with my parents, so that I can take advantage of the downturn in the rental market. I hope to become a homeowner – hopefully – by the time i’m in my mid-30s (which to me sounds reasonably ambitious).

My questions: (1) For higher-than-average income earning younger adults, when is the right time to open up my RRSP? Should I be allocating a good chunk of my income to RRSPs instead to get some tax benefits this year?

(2) What is the best way to manage capital allocation for different goals? Right now I have a well-diversified self-managed TFSA account. I myself am confused as to what this is for (retirement?). Does it make sense to open up a TFSA/RRSP specifically for buying a home with a less risky portfolio (assuming I’ll cash out in ~10 years)? Otherwise I would have to take a big chunk of my saving in the one TFSA account to fund a house, which I realize opens up more contribution room, but not sure if there is a better way to plan out my finances. Writing this email in between meetings, so apologies for any confusion.

First, P, if you’re living downtown for thirteen hundred bucks a month, paying nothing for a car, commuting, property tax, condo fees or property maintenance and saving most of your salary, why stop? The moment you decide to become a real estate owner will immerse you in debt, immobility, recurring costs and (sadly) adulting. Enjoy this time. Use it to build. As you are.

Now, RRSPs are meaningful and much misunderstood by the moister class. These are tax-shifting vehicles more than retirement accounts. You can chunk 18% of your earned income in there, use that to reduce taxable income, grow the money without paying a cent to Justin (even if you like him) then suck it out cheaply during a year of sabbatical, layoff or transition. Moreover, it’s the perfect thing to feed if you do end up succumbing to house lust.

The Home Buyers’ Plan allows a $35,000 withdrawal from the RSP for a deposit. No tax. You need not start making repayments for two years. Then you have a long 15 years to put the money back into the fund (if you miss a year that portion is added to income). In the year of purchase ensure you make the max contribution at least 90 days before using the HBP, so you’ll also have a tax refund to spend on new appliances.

As for establishing a separate registered, low-risk, account for a real estate buy ten years away, bad idea. You do not want to be all in bonds or wussy funds – stay balanced. Roaring Twenties, remember?

Here’s Ann. Simple question.

I am a new Ontario teacher and would like to start investing my salary since I live with my parents and I refuse to enter the crazy condo game. I have about $25,000 so far, but will add 50k every year. How do you suggest doing this for a small amount like this?

Other than hooking you up with Patrick, the first thing to do is stuff your TFSA. Teachers have enviable DB pensions (defined benefit), which means a sizeable portion of pay is directed into that plan, reducing RRSP contribution room. Besides, if a teacher retires with a sizeable RSP, when it is eventually turned into a RRIF (after age 71) the forced income can push you into a higher tax bracket. Nasty outcome.

But a giant TFSA in retirement can pump out a steady stream of cash flaw and not a single dollar will be counted as taxable income. So, start there. Load up that sucker, then spill the extra income into a non-registered account (B&D of course). In retirement this will also provide tax-efficient income, thanks to dividends and capital gains. And are you paying your parents rent, Anne? Do it.

Now, Brian is 28, works in construction, and understands the incredible benefit of the MSU. “Your blog has changed my life!” he says. “I recommend it to everyone I meet who brings up financial talk.”

My partner took my advice (all from you) and in a year went from $10,000 debt to $9,000 in a TFSA and $3,000 that’s going in an RESP for our newborn. Thank you so much! I make 55-75k a year with a net worth now of 36k.

Jan is on mat leave – she makes 45k a year now but as her seniority in her union goes up it’s 100k+ a year in 6-8 years. We just had a baby boy and rent a basement suite outside Vancouver for $1,200. I see so many people in the emails you share grovel to you and say your advice has helped them and then they ask some dumb ass question about how can they work out buying this house they NEED.

I am not gonna ask you that. I want to know how to get my partner and I’s net worth to 250k! I was wondering if everyone at my age is getting these huge mortgages and overleveraging is it not the smarter thing to try and get an investment loan? Is it smart or worth the risk for my partner and I to try and get loans to stuff our TFSAs full right now and let the gains grow while we make the payments ? And will they loan us even half of what people get in a mortgage? Thank you for your time and devotion to guiding Canadians financially.

Don’t do it, Brian. Borrowing money to invest seems seductive, but the rate on a non-secured loan would be high and using the bank’s capital would just ratchet up the stress level, maybe encourage you to seek higher gains by absorbing more risk.

Steady work, good prospects, new baby, low rent, no debt, solid relationship – you are far wealthier at this moment than so many others your age who lose their way. Be proud.

About the picture: “This is Marley,” writes blog dog Peppy Sue. “She’s our 12-year old chocolate Lab, an independent, sweet girl who loves showing off her toys to friends and strangers alike. We sometimes refer to this as ‘babies on parade’. She is much loved and adds joy to every day.”



We talk much about the real estate bubble. It’s real. And dangerous. Fueled by emotional buyers, greed and fear.

What about a financial bubble? Is that real? Also a looming risk?

Lately equity markets have been at record levels. The Dow. The S&P. The tech-heavy Nasdaq, even Bay Street. New York markets are up more than 40% year/year. The TSX has gained 35%. The recovery from the pandemic has been exactly twice as fast as the trip back from the 2008-9 credit crisis, despite being deeper, wider and a lot slimier.

Balanced and diversified portfolios are stable, growing and have gained a year’s worth of ground in a couple of months. Bond yields surged, then stabilized. P/E ratios (the relationship between a company’s stock price and its earnings) are at an historically high level, leading some worried people to believe things are bubbly and wobbly. They also point to the incredible amount of stimulus that has been thrown at markets and economies since Covid arrived – $20 trillion in fiscal spending by governments around the world, plus crashed interest rates and massive bond-buying by central banks.

This, they say, makes financial assets just as imperiled and gossamer as a $1.8 million suburban particleboard palace.

But wait. P/Es are high for a reason. Mr. Market is expecting big things. In fact, it sees the Roaring Twenties.

Is this rational? Aren’t we in the middle of a Third Wave with lockdowns, quarantines and desperate health care workers? Why would investors and markets be so blindly optimistic? And if financial assets are going parabolic, why can’t house prices do the same?

First, some of the reasons Mr. M is so aroused these days.

Look at the latest jobs numbers. In the States almost a million new hires (916,000) in March – the most since August. It was 50% higher than anyone expected. The jobless rate is back down to the 6% range. One year ago – April of 2020 – that number stood at 14.8%. This is an unprecedented labour market recovery. Ditto in Canada. We added 303,100 jobs last month, atop the 259,000 regained positions in February. It means of the three million jobs Covid incinerated, all but 296,000 have been recovered – even with the travel, tourism and hospitality sectors still  hobbled. Our unemployment rate has dropped from 13% to 7.5%.

Next, vaccines. They have changed, or will change, everything. The US is jabbing up to four million people a day in an inoculation campaign that has rocketed ahead with the Biden administration. In Canada we 21% of  beavers are now dosed (at least with the first jab) and our supply of vax is ramping up fast. Herd immunity in both countries should be achieved by late summer. Reopening fully will, the market believes, be upon us by autumn.

Next, profits. Expectations for corporate performance in the coming months are blazing. The latest guess is a jump for the first quarter of this year of about 18%, and for Q2 of between 45% and 55%. This comes on the back of surging consumer confidence, a record heap of cash in personal bank accounts and central bankers that will start to ease up on stimulus but promise to keep a lid on rates.

Meanwhile inflation is a threat, but remains low. April is a traditionally strong month for financial assets. The pace of vaccinations will explode higher over the next eight weeks. In the US Biden is spending huge gobs of money – $4.5 trillion more between the Covid bill and the infrastructure program – while in Ottawa we’ll learn next Monday how much more spending the T2 gang has planned. Expect a lot.

The Vix (that measure of fear and market volatility) has cratered over the last year, now at the lowest point since February of 2020 – when you never thought about virus. WFH will start to dissipate by the end of 2021, and the reopening trade in urban areas will be a major economic wave next year. Currently almost all of the 11 subsectors of the S&P 500 are flashing green. The latest factory data is awesome. Business activity, new orders and wholesale prices are all increasing. It’s the Biden Supercycle. The Roaring Twenties.

In short, invest. Stay invested. Be balanced and diversified. Try not to be a cowboy. Stop reading doomer websites. Wash your hands, keep the mask on, get a shot, focus on your dog and look forward to what’s coming.

Now, what about real estate?

Yup, the gasbag isn’t done yet. Cheap rates, WFH, nesting, suburban flight, tawdry realtor tricks and now FOMO & speculation have created a sad outcome.

But, wait. Economic reopening will eventually bring higher rates, which always impact housing. Absurd prices will narrow the universe of potential buyers. The enhanced stress test will reduce the amounts newbies can borrow. The winding-down of WFH (it won’t disappear, but seriously diminish) will hit suburban and rural values. The recent rapid rise in household debt has used up much future demand. And as markets stabilize, then correct, FOMO will be so gone.

It’s always good to remember what a bubble is. It’s created by a surge in prices driven by exuberant market behavior. In a bubble, assets sell for a huge premium over intrinsic value. And therefore, it never lasts.

We have one bubble now. It’s not stocks.

About the picture: “Blog dog Robin here, to introduce my little gal Lola, from Mexico.  Approximately 6 yrs old and possibly a Jack Russell/Beagle X,  Lola thinks she won the dog lottery when she met me and immigrated to Canada from the streets of Cabo 2 years ago now. Feel free to use her photo in your wonderful blog.  Thanks for all the advice and humour.  I never miss a day.”



There will be no capital gains tax inclusion rate increase in the budget next Monday. No creeping tax on realized home equity, either. And no wealth or inheritance tax.

That’s the will of the Liberal grassroots, as expressed in the policy conference just completed. Add to that comments by the federal housing minister (‘no capital gains on residential real estate) plus a major TV interview by Ontario MP and housing policy dude Adam Vaughan (‘we can’t penalize homeowners counting on their houses for retirement’) and the conclusion is inescapable….

The feds intend to let the market run hot. They’re also scared about whacking investment capital or the TSX during a nascent post-bug recovery. So accountants everywhere can stop fretting.

But, but, but. The odds are large for a new tax bracket Hoovering off more from the high-income crowd, boosting the top marginal to 55%. Maybe a tad more. Just listen to that giant sucking sound. By the way, no hike slated for overall corporate tax rates, as the Third Wave crashes hard into employers. However, count on a lot more spending, continued deficits and a relentless increase in public debt (not that anyone cares any more).

The Liberal rabble wants a UBI, which is doubtful. They also want a free drug plan for everybody (more likely) and universal cheap child care (a certainty). Our finance minister has declared this a ‘shecession’, called the loss of female jobs because of Covid ‘dangerous’ and pledged to have the state far more involved in kiddie welfare.

In short, the budget on Monday next will raise little in new revenue, commit to a huge amount of new spending, kick the can of debt/deficit down the road so Gen Z can deal with it when they stop watching TikToks, probably guarantee a nice house in a decent hood slides further from reach and sets the stage for a federal election in the autumn, right after herd immunity arrives.

Oh, one more thing…

“I’m an irritating millennial living in Vancouver,” writes Allison. “I earn well above the median household income in this self-important village of a city. I’ve been looking at buying a condo for the last 3 years and haven’t pulled the trigger because (1) everything I can afford as a single person sucks; and (2) my rent-and-invest strategy is working out pretty well.

But – I live in a crappy rental apartment that is hundreds of dollars below market. If I want to move I will pay at least $700 more per month in rent. That’s a big dent in what I can invest each month. So why do rents feel like they are increasing so much faster than income is? How is the grotesque real estate situation influencing or not influencing that? How can rents possibly be limited by local incomes when median household income is around $75k? I would love for you to write a post that digs into how rents are or aren’t related to real estate craziness and local incomes and what it means for the finances of the average person.

Actually, Ali, renters are subsidized, coddled, supported and made special by politicians who suppress rents, ban evictions and hassle landlords. The costs of home ownership far exceed those faced by tenants, even in an age of cheap mortgages. If it were not for emotional market gains and tax-free profits, renting would be the totally valid choice. There’s no other compelling reason a young, single female (or male) would accept hundreds of thousands in debt, plus monthly fees and expenses to live in a place they could rent without care or obligation, investing the difference.

But we’ve lost our way. Real estate’s a cult now. Governments have fostered and helped create that. Prices are extreme and homeowners have become the elite. The maiden Chrystia budget will not have the stones to tax windfall capital gains, but it might just throw a bone to rising voters like Allison in the form of a rental tax credit.

The logic: if people buying real estate get a massive wealth advantage by completely avoiding taxation on gains which were handed to them by Mr. Market, renters should not be penalized just because they cannot afford to buy. So it’s only ‘fair’ the government levels the paying field by allowing a portion of rent to be deducted from taxable income.

Yeah, more government dependence and debt through reduced revenue. The T2 hole deepens.

$     $     $

As of this week the word ‘master’ will no longer be allowed in Toronto. At least not as part of real estate listings. Toronto realtors have decided to follow the lead of CREA, the national organization, and cancel the word forever. From now on no master bedroom. No master ensuite, either. The politically-correct word is ‘primary.’


Master is “largely associated with terminology rooted in slavery and/or sexism,” the realtors say. It has “offensive undertones”, is an “outdated term” and inhibits “productive communication between real estate professionals and their communities.”

Of course, if there is a ‘primary’ room in a house it means the others must be ‘secondary’ or worse. That seems a bit hurtful, exclusionary, elitist and smacks of privilege. How will the people sleeping in those diminished places feel? Perhaps they need compensation.

Anyway, it’s progress. The Mills love it. And this jives with the loss of other innocuous but banned words many grew up with, like “Dominion” or “fisherman.” Could there be a master plan?


About the picture: “Our Holly is our 16-month-old Sarplanenac,” says blog dog Sue.  “She is a Yugoslavia Mountain Dog.  They were bred to guard flocks cattle and sheep.  We are sheepless so she guards us.  She’s loveable and beautiful. You are welcome to use her photo.”


The loonie

RYAN   By Guest Blogger Ryan Lewenza

The four most common questions I receive from clients are: 1) will the equity markets and my portfolio be up this year; 2) how I can pay less in taxes; 3) how do you maintain your boyish good looks and chiseled abs when you’re so busy looking after clients; and 4) where is the Canadian dollar headed. I look forward to the thrashing I’ll receive on the third question in the comments section but today I’ll address the last question on where the Canadian dollar is headed.

The Canadian dollar has been on a tear! Since bottoming around 69 cents to the US dollar last March, it’s rallied over 15% to roughly 80 cents currently. The strength in the Canadian dollar can be attributed to a few key factors.

First, oil prices have come back strongly since going negative for a day last March (that’s one for the books!). Second, the Bank of Canada (BoC) has announced that it will start winding down its emergency bond buying program in the coming months, being the first major central bank to end these emergency programs. And third, general weakness in the US dollar versus most currencies with the Federal Reserve keeping the ‘pedal to the metal’ by continuing to inject massive sums of monetary stimulus through their bond buying programs.

But stepping back the Canadian dollar has been largely range-bound for over six years now. Since oil prices collapsed from over $100/bl in 2014 it has taken the Canadian dollar down with it, falling from par or $1 to a low of $0.685 in 2016 (there was a re-test of these lows in March of last year). So from the chart below you can see the CAD has been range-bound between roughly $0.70 (technical support) and $0.80 cents (technical resistance).

Question then is: is the CAD on the verge of a big breakout or is it set for more range-bound trading?

Canadian Dollar Has Been Range-bound for Years

Source: Stockcharts, Turner Investments

Let’s start with oil prices.

While there are times when the relationship between the Canadian dollar and oil prices will disconnect or weaken, over the longhaul, oil prices still play a prominent role in where our dollar goes. As oil prices have come roaring back, in large part, due to expectations for higher demand when we get control of Covid, this has helped to drive our dollar higher as well.

Last year I predicted that oil prices would recover back to $60/bl where we currently stand. I’m getting more bullish on commodities as demand and inflation pick up (commodities do well in an inflationary environment) so we could see oil prices move a bit higher (possibly hit $70/bl this year), but I do not see oil prices hitting $90-100/bl any time soon so upside is fairly limited from here. As such, this should help to limit further upside in the Canadian dollar.

CAD Strongly Correlates With Oil Prices

Source: Bloomberg, Turner Investments

Next up is the ‘interest rate differential’ or the difference in government bond yields between Canada and the US. If our interest rates are higher than the US (as they are currently) then this is bullish for the Canadian dollar.

With the BoC announcing that it will be winding down its bond buying programs well ahead of the Federal Reserve, this has led to an increase in Canadian bond yields and our interest rates being higher than the US, which is supportive of the dollar. However, the BoC will still likely stay close to the Fed’s policies since they can’t risk hiking rates ahead of the US and our dollar moving much higher. Given this view I don’t see our interest rates moving materially higher than the US, so this should also help to limit further upside in the CAD.

Lastly, based on these factors (oil prices and interest rates), I developed a financial model that helps forecast ‘fair value’ of the Canadian dollar. Based on my expectations for oil prices and interest rates, my model suggests fair value at 81 cents, very close to its current level. Once again this suggest limited upside in the CAD from current levels.

Canadian Dollar Model Suggests Fair Value of 81 Cents

Source: Bloomberg, Turner Investments

Ok, time to bring it on home!

Based on my expectations for the factors discussed above, my financial model that suggests limited upside, and the range-bound trading pattern of the Canadian dollar, odds are we’re closer to a short-term top than a major breakout to the upside. Given this view we recommend investors/clients to stick with their US dollar investments and you may want to consider buying some US dollars for that vacation that you’re likely to go on next year as Covid begins to retreat.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.



Is that it?

Was that just a first warning shot over the realtors’ bow? Or the only volley?

Yesterday the federal bank cop upped the stress test rate, effective June 1st. Now anyone seeking an uninsured home loan has to prove the ability to carry payments at (a) the market rate +2%, or (b) at 5.25%, whichever hurts more.

Here’s what it means:

  • About 5% of first-time buyers will have to borrow less or live under a bridge.
  • Tighter credit limits may mean a harder time getting a HELOC
  • The crazy almost-two-month-long warning may goose real estate sales and prices between now and the end of May.
  • The feds smell trouble. “The current Canadian housing market conditions have the potential to put lenders at increased financial risk,” says the regulator.
  • This is protect the banks, not the borrowers. “Lenders can experience losses both through the potential inability of borrowers to meet their debt obligations, as well as through declining values of the real estate properties pledged as collateral in mortgage loans,” says Ottawa
  • The authorities are getting ready for a significant bump in mortgage rates once the pandemic is over (whenever the hell that may be).

So it’s something. But not a big thing. The feds are starting to acknowledge way too many people have taken on far too much debt. Mortgages which are not CMHC-insured pose a special risk to banks (of course) and this was the original reason the stress test came into being after the last bubble episode, in 2017-8. But since then things have just become more flaky, squirrely and scary.

These days real estate prices are totally out of control (a property in Renfrew, of all godforsaken places, just sold for $1 million over ask), household mortgage debt increased by $118 billion in the last 12 months and the percentage of people in the danger zone (loans surpassing 450% of income) is almost 25%. “We will continue to monitor housing market conditions across the country,” says the finance department. “To inform potential steps the government may take, we will closely examine the results of the consultation announced by the Superintendent of Financial Institutions.”

Hmm. That was suitably turgid and thick.

So what does it all mean?

Baby steps. Ottawa is clearly betting (a) house lust will eventually ease and FOMO-addled brains will repair, maybe; (b) mortgages are going to cost a lot more when Covid leaves and interest rates move back into a more normal zone; and (c) the last thing the T2 gang wants is for real estate to deflate, even though this is crashing family budgets and crushing affordability. Now that the slimy little pathogen has killed off tourism, travel and the service sector, housing matters. Nesting Millennials, be damned.

The announcement this week does little to chill the market and may in fact heat it up for the next six weeks. It may also signal the feds would rather see regulatory curbs used instead of policy changes to prick the bubble. And maybe it tells us that, ultimately, they like the gasbag just fine.

So will the first budget in two years be silent on real estate?

Beats me. No hints have been made. No balloons floated. At any time Chrystia could have dropped the market temperature with a warning about speculation and excess. She chose not to. They’re letting this thing run hot – following the lead of the Bank of Canada, stoking inflation, feeding expectations and now just easing up a little on the supply of tawdry debt.

It’s no surprise then this change was announced just a few days before the big reveal in Ottawa. ‘Toughening up’ on mortgage lending by the bank cop gives the politicians some cover for doing little or nothing more.

The perfect storm continues. Cheap money. Five million in WFH mode. Lockdowns and quarantines feeding the nesting instinct. Speculation, flipping, FOMO, spring and willing lenders – all fanning the flames around us. The move this week is to shelter the banks. It’s not to help your kid leverage a house, or shield her from herself.

That’s your job

About the picture: “This is Andy, the Welsh Springer Spaniel,” says James. “He lives in the Gulf Islands of BC. He turned five last week and is a deeply loved member of our family. Feel free to use this on your blog if you want. Thank you for all the great advice. Keep going.”


The haves

Up or down? Better or worse? Should we party or turtle?

The numbers seem bewildering. Seven in ten own real estate, which is going insane. The personal savings rate has not been this high since I had black chest hair (thick, manly, be envious). Stock markets and financial assets are galloping. Portfolios plumping. The US economy and corporate profits are on the verge of a melt-up.

But whoa. Most of Canada’s in a serious Covid lockdown. Household debt is growing by a fresh $10 billion – per month. The average family can no longer afford the average house. And here’s the latest Misery Index: extreme. The doomers at MNP have revealed 53% of us are just $200 or less each month from insolvency – unable to pay regular bills.

This is the worst in half a decade and represents a fat 10% jump from four months ago. Of the 53%, a third are already pooched – zero money left at month’s end.

Says the debt agency: “The anxiety Canadians are feeling about making ends meet – or already unable to do so – tells us we may eventually see an avalanche of households falling behind on payments or defaulting on loans, mortgages, car payments or credit cards.”

By the way, of those surveyed here are some ugly facts:

  • 25% have taken on more consumer debt during Covid
  • 20% are depleting savings to pay regular bills
  • 14% are using Visa & MasterCard to make bill payments. 10% are using a LOC or bank loan to do so.

Now, how do we possibly square this with Ottawa having just sent the better part of $100 billion directly to people during the pandemic? Or $108 billion sitting in personal savings accounts? Or detached house prices in both Toronto and Vancouver averaging $1.7 million? Or a cottage Bill was looking at in the Kawarthas with electrical problems being listed at $995,000 and selling this week for $1.5 million? Or, of course, puppies costing $5,000?

Because we have cleaved. The people doing okay – WFH, on salary, employed, saving in the pandemic, buying houses, building equity, growing assets – are living in an alternative universe from the rest. In that other world a huge mess of people are out of work, mostly in the retail, food service, hospitality and tourism sectors. A disproportionate share are young, women and minority. The Third Wave lockdowns in Ontario, BC, Alberta, Saskatchewan and Quebec are making it worse. Big job gains we saw in the winter are being erased again. These are the people who apparently will never own a house or retire secure. We are building two Canadas.

There’s no easy fix for this. But rest assured the federal government will try, starting with the budget in ten days. The ‘have/have not’ disparity will be the impetus for more public spending and higher taxes.

The right-wing CD Howe Institute this week is calling for a 2% jump in the GST, reform of public pensions, dumping first-time homebuyer help and lowering corporate taxes – along with subsidizing both wages and child care costs for lower-income families.

Most of the big banks are calling for cold water to be thrown on the dumpster fire called the real estate market. Lefties in the Libs and NDP want no-cost pharmacare and a UBI so nobody has to worry about paying their cell bill ever again. Accountants are telling clients to prepare for a higher capital gains inclusion rate plus a new tax bracket for the over-$400,000 income crowd. Some people want speculation and capital gains taxes on residential properties. US-based tech giants and social media platforms are preparing to be whacked.

Of course the budget on the 19th will be geared for an election later this year once the vaccinations have rolled out fully. If the T2 gang wins, the 2022 plan will be the one you need most worry about – if you inhabit the Have world. There is no way the status quo remains unchanged in that scenario, with federal finances shattered by pandemic spending, tax revenues curtailed, public debt on its way to 100% of the economy, real estate unaffordable and structural unemployment upon us.

Prudent people who wish to pay their fair share and no more need to understand this. And act.

First, shelter assets. Canadians have not used 80% of the RRSP room they’ve earned, for example. Not only can you chop taxable income with a contribution, but you effectively remove those assets from anything Chrystia the Impaler comes up with – at least for years. Ditto for TFSAs. On average we have filled less than half the potential amount granted. Worse, the bulk of these funds are sitting in savings accounts and GICs paying less than inflation. Fix that. Third, open an RESP for your kids. Invest the max each year and get a grant. This is the easiest 20% you’ll ever make.

Worried about higher capital gains taxes? Then realize gains now. Any change in the inclusion rate (currently 50%) is unlikely to be retroactive. This goes for investment real estate as well as financial assets. In fact, given the certainty of higher taxes and the unsustainability of the property market, is there a better moment than now to bail on real estate? Sell high. What a rad concept. If you think that over the long term government will allow hundreds of thousands in taxless, unearned profits on a house while so many people can’t pay for food, you’re dreaming. That ship sailed when Covid arrived.

Consolidate. Shelter. Keep your head down. Yes, live quietly among the masses.

Maybe they won’t notice.

About the picture: “This is Islay,” says blog dog Brock, in BC. “She is a 3 year old Eurasier. Queen of her castle in the backyard, for now. She is also a victim of this housing market. Her castle is being put up for sale by the landlord and we most likely will be evicted with the new buyer.”


Getting rich slowly


  By Guest Blogger Sinan Terzioglu

As equity markets have recovered significantly over the last year and are making new all-time highs, some are taking on more risk to supercharge their returns.  Whether it be by purchasing individual securities like GameStop, utilizing leverage or speculating in crypto currencies and derivatives, risk management has increasingly become looser. The last few months remind me of the early 2000s as the tech bubble was forming.  Free trading apps like Robinhood and WealthSimple have made it all too easy for people to speculate and engage in dangerous behavior.

Borrowing to invest is risky.  Some have achieved great results with leveraged investing over the long term but many have not.  Markets inevitably test investors, so if you don’t have a long term mind-set, leveraged investing is definitely not for you.  Those who have succeeded did so by not overleveraging their equity and developing a plan for turbulent times.  Most importantly, they invested in high-quality productive assets where the risk of a permanent loss of capital was low.

We all know about the success of Warren Buffett and his right-hand man Charlie Munger, but few have heard of Rick Guerin, once considered a super investor after achieving market-beating returns in the 1960s and early 1970s.  Guerin had worked with Buffett and Munger on a number of deals.  Buffett supposedly said Guerin was just as smart as he and Munger, but the big difference was simple: Guerin was in a hurry.  Heading into the market downfall of 1973 and 1974, he was levered with loans and got margin calls he couldn’t meet. Thus, he had to sell his Berkshire Hathaway shares to Buffett for under $40 a piece.  Today those Berkshire shares are trading around $400,000.

Reddit Stocks
One of the most traded stocks recently on the WealthSimple app is the theatre chain company AMC.  This security has a large short interest and has been one of the most talked about securities on the online chat forum Reddit.  Most individual investors should not be purchasing a security like this as there’s the real possibility of the company going bankrupt.  AMC owes over $5.7 billion and some of the debt has taken on over the last year bears a double-digit interest rate.  Over the last 12 months AMC has paid more in interest than it earned in operating income in each of 2017, 2018 and 2019.  Of course it is possible the company can turn around but its share price could significantly fall in the meantime as the company works on changing its operating model.

If you are going to invest in highly speculative securities like this at the very least don’t hold them in registered accounts like TFSAs and RRSP since all of the contribution room for these accounts should be handled with care.  Once lost you cannot get the contribution room back.  Speculative securities should only be held in a non-registered account so you have the ability to utilize capital losses to offset future capital gains.

Crypto Currencies
I am often asked about crypto currencies like Bitcoin and why we don’t invest in them.  There is no denying digital currencies will increasingly become a part of our lives but our view is that this is not an investible asset class.  While the price gains have been spectacular no one can value something like Bitcoin because it produces no cash flows and therefore lacks an intrinsic value.  That is not to say the price cannot continue climbing because it certainly can but without the ability to calculate an intrinsic value you are simply speculating on what others will pay.  One of the most important things when striving for long term investing success is to not lose money and since we cannot value crypto currencies there is no margin of safety.

Some argue that if you allocate 5-10% to crypto currencies this provides diversification benefits to a portfolio.  While that may be true for a period of time it still does not reduce the risk of permanently losing capital.  From a technical perspective, I wouldn’t bet against BTC right now but fast forward a year or two and I would not be any more surprised if Bitcoin doubled in price or lost 50%.  So if you have conviction and are ok with the speculative nature of this asset class than good luck to you but at the very least position size responsibly.

Recent news about a US family office blowing up after using swaps to leverage their equity by over 5x has once again highlighted how dangerous derivatives can be. History is full of disasters like this where a recent streak of success led to increasing greed and ridiculous amounts of risk.

Over the last few months there have been many stories of individuals buying call options on GameStop and making boat loads of money.  They have shared their profit screens online and this has led to others to bet big on call options as well.  As GameStop jumped from $20 to over $440 per share this produced enormous gains for those lucky few but as the stock dropped like a rock from its highs to $40 a share there is no doubt many lost significant amounts of money.  This is no different than taking most of your money and spending it on lottery tickets.  The options market is very complex and unless you are willing to put in the time to learn and manage risk most individual investors should stay away from it.

Always Think Long Term
You will greatly increase your probability of achieving investment success by adopting the mind-set of getting rich slowly.  Being patient is key.  What made Buffett and Munger so successful is that they have been patient investors for over 2/3rds of a century.  Earning a reasonable rate of return is important but longevity is significantly more important.  You must ensure you stay in the game and continually evaluate your risk and behavior.  As Buffett once said:

“It is not necessary to do extraordinary things to get extraordinary results”

By developing and following a long term plan you significantly increase the odds of meeting your financial goals.  Investing intelligently is about controlling your expectations, your risk and your tax implications.  Most importantly, intelligent investing is preventing yourself from being your own worst enemy.  Until you have achieved a portfolio that will be able to provide a pension-like income stream for several decades most should not even consider investing in individual securities.  This takes time and the earlier you start and invest in tax-advantaged accounts the sooner you will achieve your financial goals.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

About the picture: “I’m recently retired, have lived and worked all over the world in the last 20 years – Dominican Republic, Cuba, France, Hong Kong, Singapore, Brunei, Indonesia, Thailand, Abu Dhabi and South Korea,” says blog dog Carole. “Amazing expat life of adventure, but happy to return to live in Canada (expensive but worth it). Picked up this “desert shepherd” from the streets of Dubai while working in the UAE. Maybe you can use this photo of Peepster. I’ve got a great diversified diy portfolio of equities (dividend stocks, etfs) and am grateful for direction gleaned from your blog. Thanks again.”