Le pain

Crazy times? You bet. Remember them.

This week Le Chateau went bust. Over 120 stores will close and 1,400 more people lose their jobs. Also in the last few days the airlines are making a final desperate case for federal aid before the hammer falls. Westjet bailed out of Atlantic Canada and is trying to deal with a flood of refund requests. Europe just closed the door to travel from Canada. The US border will stay shut for a long time yet. Air Canada has chopped routes. More coming in a few days. We could end up with one carrier and prohibitive pricing.

In the country’s largest city tenants have fled, condos crashed, landlords are throwing incentives at renters and apartment prices are falling daily. And yet September saw the biggest price increase for houses in 22 years.

By the way, Toronto has an unemployment rate of 12.8%, with about half a million people jobless. That beats Calgary (12.6%) and is way above the national average of 9%. In Vancouver there are 11% of citizens without a job. These are grim numbers. We’re in the grip of a recession, clearly. But the media keeps telling us everybody is happy working from home, as bidding wars escalate real estate values. It’s like this virus is giving us a big, national pajama day that lasts for eight months.

Here’s some reality.

Covid, says a new bank poll, is killing personal finances and the confidence of many. Four in 10 think this has whacked their retirement plans. A quarter of us can’t make RRSP contributions – no money to do so. A third of people now think they’ll have to work more years to make up for this virus and 40% who thought about downsizing real estate to raise retirement cash are unsure. Why? Because they see rising prices and fear they’ll just end up paying more.

Meanwhile yet another survey (also sponsored by a bank, the green one) says TV-watching is up 63% and people are cooking at home 54% more of the time, instead of spending money on traveling or entertainment (or working). So this is why airlines have laid off or terminated thousands of employees, why hotel occupancy has gone from 78% (seasonal norm) to 30% and six in ten restaurants are headed for the grease bin.

Now we have this damn second wave. Big hits in Quebec and Ontario. Even BC, NB and the flatlanders are surprised at how the bug has crawled back. In the US – just 11 days before the vote – new infections top 70,000 and are inching up to record levels. Just imagine how much fun January will be.

The pandemic is doing what this blog predicted when it first hit. People with wealth, assets, balanced portfolios and no debt, are getting wealthier. Financial markets have been supping at the trough of government and CB stimulus – with more coming. But people who really need their jobs, don’t have enough saved or are slaves to fat mortgages are way more at risk than they were in February. The only saving grace for them has been a bump in housing values. But that’s not going to last.

Here’s yet another bank survey (the blue guys) which underscores the goofiness of society. It found 56% of first-time buyers intend on hitting up their families for the down payment. The average ask among Millennials is (seriously) $100,000.

Of course money shoveled off to junior so she can buy real estate means a smaller nestegg left in the Bank of Mom to finance retirement. Mix in a protracted recession, an enduring pandemic, structural unemployment and the post-Covid certainty of higher middle-class taxes, and you can see where this thing is going.

The conditions which created today’s housing prices cannot be sustained. Runaway public debt will increase bond yields and mortgage costs in the years ahead. The current collapse of entire industries (bricks-&-mortar real estate, vacations, business events, live entertainment, pro sports, hospitality, food service) will require a decade of rebuilding. On Friday StatsCan reported that the travel crash alone will cost 400,000 to 500,000 jobs this year. Long-lived unemployment and the disruption the bug’s had on personal saving mean less disposable income.

So is buying a house in a pandemic and during a recession with 10x or 20x leverage when prices and emotions have never been higher a rational act? Duh.

Covid is bad. FOMO is worse. Everybody chill. There’s a long road ahead.



When Westjet pulled the plug on Atlantic Canada some days ago, I was moved to post this on a local chat board: ‘Bubbles have consequences…’

The response was predictable. “Garth doesn’t get it,” and “No, wrong. Pandemics have consequences”, were typical replies. And so the virus continues to divide us.

As a reminder, my choice has been to stay on the east coast during the last few months of Covid. (Anyway, my office in a Bay Street bank tower has been closed since March.) The four Maritime provinces created a bubble in July, sealing the borders and requiring quarantines for any interlopers. Besides the airline surprise, there have been two notable results:

(a) No virus. Well, hardly none. There are but five active cases in NS (these people travelled to some germy place like Toronto, now isolating), and no new daily cases for a while. Nobody’s really sick. Nobody’s in hospital. Nothing is closed.

(b) Real estate is nuts. Prices up 40%. Multiple bids. But most buyers aren’t locals. They’re Ontario refugees. And all the action is virtual. No showings. Nobody’s ever seen this.

So while my fancy Toronto portfolio-manager, hot-shot, master-of-the-universe financial guru colleagues have been working out of their spare bedrooms and breakfast nooks, my little band of compatriots has been ensconced where they should be. At work. In their offices. Collaborating. Fully dressed. Connected to the Big Pipe. WFW. Here’s one now…

The condo update this week on this pathetic blog led to a discussion about working from home. Seems a lot of people never want to return to the office, never commute, never be physically accountable nor forced to organize their lives the way they used to. By removing the walls between ‘work’ and ‘home’ they get to play with the dog (or kids), shop, houseclean, exercise or wash their socks in between Zoom meetings, data entry, email frenzy and working on projects. Proponents say this is the way of the future. That traditional workplaces are dead. That work-life balance is the No.1 thing people want. And finally the virus has delivered it.

Others (including crusty employers like moi) say this is bunk. WFH is a complete risk for most organizations and employees. Productivity falls. Communications falters. Synergy fizzles. Mistakes multiple. Ideas wither. Besides, any worker not needed in the workplace can eventually be replaced by either AI or some dude in Manila making one-tenth the wages who doesn’t have a giant mortgage in Surrey. Out of sight, out of mind. There’s a reason this phrase endures.

Anyway, don’t take it from a paleo like me. Look at the evidence. Covid is murdering the work ethic while turning people into stressed-out basket cases. Here’s a survey from recruitment firm Hays Canada showing many employees are reeling from the deleterious effects of WFH, including isolation, lack of support, loneliness and the feeling of an increased workload when the barriers between employment and personal time are erased.

While a majority of employers are confident about the future, 49% of their employees are seriously contemplating quitting. In Ontario that rises to 52% In Quebec, 54%. And while over eight in ten WFH folks said they were content earlier this year, that has now plunged by 20%. “COVID-19 has left everyone exhausted and while many businesses are improving, staff are waving a white flag,” says the company.

In the States, similar findings. In a survey, The Martec Group found this: “a significant decline in mental health across all industries, seniority levels, and demographics. Job satisfaction, job motivation, and company satisfaction were also negatively affected.”

A minority of 16% like WFH. The rest say they hate it, and resent the employer for shutting the workplace. Before the virus hit, two-thirds of people believed they were in good mental health. After working from home for a few months, that dipped to 28%. Job satisfaction and motivation also crashed – as here. A third said work-life balance got better The rest moaned, ‘lemme outta here’…

Well, Covid may have changed a lot of things. But it hasn’t changed human nature. People need, want and crave other people. That’s why workplaces developed, cities formed and urbanization has been the most prevalent trend of the last century. This is why the epicentre of societies has always been the downtown core, not the Wal-Mart in Richmond Hill. It’s why the gleaming towers are there. The best transit infrastructure. The bars, museums, clubs, galleries, restaurants, high-end retail, buskers, protests and shoe-shine guys.

So, WFH on a large scale will end. So will the pandemic. Both are temporary. Just like the silliness of buying a house two hours away because you’ll never commute again. Or competing for a listing four provinces away because the pictures look romantic.

Please regain your sanity. Go back to the office. And don’t move here. We’re busy working.

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By the way, have you seen this tally of government virus spending from the economists at RBC? Yup. Pooched.


Herd immunity

Remember the words posted here weeks ago about the coming condo collapse? Well, presto. It’s here. At least the beginning. Right on cue.

For example, a one-bedder unit just steps away from the sky-darkening bank towers at King & Bay in the Big Smoke was commanding $1,200 for each of its six hundred feet in March, before Covid came to town. This week? That’s down to $785 a foot, which is a fat 34% discount from the market value just seven months ago.

But there’s more. Says the listing agent, desperately: “***Seller Will Pay 6 Month Maintanence Fees If Sold By Oct 15,2020***” (realtor spelling, not mine). That monthly condo fee, by the way, is $800. So knock another five grand off the price.

Bottom line: a fully-renovated, low-rise unit in a great building in a hot location that commanded $720,000 pre-virus is now on the market for $480,000. Odds are the seller is a dude who was renting it out for two hundred a night as a perfect downtown Airbnb unit (now illegal) or soaking $2,250 a month from a young legal secretary in a gleaming skyscraper who’s now WFHing in mom’s basement in Ajax.

And rents? Pshaw. As we told you, there’s already been a 15% reduction in the cost of leasing a condo in Toronto, with rates now eroding in Vancouver and Montreal where new condos are starting to come online and listings pile up. Too much supply, not enough demand. It’s classic.

This week the global financial press started to take notice. “In the world’s big financial centers — from New York to Toronto to London to Sydney — rents for inner-city apartments are plunging,” reports Bloomberg. “International students who normally bolster demand are stuck at home and young renters — the most mobile group in real estate — are finding fewer reasons to pay a premium to live in what is, for now, no longer the center of things.”

Everywhere, a similar story. Demand has been eroded by an abrupt halt to immigration, the shuttering of major office complexes, the meme that workers will never have to go downtown again (amusing), cities curtaining mass transit, a reduction in Airbnb’s toxic presence, uni students learning online plus a flowering of the suburbs and real estate with front doors and back yards as work-from-homers crave more space and fewer germs.

Meanwhile supply is erupting as new residential complexes come to market, negative cash flow crushes amateur investors, short-term rental hosts have no clients and the tenant pool dries up along with jobs in restaurants, bars, clubs, hotels, offices and downtown retail outlets. (For example, sales are down more than 90% for stores and services along the Path – that glitzy 30-km-long underground complex beneath the pavement in Toronto.)

“With remote working in vogue for everyone from banks to tech companies,” adds Bloomberg, “and the quirky shops and bars that made living in a city fun curtailed, the equation about where to live is changing. And so is the balance of power between landlords and tenants.”


So, there are some lessons here.

Like never get caught up in FOMO. For the past few years urban DT condos have been hot properties as thousands of units hit the market at ever-rising prices and ever-smaller footprints. In a place like Toronto most were bought from plans in the pre-con phase, at least half by people who never intended to occupy them. Even with competition among tenants, those big mortgages and high ownership costs meant more than 40% of all landlords were losing money. So long as valuations were increasing, the suckers were willing to eat the loss. But now? Whoops.

Lesson: buy stuff that makes money. Speculation can kill you.

Another one (very radical): buy low, not high.

People flocked to condo investments because (a) financing was cheap and easy to get, (b) they like the overlord feeling of being an landlord, extracting rent from serfs, (c) real estate values always go up while financial assets are risky and (b) everyone else was doing it. In reality, landlording costs usually exceeded income, any net profit was 100% taxed and because most people bought into a rising wave, they’re now being Hoovered.

But I know this takes courage. To resist the crowd’s siren song when an asset is expensive, inflated, sexy and aroused. And, equally, to buy things that are unloved, declining, deflating, cheap and flaccid. Today the crowd is storming Hicksville, jacking values of dodgy houses in cities where commuting downtown is impossible and/or suicidal. Also today we have a 34% drop in the value of prime downtown units amid the belief that what happened over the last eight months will set the scene for the future. Forever and amen.

Apparently the herd never learns. And thank goodness for the rest of us.


When the party ends

Aren’t you tired of Millennials? Whiskers, tats, bicycles, house lust, skinny pants. Yeah, me too. So let’s talk about old snort issues for a few minutes. Like how to get money out of your investments without being nuked by the virus or taxes.

Joan, in BC, throws us this question.

We have a financial advisor and a friend who is a retired financial advisor, each giving us different advice. We were wondering if you could help us decide the best action to take. I’m 67 and retired. My husband is 66, still working, and intends to do so until he’s 71. We started receiving our OAS and CPP pensions at 65 and receive a federal government pension as well. We have no mortgage and no debt and our lifestyle is pretty frugal. We have approx. $327,000 invested, TFSA’s and spousal RRSP’s mostly in Spousal, since my income is much lower.

Our retired advisor friend thinks that with the instability of the markets, Covid, etc. we should seriously consider converting our RRSP’s into either a RRIF or an Annuity now, instead of waiting until age 71. Our current advisor disagrees, since we are well balanced and diversified and weathered the drops in March pretty well. Also, he said Annuities are paying lousy returns right now. We feel since a RRIF is subject to market fluctuations, what’s the point and also we don’t want to add to our income, since it would push us into a higher tax bracket. What do you think Garth?

Easy, you need new friends. Your advisor’s correct.

Now let’s make sure everyone knows the difference between an RRSP and a RRIF. Plus the tax changes that came down recently. During your working years contributing to a retirement savings plan nets you a tax break since the annual contribution can be deducted from taxable income. Cool. Do it. RRSPs are great tax-shifting tools and can also be used when you lose a working gig, get pregnant, buy a house, go back to uni or want to take a year off to find yourself (good luck).

RRSPs (like tax-free savings accounts) are not products or things, but just accounts into which you can dump different investments. Growth is tax-free, so it makes sense to hold things that will swell in value (like equity ETFs) as opposed to brain-dead, interest-earning duds (like GICs).

But the RRSP party ends at age 71, when these holdings must be converted into accounts (called RRIFs) that pay income. And, yup, it’s taxable. Now the good news is, thanks to Covid, the feds have lowered the minimum amount a RIF must pay out annually, by a whopping 25%. So now at age 72 only 3.96% of what a RIIF contains must be converted into taxable income (this rises to 15% by age 94, should you be so wirey). That means almost all of the RRIF investments can continue to grow free of tax for a long, long time.

Okay, back to Joan. So, yes, an RRSP can be converted to a RRIF at an earlier age, if you want. And once that happens, income must flow (through a slightly different formula) and be taxed. But why do this? There’s no rule preventing a person from taking RRSP money if they need income.

Her retired advisor friend should stay retired since converting a retirement savings plan into a retirement income fund doesn’t reduce risk one iota. It just means taxes are payable on withdrawals that (in this case) aren’t needed. As for an annuity – which locks the money up in return for a guaranteed monthly stipend – the worst time possible to get one would be now. Annuity payouts shrink along with interest rates, which these days are in the ditch.

Advisor, 1. Friend, 0.

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Well, here’s an interesting chart. HouseSigma figures Toronto condos have never dived this deeply, or quickly, into a buyer’s market.

Things grow darker weekly for all the amateur landlords and specuvestors who snapped up mini-units of 500 square feet or less over the last few years. The vacancy rate is going up, rents are going down, condo prices are falling ten grand a week, listings are piling up (200% more in a year) and both tenants and purchasers are scarce.

Word is that some mortgage brokers are about to stop lending any funds against these things. Meanwhile thousands more units are coming to market as existing projects are completed. There are oodles and oodles and oodles of assignment condos available as investors bail. And look at the latest Covid news – as of this week  no more open houses in Toronto or most of the GTA, the condo heartland of the nation.

Well, come winter, the growing second virus wave, a lot more mortgage defaults and risk-averse lenders there’s every reason to think the glut will worsen with prices caught in a vice. It will be a painful lesson for investors who thought losses were impossible and there’d always be some kid willing to shell out $2,500 a month to sleep in their closet.

Of course, the city will come back. The pandemic will end. Downtowns will seduce, entice and intoxicate once more. So have the chequebook ready.


The end is nigh (not)

The American stock market sits near a record high. In the middle of a recession. And a pandemic. Which grows worse. With a crazy uncle dude as president.

How can this be? How can it last?

Nary a week passes on this pathetic site without some wuss predicting collapse. Mayhem. Apocalypse. A market crash and crumble. The virus didn’t do it (yet). So now the forecast is for social chaos and financial ruin following the November American election.

Given that this is October 19th, it’s a fine day to talk about being wiped out. Over the lifespan of this blog, lots has hit the fan. There was the 2008-9 credit crisis, which melted stocks. The 2011 US debt ceiling crisis. The 2015 oil crash crisis. The 2016 Trump election shock. And now the 2020 Covid collapse.

Along the way, every single time, people have panicked, sold into a storm, gone to cash, exaggerated current events and lost perspective. But as bad as things looked, nothing has compared (so far) with what happened on this day in 1987. Black Monday. Wall Street shed 22.6% of its value in a single trading session. Ouch. Compare that to the 12.9% drop that the virus caused one day last March, or the 12.8% plop that took place in October of 1929.

Now, I have a confession. I’ve made it before. I shall make it again. Caught in the middle of that disaster my perspective was also warped. At the time I was the business editor and daily columnist for a big Toronto newspaper. By mid-afternoon – when it was apparent to everyone that history was unfolding – the CBC sent a crew to my office to ask me what the hell was going on.

That interview still sits in the corp’s archives. And just look how sweet, innocent, wrinkle-free and hairy I was at the time…

What did I tell the reporter (and the audience)? That the consequences of the crash would be long-lived, leading maybe (but likely) to the collapse of an American bank or two, along with a sustained period of economic reversal. What should people do, she asked? Run, I said. Flee stocks, go invest in something safe that pays you interest. This could be bad. (By the way, five-year GICs were then yielding 9.4%, so not such a flawed idea.)

Once that interview was done and the trading day finished, I laid out pages for the paper’s morning edition that contained pictures of 1930s soup kitchen lineups on Toronto’s Yonge Street with thousands of unemployed, desperate people. It was a moment of naïve irresponsibility I regret still.

So what happened?

No big bank collapses. No depression. The next day the US Fed put out the tersest and most pointed statement ever. Thirty words that made all the difference: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system”. The bank bought up scads of assets, injected liquidity into the system and collapsed interest rates. Just like it’s done in 2020. The shorts were killed.

The market rebounded. By the end of the year the Dow was higher than in January. In twenty more months it was at a new record high. And with the crash came a slew of reforms, including market circuit-breakers (triggered in 2020) which would in future force investors into sober second thought in the midst of any meltdown.

There would be more crises. The 2000 dot-com, tech bloodletting was intense. Nine Eleven tested everyone. The Gulf War. And then the five end-of-world events that have occurred since this blog published its first bleating words.

Now, so much more.

Covid is getting worse thanks to Trump, the virus-deniers, anti-maskers, party-animal kiddos and a flawed, political, uncoordinated approach to public health. Europe is on the verge of a lockdown. The USA appears to be a few weeks from being officially out of control. If Biden wins, guess what? Yup. Dr. Fauci will rule.

Meanwhile there’s a whole generation of RobinHoodies flipping stocks every few minutes on their phones, pushing valuations higher, buying sexy companies and melting the markets up. Central banks? Ah, out of bullets.

In this world a market correction would not surprise. After all, the rally since the end of March has been spectacular. Historic. If you had gone shopping for equities on the afternoon of March 23rd, 2020, as in the final hours of October 19th, 1987, you’d be rolling in capital gains. But that would take courage as well as money.

Courage, by the way, comes from confidence. That flows from experience. And wrinkles sure help.


Nothing is normal

First, Trump. Then Chrystia.

The world’s holding its virus-tinged breath awaiting November the 3rd and the outcome of the American election which has been as weird as expected. That crazy uncle is now being given a 12% chance of winning, while the boring old guy gets 87% odds (the latest from fivethirtyeight.com). But, who knows? 2016 was a surprise. And so far 2020 has been so predictable.

But after that’s out of the way, we’ll be dealing with the crew in Ottawa. Bloomberg reported Sunday that insiders are pointing to a Chrystia Freeland economic update/mini-budget and group hug in November. It will be the new finance minister’s first foray into, well, finances.

What to expect?

Way more spending, this time on a national pharmacare program, child care agenda, green initiatives and boodles for cities, where Covid has crashed revenues. With backing from the NDP, the Trudeau Libs are steaming ahead with the things contained in that Throne Speech (which you forgot about).

The current year’s deficit will increase to a level making the rest of Pierre Poilievre’s head melt. The shortfall for next year is already at $74 billion, and none of this new spending has even started. (The previous all-time high was Harper’s $56 billion at the height of the credit crisis. Seems quaint.)

In order to retain the Dippers in his pocket, Trudeau will likely embrace two of Singh’s demands: a return to CMHC-insured 30-year mortgages, so people can pickle themselves further in debt, and a doubling of the first-time homebuyer’s credit, so taxpayers pick up more of the closing costs on a house. The result of both of these measures? Yes, more upward pressure on prices. And more mortgage borrowing.

Here are two things to worry about:

First, our annual deficit (federal and provincial), as a share of the economy, will be the worst in the entire western world. More than Italy, Turkey. Argentina, Russia, India, America, Brazil…well, you get the picture. Nobody, anywhere, is spending money like our prime minister. So the inevitable consequences will be higher taxes, currency debasement, inflation and ultimately a sharper rise in interest rates. Mr. Bond Market is becoming aroused.

Second, mortgages are out of control. The massive deferrals of the last few months made the debt pile worse, and now this insane housing boom is pushing borrowing off the chart. Ten years ago outstanding mortgages equaled 59% of the economy. Now it’s 84%. The pointy-head analysts at UBS say Toronto is the worst bubble city in the world. With five-year mortgages at less than 2% and debt exploding higher, we’re massively at risk of any economic shock. Like another lockdown.

By the way, did you catch Benny Tal’s latest housing epistle? The CIBC economist is just shaking his head at what’s going on with residential real estate in the midst of the “worst ever” recession in Canada. It seems by pumping up prices in the teeth of economic chaos we’re making the wealth divide far worse. That’s because of who is buying properties.

The services-oriented nature of the current recession has led to a situation in which no less than 80% of jobs lost since February were in low-paying occupations, a notably higher share than in any other recession….we conclude that roughly 50% of the widely-quoted average home price inflation is due to a compositional factor in which activity in more expensive units (read: larger) is rising faster — adding to the overall average. In fact, we see this trend clearly in the rising share of ground-oriented units at the expense of high-rise units — a trend that makes sense given the nature of the crisis.

In other words, the virus nuked the jobs of blue-collar workers while millions of office workers just started their WFH episode. As rates tanked and at-home people suddenly craved more space, more nesting and bigger suburban backyards, real estate ignited. Detached properties outside the core went up. Condos went down. And the mortgages financing the action have blossomed. Historic levels of borrowing. All at rates which can only eventually go up, not down.

Being reasonable and non-hormonal, you might conclude this is unsustainable. You’re right. Canada cannot run these kinds of deficits without consequences. One of those will be upward pressure on the cost of money as the dollar devalues. And that will apply to more than $1.5 trillion in residential mortgages – even more of course, if we get 30-year amortizations back.

But wait. What if the government just forgives all the debts?

Remember that Internet conspiracy theory twaddle mentioned here last week about Ottawa locking us down again, building internment/isolation camps, then creating a debt jubilee in return for everyone handing over their property and assets? We told you to beware. That it would spread. And it has.

This was just published, down under: “Canadian politician leaks new Covid lockdown plan and ‘Great Reset’ dictatorship – Australia is part of it.

I swear. 2021 cannot come soon enough.


Up to the eyeballs

DOUG  By Guest Blogger Doug Rowat

Personal debt must certainly be the most popular topic of online financial-advice articles.

Googling ‘financial planning’ will produce about as many articles related to debt management as Googling ‘reality TV’ will list members of the Kardashian family.

In other words, personal debt is an overexposed topic in the financial-advice universe.

So overexposed, in fact, that I bet you can already predict the images that accompany these articles: perfect lighting, laptops displaying pie charts, calculators, cups of coffee, maybe suited-up advisors helpfully pointing at something? If only personal debt problems were actually so neat and tidy.

And God as my witness, I wrote the above before my first ‘financial planning’ Google search produced this pic (admittedly, no calculator):

Financial planning articles can be as clichéd as the pics that go with them

Source: Google Images

Unfortunately, we’re also too familiar with the hackneyed debt advice that’s offered by these write-ups: pay off your most expensive debt first, consolidate debt, create a household budget, spend less than you earn, and so on.

However, I want to present the subject of debt in a different way, not by providing another self-evident step-by-step guide to managing it—do your own Google searches for that—but rather by highlighting a few behavioural and attitudinal changes that we can make to better understand and deal with it:

  • View debt objectively through the lens of both the lender and the borrower. For example, one unfair perspective is that lenders are ruthless. Another equally inaccurate viewpoint is that borrowers are deadbeats and should be forced to pay debt at any cost. Naturally, there need to be consequences for failing to pay debt, but be cautious before deciding how severe those consequences should be. If a lender is ALWAYS assured of getting paid back regardless of what it may cost the borrower, then not only will many borrowers be ruined, but the lender, freed of consequences, will become more reckless with their lending. This is how debt crises are born. Similarly, if there are few consequences to the borrower for defaulting on a loan then credit would cease to flow due to an overabundance of caution from lenders. Unsympathetic representations of bankers and lenders are always popular (I’m an English major, so Ebenezer Scrooge and Shylock immediately come to mind). Similarly, depicting borrowers as lazy freeloaders is equally popular, especially today given the amount of CERB money floating around. But in our Covid-19 world, a greater awareness of both the lender’s and borrower’s perspectives is critical to finding a middle ground regarding debt repayment. Consider, for example, which side you favour at the moment between renters and landlords (not dissimilar to a lender-borrower relationship). Is forcing rent payments reasonable? Is a further ban on evictions reasonable?
  • Be brutally transparent about the cost of your debt. I’m not speaking here of the costs related to more obvious debt burdens—we all know credit cards, for example, have painfully high interest rates. I’m speaking instead of the more subtle ways that we casually ignore debt expense. For example, it’s enjoyable to focus on the appreciation of a house or condo, but few diminish this enjoyable experience by considering the long-term mortgage costs (not to mention the myriad of other costs associated with real estate ownership). A homeowner might, for example, ponder how nice it is that their house has appreciated from $750,000 to, say, $1.25 million over 10 years. What’s far less common is for the same homeowner to subtract the interest. For the record, a 4% interest rate on a $600,000 mortgage over 10 years would’ve shaved this $500,000 ‘profit’ by about $206,000. So, avoid self-delusion: always be forthright regarding the full cost of your debt.
  • Similar to the point above, strive for self-awareness. It does little good for a financial-advice column, for example, to make the obvious recommendation that an individual pay down their expensive credit card debt first, if that individual hasn’t first personally addressed why it is that they’ve allowed their credit card debt to get so high to begin with. Dealing with debt problems should always start with a consideration of one’s character flaws. Many people suffer from present bias, for example. Present bias occurs when an individual places more value on something they want now versus what it might cost them down the road. Present-biased individuals tend to be impatient and, in a more practical sense, usually make expensive purchases in between pay periods rather than waiting for pay day itself. They also struggle with time-consistent behaviour. You can test such tendencies in simple ways. For example, would you prefer $1,000 now or $1,005 in a week? An impatient person might take the $1,000 now even though the annualized rate of return for waiting a week is actually exceptional. You can also reveal problems with time consistency by reframing the question: would you prefer $1,000 in 52 weeks or $1,005 in 53 weeks. A time-consistent individual would take the same dollar amount in both scenarios. A differing answer to each scenario is actually illogical. Having awareness of one’s illogical or impulsive behaviours is THE critical first step in addressing debt problems. Stanford University researcher Theresa Kuchler highlights as much:

We found that [credit card] users who exhibited a stronger present bias reduced their debt less than users with a less strong bias. Moreover, users who appeared to be aware of their own behaviour managed to stick with their original [debt reduction] plans much better than those who appeared to repeatedly tell themselves they would save more for debt paydown in the future.

So, when considering debt: 1) be open minded to the perspectives of both lenders and borrowers—this helps control resentment and bias towards either side; 2) always make it habit to factor in the cost of your debt—this immediately brings awareness to how debt corrodes wealth accumulation and 3) before following simplistic advice (pay off your credit card debt first, etc.) gain the self-awareness to recognize how your own bad behaviour is contributing to your debt problem—and this, actually, is probably the best first step to solving any problem.

Once you’ve done all of the above, then—and only then—can you start searching for debt-management articles featuring pictures like the one above.

The more laptops, pie charts and cups of coffee the better.


Finally, I can’t tell you exactly how long the current US recession will last, and it’s certainly discouraging that the country’s still well entrenched in a Covid-19 second wave with the cold winter months still to come. However, keep perspective. Equity markets have strong momentum, government and central bank stimulus is almost certain to continue and the prospect of an approved vaccine always lies on the horizon. And history has clearly shown that recessions are brief and economic expansions long. It seems impossible to believe some days, but the current recession will end and the economic expansion that comes after, will in all likelihood, last far, far longer:

Length of US economic expansions and recessions

Source: JP Morgan Asset Management. (*data does not include current 2020 recession)
Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.



The runts

Would you live in 455 square feet? Or pay six hundred thousand bucks to do so?

Nah, didn’t think so. That’s less space than a decent garage. Thirteen hundred dollars for every 12 inches of it. Plus monthly fees, insurance premiums, utilities and property taxes.

But thousands of these micro-condos have been built over the past few years, eagerly gobbled up by investors, especially in DT Toronto. And why not? They turned into money machines. Eighty per cent financing at cheap rates. Big rents charged – $2,200 a month or more. Airbnb revenues of $150 a night possible. And annual price jumps of 5% or better, while the tenant paid down the principal. An endless supply of new Canadians oand students flooding into the city as renters. Ka-ching.

But that was BC. Now, after the pandemic hit, everything’s changed. Those little pads are wealth traps.

Airbnb is moribund and illegal. The students went back to mom’s. Immigration’s down 70%. The employment pool for renters – in restaurants, bars, hotels, or downtown offices – dried up. Fear of infection made elevators, lobbies, corridors and other common spaces scary. Rents began to fade, and are now plunging. People don’t want to live in a tiny pied-a-terre space when everything’s closed – the pool, the sauna and gym plus the downtown hot spots, clubs and concert venues.

It’s a perfect storm. Thousands of investors. Vacancy rates rising. Lease rates falling Competition for tenants. Negative monthly cash flow. And now, a tsunami of listings. In urban Toronto there’s been a 165% increase in micros for sale. Prices have started to fall – about $10,000 a week. The sales-to-listing ratio sucks. It’s a total buyer’s market. Make an offer and odds are you’ll get a deal. Or wait two months and get a better one.

Ahem. Remember how this blog told you to stop your daughter from buying a weensy one-bedder because she “wanted to get on the property ladder.” Well, she’s on it now. Going down.

More news worth knowing: The World Bank’s chief economist says the pandemic will morph into an economic crisis, “with very serious financial consequences.”


“This is a war,” she says. “During wars governments finance their war expenditures however they can and right now there are dire needs. The scenario we are in is not a sustainable one.”

That means central bankers, like the ones running the Bank of Canada, can’t just continually print F-150s full of money to truck over to politicians, like Justin Trudeau, to throw randomly at society for virus repair. The accumulation of debt is monumental and must be temporary. Stimulus programs, quantitative easing and massive bond-buying programs have got to cease. When they do, bond yields will rise, mortgages won’t be so cheap and incomes will drop. Yup, could be a financial crisis for the unemployed and the vulnerable, even with a vaccine.

Maybe the World Bank is full of it. Perhaps this is just common sense. It was inconceivable a year ago Ottawa could run a $200 billion deficit in just 12 months. But now it’s $350 billion. The more money that’s printed and spent the greater the odds all dollars become worth less, bringing inflation and higher prices even as the economy’s in a funk.

So what?

So don’t expect this little bug-induced real estate boomlet to have legs. It’s impossible. The conditions creating it were both unique and temporary. The rush to Hicksville is a myopic as the abandoning of the downtown core. The belief government has your back is misplaced.

The pandemic will pass. Normal will creep back. And many will be shocked it’s not different this time.

$     $     $

Posters to this pathetic blog’s steerage section routinely diss the Toronto equity market. So let me share a note from my suspender-snapping, Porsche-driving, hot bottom portfolio manager buddy Ryan. Of course, we’ll start with a chart:

Cheap & unloved in Toronto

Source: Turner Investments

“Just updated my valuation charts for the S&P 500 and TSX,” he says, “and boy the US markets are expensive and Canadian markets are cheap!

Note how both the S&P 500 and TSX both traded around 1.5-2x in 2009/10, but with the S&P 500 outperforming since then, it now trades at 3.5x while the TSX still trades at 1.5x. One day the TSX will start to outperform the S&P 500 in large part due to this huge valuation gap but we’re not there yet. Technology sector would need to start underperforming, China would need to see higher GDP growth, and commodities would need to break out. Until then we’ll stick with our overweight of US markets, but one day the TSX will have its moment.

He gets it, of course. Once again, pandemics are temporary. There will be therapies. Vaccines. Global growth will spurt higher. Commodity demand will take off. Prices inflate. And you’ll be so happy that you own the TSX.


Losing it

Here’s Tom, from Windsor.

It’s interesting, that city. Two hundred thousand people living in the southernmost place in Canada corded to Detroit by the busiest border crossing in North America. The trouble is, the border’s largely closed – essential travel only. Thanks to Covid. The local economy is decidedly blue-collar. Cars rule. Chrysler is the big deal, but there’s doubt about its future. And the GTA is long ways off – fours away down the 401 Highway of Death.

Despite that, delusion. FOMO. Read Tom’s report.

Thought I’d let you know what was happening in real estate here. We bought a 2200 sq ft townhouse here 5 years ago for $279,000. My wife did an HGTV Reno on the place so all said and done we had around $480,000 in it which I didn’t ever think we would see again, but it was our retirement place so I didn’t worry too much about it. Anyway, we have three kids all grown who work in the cruise line industry and two of whom were furloughed and moved back home with us. As a result we thought perhaps we should look at a detached home with a bit more space.

Started looking in July and every place we saw (about 30 homes) all sold within days of being listed and every one of them sold by auction. The average listing price of the homes we looked at was $699,000 and the average overbid was between $120,000 and $135,000…nuts! You couldn’t put any conditions on the offer and they did an offer day in every sale. Many if the houses had kitek plumbing that needed repairs and still they sold over auction and these were places that would never have sold without prior repairs being done not sold as is in an overbid auction.

About 3 weeks ago we were door knocked and offered $800,000 for our townhouse. We gave it a lot of thought but rents have gone up here as well and we can’t replace our unit for $800,000 in this market. It’s crazy that this is happening in a town that has a major industry revolving around vehicle manufacturing that currently has no new product line announced for its major employer. If that place goes under, like Oshawa and GM, it’s over here for many years yet people still throw this kind of money at places. We have decided to not get involved in this market but rather watch from the sidelines.  Anyway, I’m sure it’s the same story in many other places but I’d thought I’d give you an update.

Well, should T have sold for eight large in a once-in-a-century pandemic boom and pocketed the tax-free windfall? Probably. But we don’t know anything of his circumstances. Except for two clingy, spongy adult children who can’t make it on their own.

What’s this note really about? Risk, of course. People overbidding for homes in a tertiary market with an uncertain economy in a volatile time. Buyers competing for houses with structural issues and doing so without protections in place. No conditions. No inspections. All hormonal.

What would cause this behavior? (a) The fantasy belief that prices will go up forever, so it really doesn’t matter how much something costs. And (b) the cheap loans which make overpaying possible. For now.

Okay, let’s not diss Windsor too much. But the place is gritty. The main drag for years has been littered with empty store fronts and marginal tenants. US wit Stephen Colbert once called it (on air) ‘Canada’s rectum.’ It’s currently a Stage 3 hotspot for the virus. Unemployment during the summer hit 16.7% – the highest in Canada (it’s recently dropped to about 13%). But there’s a killer view of the gleaming Detroit skyscrapers across the river.

Real estate? Sales this month are running 32% above last year’s level. Prices have surged 31%. So far in 2020 – the year of virus, lockdowns, economic glut and record joblessness – prices in Windsor are up 18.67%. And therein we have a cautionary tale about what is happening these days to our nation. We’ve lost it.

Windsor is not like, oh, Hamilton, Oshawa or Mississauga. There’s no commuting to the Big Smoke. No big population inflow. No looming employment opportunities. The average age is above that of Toronto, the GTA or Ontario. And no quick trips across the water now to catch a Tigers or Red Wings game.

But this is not about one city. It’s just emblematic of outlandish behavior everywhere, whether in Kamloops or Bedford. Even the head house-humper at Royal LePage is sounding an alarm. ““Prices right now are rising at an uncomfortable rate,” says Phil Soper. “The economy and the social data in Canada right now is not boom time.”

You bet. The jobless rate everywhere is awful. Governments are going dry for funds. Cities are in financial crisis. Westjet just pulled out of Atlantic Canada. Ontario and Quebec cannot control Covid. Four million people are on government pogey. We’re heading into winter with hotel occupancy at disastrous levels, tourism moribund and six in ten restaurants expected to fail.

Moreover, the interest rate tough has been hit, and it seems to this pathetic blog like the real estate peak has been passed. Numbers emerging over the next two months will show increasing bond yields, for example. Massive government stimulus plus an end to the US election uncertainty will bring a rise in rates – according to a second major US bank report (Citibank first, now Bank of America). Rates could be 1% higher by the end of next year, which would – yes – more than double the current level.

Pandemics are temporary. They end. Always. Recovery will bring modest inflation, higher rates and a repopulation of the major cities. Decisions people are making today – buying in places that were cheap for a reason and taking on inflated debt to do so – could look dodgy at best, lethal at worst, two years hence.

Tom’s house may be worth $480,000 again. Bummer. But at least the kids will be gone.


Less than zero

The virus news sucks. Ontario started shutting down again late Friday. Real estate open houses are kaput. Quebec’s a mess. Cases continue to pile up in the States, Europe and Asia. Two pharmas just suspended vaccine trials. Trump’s claim for a cure by election day is just more of his hot air.

Your odds of contracting it are slim. Of dying, even less. But the chances of being more impacted by Covid than, say two months ago, are probably 90%. When the snow flies, even moreso. Governments and the politicians in them are not ready to trust you yet.


WFH will be with us until the spring. An airline may go bankrupt. The federal deficit will be insane. Chrystia’s gonna tax you more. And some people think banks will soon start paying you to borrow money.

That was a topic here a few days ago. Negative rates. Recently some media reports suggested the Bank of Canada was considering this. So we should noodle it for the next three minutes.

First, negative rates do not mean you get paid to take a mortgage and be deliriously happy. Instead it’s when the central bank drops its benchmark rate to less than zero and provides the commercial banks with oodles of money, hoping they will lend it out. And why would they do that? Because the news is bad. Worse than bad. A disaster.

Central banks adopt negative rates, which are drastic, when they fear the economy’s about to slide into a deflationary spiral. Deflation’s way worse than inflation. When it hits, spending stops as prices steadily fall, GDP shrinks, unemployment worsens, corporate profits fizzle, companies fail and real estate takes it on the chin. Just Google the 1930s and see what deflation did to the price of a house in Toronto, Montreal or Winnipeg.

So negative rates are a last-gasp monetary tool to thwart this. The whole idea is to make saving so unattractive that people (and companies) spend everything and borrow lots. Negative rates first appeared following the 2008 credit crisis and more recently in Europe, where economies have been struggling. If they ever come to Canada, the last thing you want is to have the bulk of your net worth in a house. Deflation makes debts harder to pay, not easier, as incomes and opportunities wither.

But what about Canada in 2020? Where’s this talk of negative rates coming from?

From this dumb comment by our new central banker Tiff Macklem: “We are not actively discussing negative interest rates at this point, but it’s in our toolkit and never say never.” His last four words were a mistake. He surely wishes he could take them back.

Negative rates would mean the Bank of Canada rate drops by another quarter or half-point. That would reduce the banks’ prime by a similar amount and drop five-year mortgages to about 1%. Bank profits would be clobbered. Markets would run red. Sparrows would fall. And it would only happen if the virus flared out of control, ICUs were overrun and a complete economic lockdown were to occur – guaranteeing recovery would take many years, not a few months.

Consequences would pile up. Savers would make absolutely nothing on hundreds of billions in high-interest accounts. GICs would renew at zero. Fools would borrow excessively and asset bubbles grow, before collapsing. Banks, squeezed as never before, might eventually halt lending since they’d be taking risk without gain. Cascading prices would be lethal to small business and big corps alike.

Trust me. You do not want negative rates. Nor deflation. And the good news it this: ain’t gonna happen. Not in this lifetime.

In fact, you should expect the opposite.

The year of Covid has brought unprecedented government and central bank spending. That $350 billion deficit T2 created is because of fiscal stimulus like never before – all those CERB cheques, payroll subsidies, rent assistance and enhanced social benefits have cascaded into the economy to replace money the virus stole. Meanwhile CB rate drops have helped unleash a weird real estate boom and explosion in mortgage debt. Our Bank of Canada is also gobbling up $5 billion a week in securities, pumping all of that cash back into the system. Never. Happened. Before.

Inflation has started to rip, and all this spending assures much more to come. Public debt levels have exploded higher. The Libs in Ottawa are actually doubling Canada’s total obligation. Eventually the combination of debt, extreme deficits, government borrowing, inflation and economic recovery will trigger the bond market. A sell-off there will jack rates in short order – with neither the BoC nor Mr. Socks able to do anything about it.

In short, no negative rates. In fact one major US bank is calling for a full 1% jump in 2022. Most other analysts see rates sliding higher in 2023 and beyond. Those who argue “the government won’t allow it because everyone is in debt” have some surprises coming.

Conclusion: be careful what you wish for. Lock in at today’s absurd levels. And hope the guy running our central bank shuts the hell up.