The frenzy

The pound poll, results posted here yesterday, had a sample size over 5,000. Rarely do surveys in Canada query that many people. Of course, none of you were randomly selected, since that would be far too frightening. But, still, it’s a mess of folks. And the numbers confirm suspicions this blog has held for a number of months…

So, yes, the wealth and income gaps are chasming out of control. No coincidence that the majority of people here are (a) professionals, (b) above-income and (c) work from home. Thus we do not represent all of the nation. Far from it. We stand on one side of the gorge. The virus will have a lasting impact on many things – public health policy, government finances, social mores, workplace cohesion and conservative politics – but the greatest will be on helping to fracture society along financial lines.

It’s not good. But it’s everywhere.

We’re not alone, either. In the last year Canadian house prices rose 17% (to $607,280) and US real estate grew in value 13% (to an average of $309,800). Interestingly, the market for cheap homes in the States slid a little while ‘luxury’ homes (over $1 million) grew 90%. And now Joe Biden has just thrown gas on the real estate fire. In his first week in office the new prez (a) froze foreclosures, (b) gave first-time homebuyers $15,000 each for downpayments, allowing the purchase of a $500,000 property, amd (c) made ultra-cheap FHA mortgages widely available.

The fifteen grand is a big deal. It can be accessed immediately and serve as a deposit on a home, although it’s technically a tax credit. It’s available to anyone who hasn’t owned in three years, and Washington wants to boost the number of buyers by almost a third. The results? Inevitable. Prices will go up as a shortage of inventory is exaggerated and once again America is on the road to the kind of excessive home ownership and speculation that led to the 2005 crash. But that was 16 years ago. Nobody remembers.

But here’s the point: everybody sees what the virus has wrought. WFH salaried professionals have done great. Over 90% of our survey responses showed net worth has increased since Covid arrived. There’s no way this wealth divide can be bridged by taxing the rich (although Mr. Socks and Chrystia will try), so the next best thing (policy-makers believe) is to ensure everyone has a house. Because real estate always goes up. Oh boy.

This may explain comments from our central bank boss, Tiff Macklem this week. When presented with the facts – more houses sold last year than ever before; December sales were the highest on record; house prices rose 15x the inflation rate in 2020; homes are being flipped for 50% and 60% annualized gains in wide swaths of the GTA – he shrugged. It’s all just because of cheap mortgages and WFH, he says. No speculation.

A speculative, FOMO frenzy that beats 2017

Source: Toronto Storeys

“Because people are working from home, they don’t need to commute. Many people feel that even after the pandemic there is going to be more flexibility in many workplaces to work from home than there was in the past. So far we are not seeing the kind of excessiveness in the housing market that would really get us worried. This doesn’t look like 2017.”

No, governor. It’s worse. And you know it. This is a frenzy.

Home prices have flown way past 2017 levels. Nationally the cost of a home is 22% higher, yet incomes have risen less than 5%. Yes, mortgage rates have declined slightly, but Covid has changed everything, including our insatiable appetite for debt. Now we’re seeing speculative prices growing at twice the pace in quaint old ’17. Worse, the FOMO disease has spread (thanks to the pathogen) from the Big Smoke to the burbs and beyond to those hinterland cities where average folks could once afford average houses. This time we’ve managed to poison, gentrify and infect markets hundreds of miles out from the core. Hell, people from the GTA are moving to Nova Scotia buying houses over FaceTime in bidding wars. Is this normal, Tiffer?

Nope. In fact another government agency – CMHC – is warning darkly if the virus roars back and we see a new recession form, unemployment could spike to 25% and real estate crash by 47.9%. Without government intervention, it adds, a few big CUs would fail along with CMHC itself – which insures over $600 billion in mortgages.

Says the agency: “As we continue to deal with the impacts of the COVID-19 pandemic, it is important to monitor the evolving financial risks facing Canadian housing markets including an uneven economic recovery impacting most vulnerable populations. Stress testing exercises like this are an essential part of effective risk management and vitally important to the long-term health and stability of Canada’s housing finance system.”

Well, who knows what lies ahead? But we do know what’s happening now.

Mortgage borrowing goes bananas on big houses

Source: Financial Post

In the last six months, Covid-fueled mortgage borrowing has been frenetic. As in the States, the greatest new debt is coming from the purchase of ever-larger, ever-more-expensive digs. Cheap mortgages, WFH, nesting and a delusional population have created a market of historic peculiarity. In the last 90 days Canadians snorfled another $29 billion. Mortgages now top $1.6 trillion. And you know what a trillion is, right?

Over 60% of Canadians, says MNP in a consumer-debt survey, “feel now is a good time to buy things they otherwise might not be able to afford.”

This doesn’t end well.

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All about you

Looks like the typical blog dog is a 40ish-something professional earning above-average income who’s pro-vax and upon whom the slimy little pathogen has showered a heap of new net worth. Students don’t come here. Retirees are relatively scarce. And a majority  scurried home when the virus arrived, then made their dogs deliriously happy by staying there.

Blog data is below. So, 5,140 responded since this time yesterday, or about 10% of the usual number of listless, bored, confused people who stumble in here daily looking for a sanitized bathroom. Of course, this is all about comparing yourself to everyone else.

Key findings: few blog dogs were punted from their jobs by the virus and three-quarters suffered no income loss, either. The WFH brigade is huge – well over half of the respondents have been in sweatpants for almost a year now, Zooming their employers and frittering away far too much time on some pathetic blog. Shame on you. Back to work.

A third of those surveyed fessed up to having received money from Mr. Socks, and doubtlessly a bunch of this was in the form of the sweetened child pogey as well as CERB. But the real kicker is what the virus has done to net worth. Up for an astonishing 90% of you. As we’ve been speculating here for a while, the bug has turned the wealth gap into a canyon. Financial markets have soared since vaccines came on the scene and real estate markets everywhere have been insane – fueled by FOMO, nesting, fear of germy cities and dodgy neighbours. Plus, of course, the weird belief that people will never commute back to the workplace allowing them to migrate to the hinterland and wreck real estate there.

Speaking of wealth, most people answering the poll are in professional jobs, and 70% have household incomes between $100,000 and $400,000. Almost 7% make in excess of $400,000, which is nine times the national average. Mostly realtors and embezzlers, likely. A third are in their 30s, and 80% are younger than 60. And check out the vaccine hesitancy, to see if it matches the number of dumbass comments that I’ve had to delete lately.

What does this tell us about the 1% of readers who light up the steerage section on a daily basis, defending MAGA, saying Covid’s just a flu, telling us Trump won the election, Alberta is going to separate, the stock market is a Ponzi scheme, the economy’s collapsing, the future’s dark and cats are okay?

Yup. Ignore ‘em. They only think we care.

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Tale of two

It’s been an economic crisis like no other. For the first time in a century we locked down whole cities. Provinces, even. Travel restrictions. Bars, eateries, hair salons, gyms, arenas, shops, theatres all shut. Never in our lifetimes have the streets been full of people in masks or has transit ridership plunged 90%. Entertainment, tourism and travel have been crushed. You can drive on the Gardiner Expressway without melting down.

So, there are 1.7 million people unemployed. The number working from home is currently just under 5 million. But here’s the weird thing – almost 350,000 new jobs were created in the last 12 months, and they were all high-paying positions. So as the hairdressers, shoe store clerks, baristas and fitness instructors got whacked, society gained more government employees, health care professionals, realtors, IT dudes and managers.

CIBC released a report this week saying, “it’s a tale of two economies.” And this: “The lower the pay grade, the worse the job market performance is,” as three-quarters of a million lower-wage people were idled.

Well, here’s the bottom line: net worth for the WFH crowd has increased if (a) they had investment portfolios, which ended up delivering solid gains in 2020, or (b) they own real estate, which was bloated by FOMO and crazy-cheap mortgage rates. Meanwhile these folks in general retained their salaries while seeing their overheads plummet. Cash flow improved. Savings grew. Covid was good for their bottom line. And now the wealth gap has yawned even more than back in 2019, when you never thought about bats or vaccines.

What’s next?

It gets worse, but only for the folks at the bottom of the income scale. The lockdowns in Ontario and Quebec, especially, has decimated the service sector where most of them work. Unemployment is expected to increase to 9% or beyond before things get better in the summer. (We lost 63,000 jobs last month.) Meanwhile everyone is anticipating an inflationary spring housing market and equity markets have been inching to new record highs on the expectation of economic reopening.

The rich get richer. Assets grow in adversity. The rest fall behind. Hard times hurt.

Can the wealth gap grow indefinitely? Not if Chrystia gets her way.

More on what our politicians have in store in the coming weeks. In the meantime, let’s count your blessings.

Has the virus changed your financial life?

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The impossible

Recall that poll noted here yesterday showing 65% of Canadians are unconcerned about interest rates? They don’t care because they think the cost of money cannot rise. Ever.

And the steerage section agrees. The belief that mortgages at just 1.5% (the lowest in history) will endure seems almost universal. And the arguments are consistent: (a) higher rates are impossible because everybody’s picked in debt, (b) that would trash the economy, (c) the real estate market would crumble and the government won’t allow that, (d) public debt servicing costs would explode (so the government won’t allow it), and (e) higher rates are a Boomer scare tactic and we hate you.

So Wednesday – the final hours of the Trump experiment – is decision day for the Bank of Canada. Some people have speculated lately that because of Covid’s second wave, the lockdowns in Ontario and Quebec and the big job losses last month, that the central bank would cut its key rate a little. But that seems unlikely.

In fact, here’s a new survey of 16 leading Canadian economists by Finder supporting that – 75% say a cut isn’t warranted. That’s because 2021 is the Year of the Vax and as the months roll by more and more folks will be inoculated, allowing the economy to re-open, restoring growth and kindling monetary demand without more stimulus.

But what comes after that?

What about all those people swallowing huge new dollops of debt to buy houses at record-high prices with financing at well below 2%? What happens to them in five years if they have to renew at a higher rate, especially if rate increases mean house values will moderate or even (gasp) decline?

Here’s what the economists predict:

Will rates rise? 87.5% of these economists say, yep.

Source: Finder

So almost 90% believe the next move by the central bank will be up, not down. Two-thirds of them (69%) say the increases will start within the next two years. The rest say they will commence the year after. Thus 100% of them state the cost of money will be greater than today by the time a five-year mortgage term is up for renegotiation.

Why?

Today is not normal. That’s why. These home loans rates are weird. Unsustainable. The rate structure in place is the result of a once-in-a-generation, global pandemic, emergency recession, holy-crap reality that a year ago nobody expected. And now nobody expects it to last.

What comes next? The majority of people, Ottawa says, will be vaxed by September. Lockdowns will be lifted once case numbers start to decline (seems to be happening already in Ontario and across the US). Service industries will open again. Workplaces will resume. WFH will be under pressure. Half of economists say many people will be expected back at their places of employment by this autumn. Another 25% say it will be in the first three months of 2022. But it will happen. Concurrent with this will be more spending, more consumption, commuting, travel, child care costs, GDP growth and price inflation. As the cost of living creeps back to 2%, for example (it was 1% at the end of 2020), you can be sure the bond market will have pushed yields up in advance. And it’s here that fixed-rate mortgage costs are set.

How about Biden?

Big news, with (probably) a big impact. There will soon be a $2 trillion Covid stimulus plan coming out of Washington now that the Dems control the White House and all of Congress. In fact, expect a lot more spending than would have been the case during a second Trump tenure. Plus an accelerated agenda for vaxing the nation – 100 million people in the first hundred days. That will help economic recovery and, yeah, fuel inflation with all that new stimulus.

Now, all this is good. Better than the alternative. Normal is a long ways off, but 2021 will surely be beating a wide path in that direction. The last ten months have been a long, dark, depressing anomaly. They were not harbingers. They will not frame the long-term future.

Even the Bank of Canada’s former boss said it a few days ago: “I think there’s going to be a boomlet when we come out of this crisis, later this year.”

So, in conclusion: houses jumped 17% in value across Canada during the 2020 pandemic because mortgages cost 1.5% and people could borrow more while paying less. So they did. They pigged out. FOMO and YOLO ruled the land.

But the virus will soon fade, taking with it the reasons money was cheap and why you got to stay home for a year. How is this not simple, and obvious?

Lock in. Set up a weekly-pay mortgage. Start saving for renewal day. Oh, and get new tires.

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The infected

John says he started worrying after his buddy picked up one of those irritating snowmobile-on-water things that had been purchased back in November. At that time the dealership said it had already chewed through a third of its 2021 inventory.

“I’m in the market for a new boat myself,” he tells me, “so after hearing that I went straight to the King Fisher dealership (also Canadian made) and was told that the inventory they had on site was all they were getting for 2021 due to insane demand. That was Jan 10th and they had 10 boats for sale at the time. I called the sales person back on Jan 15th and they were down to four. I was told that if I didn’t buy this week I probably wouldn’t be getting a boat in 2021.

“That was on January 15th, 2021. Keep in mind, these boats cost between $70,000 – $400,000… Either the world has become obsessed with water sports (the outdoor kind) or isolation has driven people nuts. I bought a boat, so it’s possible that I belong in one of those  two camps myself…”

Well, our dude is not alone. RV sales have gone through the roof in the last ten months, keeping pace with the boat guys. And check out what’s been happening with bikers. The Canadian Motorcycle and Moped Industry’s latest report (November) says sales soared 55% year/year, with off-road recreation bikes up a dizzying 194%. And how about quads? Ditto. Sales before Christmas were coursing higher by 48%, and in 2020 an additional 12,000 units had been spoken for.

Meanwhile we know all about real estate. Home sales in December jumped more than 7% from November – which is unprecedented. The number of deals last month was a record across Canada. Compared to the end of 2019, the bump was 47%, pushing prices ahead 13%. For the Year of Satan as a whole, Canadians bought an amazing 550,000 properties.

The places with the biggest price gains? Wow. Small Ontario cities and cottage country. You know – backwater, hayseed, cultural wastelands like Brantford, Barrie, Peterborough, Woodstock, Welland, the Kawarthas and Muskoka – where crazy people buy quads, cruisers and jetskis.

It’s a pandemic spending revolution. No wonder. Airline bookings are down 90% and those people who do flit off to Mexico or Florida are being shamed in an era when ‘non-essential’ travel is a big sin. In parts of the country you can’t even cross a provincial border without being forced into a soul-sucking two-week quarantine. In Ontario it’s impossible to get out of the house for a nice meal or (my fav) to go clubbing and boogie all night to Tiësto or Pascal Letoublon.

So what are we doing instead?

Consuming. Spending. Indulging. Nibbling through that $104 billion pile of chequing-account cash that came from Mr. Socks plus not having to spend money on commuting, childcare, dogwalkers, gas or fresh undies and pants. We’re also borrowing as never before, with household debt levels jumping to a new historic high. No wonder. Five-year mortgages are 1.5% and the longer this damn virus hangs around, the cheaper those loans get.

In a word, change. Societal change. WFH has altered everything for many people. Urban depopulation is a thing. Small town house values have been jacked by Covid refugees. The price of a 2×4 or a sheet of drywall has scaled new heights as home renovations explode. Personal indulgences, as epitomized by $200,000 boats and $15,000 bicycles have turned mainstream. And the slimy little pathogen has done a big number on home affordability, forever locking a generation out of real estate.

Investing? Pfft. This is all about consumption.

And look at this – the latest debt survey from MNP shows just how much Covid has screwed with our heads. Four in ten say they’re not confident they can survive until the vaccine rescues society and their finances without going further into debt. But at the same time, 60% think cheap interest rates make this a great time to borrow more! Especially stuff they couldn’t previously afford! Like an $18,000 quad! Almost half (47%) state these low rates make them feel ‘comfortable’ about carrying an increased borrowing.

But what happens when the cost of money inevitably rises from these all-time lows? Well, according to an RBC survey, it ain’t evah gonna happen. Two-thirds of Canadians have convinced themselves that emergency, once-in-a-lifetime, global-pandemic-induced interest rates are here to stay. The new normal.  They say they’re completely ‘unconcerned’ about an increase.

Of course. That makes just as much sense as saying offices will stay shut and you won’t see the boss again. Other than on Zoom. Waist up.

Did you ever think a spike protein could do all this?

So many surprises in store.

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And so it ends

Petulant, defiant, Donald Trump is scheduled to board a helo at the White House Wednesday morning and depart for his Florida mansion. He’s snubbing Biden’s inauguration. But the veep will be there – the guy who at the 11th hour stood up to the President and called out his election-fraud fiction even as protestors outside the Senate chamber where he stood chanted ‘Hang Mike.’ Mr. Pence grew a set.

So the era of the tweeting 45th commander-in-chief ends on a note few could have imagined. Trump has been impeached twice and stripped of his social media presence. He’s been shunned by most major corporations, abandoned by the PGA and faces both loan defaults and a possible indictment for fomenting insurrection on January 6th. His brand is sullied and, without much doubt, he leaves America more confused, divided, polarized, hostile and ungovernable than when he arrived. Plus there are almost 400,000 dead citizens in a pandemic he consistently downplayed by mocking public health measures like mask-wearing.

But wait. His disciples say the Trump years brought economic renaissance, record markets and prosperity. No way Biden can duplicate that. In fact in recent months he warned of “a depression the likes of which you have never seen” if he failed to win re-election.

Said Trump in Lansing, Michigan in the final days of the campaign he lost by seven million votes: “This election is a choice between a Trump super recovery or a Biden depression. That’s what you are going to have with the raise of taxes, the biggest tax increase in our history. It’s ridiculous. It’s a choice between a Trump boom or a Biden lockdown. Let’s lock it all down, and by the way speaking of lockdowns, let’s get your governor to open it up. Let’s get them to open it up.”

This is important to your B&D portfolio, your TFSA, RRSP and your kid’s education savings plan because how goes America, so go your investments. The Trumpers (and they are still legion, and pissed) insist the US economy flourished under Trump because he dropped corporate taxes, ignited a trade war with China, brought in protectionist policies, sliced immigration, ignited inflation and growth while creating oodles of jobs.

Some of that is quite true. A balanced and diversified, 60/40 portfolio in 2019 did great – up more than 15% as stock markets hit a high note before being whipsawed by the virus. The American unemployment rate dropped below 4% for a while, then soared in 2020.

By the way, here’s a comparison of how equity markets did under Trump, his predecessor and George W. Bush. After four years on the job, Obama’s track record was substantially better as he presided over the recovery from the credit crisis.

Markets liked Trump, but Obama even more

And what about jobs?

Trump was elected with the help of workers in the Rust Belt states after manufacturing was decimated and jobs moved offshore as corporations tried to lower costs and abandon high-wage America. For a while it worked. Until it didn’t. The pandemic has raged in the US more viciously than in most of the world. With just 4% of global population, it has suffered a fifth of all global deaths. Ten million fewer people are working than a year ago, and the latest jobless claims have spiked again. Recovery from Covid has sputtered in recent months, and doubtlessly the rage and frustration of economic defeat helped fuel the ‘attack of the patriots’ in Washington on 1/6.

Here’s the Trump record on unemployment.

So what now?

Trump warned Biden was a leftie, a taxer, a socialist and besides being ‘sleepy’ with dementia would destroy the economy. The new president’s first economic act came last Thursday night when he promised a $1.9 trillion Covid stimulus bill to direct-pay American citizens, fast-track vax inoculations and support state and local governments. The odds of this passing through Congress are high, now that Dems control both houses. At the same time the Fed. America’s central bank, last week promised interest rates will stay in the ditch and quantitative easing continue.

The reality is that Biden is a centrist, with a five-decade record supporting that. He proved that again during with years with Obama. Biden is boring. Right now, boring is good.

But will he raise corporate taxes as promised during the campaign? Yup, no doubt. That will impact corporate earnings and maybe chop P/E ratios, tempering equity markets. But at the same time inoculating 100 million people in a hundred days will start to eliminate the single-greatest economic destroyer in modern history. There is no other way of getting the airplanes flying again, the hotels full, the stadiums teeming or the restaurants buzzing. Trump’s key failure was to consider the virus an enemy instead of a challenge. He denied it when he should have been mobilizing against it. He leaves anti-maskers, anti-vaxers, Covid deniers, China haters and mobs in his wake.

Time will tell how narrowly we escaped the full impact of this man. If at all.

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Outlook & themes

RYAN   By Guest Blogger Ryan Lewenza
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“It’s tough to make predictions, especially about the future”
– Yogi Berra

The above quote has always been one of my favourites and I often think about this quote as I’m preparing my market outlook for the year ahead. It’s part of my job to analyze and forecast where the markets and economy are headed, but I’m fully aware of my own fallibility and the arrogance required to believe I can correctly and consistently predict an unknown future.

Take last year for example. Who would have predicted we would be hit with the worst global pandemic in over a 100 years! That said, we do the best we can on making these predictions with the information and knowledge that we possess. As I often say to clients, if I can go 6 or 7 for 10 then I consider that a win. So, let’s get started.

The next few months could be dicey as Covid rates rise exponentially, governments in turn roll back reopening measures and we transition to a new US president and a democratically controlled congress. But if we do see any volatility over the short-term it should prove to be a buying opportunity, as I’m fairly bulled up for this year.

First, critical to our positive market outlook is our expectations for a big ramp-up of vaccinations in the coming months and the high likelihood for developed countries to reach ‘herd immunity’ in the second half of this year.

With us being locked up in our homes for close to a year now, record savings and cash balances on hand and our profound desire to get back to normal and do all the things we miss, I believe once we near herd immunity that we’ll see an explosion of economic activity and a big rebound in the global economy.

This sentiment is echoed by many other economists as consensus is currently projecting the global economy to expand by 5.2% for 2021, after contracting by an estimated 4.4% in 2020. Canada is expected to grow at a faster clip than the US (5.2% vs 3.1% for the US) given its exposure to natural resources and that we were harder hit than the US in the downturn.

Economic Growth Forecast to Rebound Strongly in 2021

Source: Bloomberg, Turner Investments

The key to this economic recovery will be jobs! So far the Canadian and US economies have recouped 80% and 60%, respectively, of the jobs lost last year at the start of the pandemic. I see the potential for some job losses in February and March due to the lockdowns, but then strong job growth for the remainder of the year as vaccinations pick up.

Job growth in certain areas like business services, manufacturing and construction have actually been quite strong since last March, with the more service-based sectors like leisure and hospitality lagging well behind. But as we get vaccinated we should see people flooding back into the bars, restaurants, hotels and hospitality sector. This is why I see job growth surging in the second half of the year and this will be a sign that the pandemic is nearing its end.

Leisure and Hospitality Jobs to Accelerate in H2/21

Source: Bloomberg, Turner Investments

If I’m correct about this ‘pent up’ demand and a strong economic recovery, this should translate into a big rebound in corporate profits.

Stocks go up by either the multiple (i.e., P/E ratio) increasing or rising earnings. I see earnings growing at double-digit rates this year, which should help to propel the global equity markets even higher this year. Currently, consensus estimates point to S&P 500 earnings increasing by 30% this year. This is really the crux of our bullish call for this year.

Big Earnings Rebound Expected in 2021

Source: Bloomberg, Turner Investments

My conviction for further stock gains is pretty high this year, but, as always there are a few risks to my outlook that I’ll be monitoring closely.

First is the vaccine rollout and the expected time to reach herd immunity. A low adoption rate of the vaccine could greatly hamper how quickly we eradicate this virus and pandemic. Some surveys in the US showed only 60% of Americans would be willing to take the vaccine, but this has started to rise (now at 70%) as the vaccine rolls out, which is critical since it’s estimated that 70-80% of the population needs to be immune to the virus (either through vaccination or through natural infection) for us to reach herd immunity.

Second are the high equity valuations. Currently, the S&P 500 is trading at a forward P/E ratio of 23x, which is the highest level seen in many years. I do believe the historically low interest rates does support and justify a higher than normal P/E level, but clearly US stocks are expensive. This is one reason why we’ve introduced US value stocks into client portfolios.

When all is said and done, I believe earnings will rise more than the P/E will contract in 2021, and thus, equity markets will continue to rise this year.

High US Stock Valuations a Risk to our Bullish Outlook

Source: Bloomberg, Turner Investments
  • So that’s the call. Stocks will climb a wall of worry this year on a successful vaccination rollout, a rebounding economy and higher corporate profits. Now let’s discuss key themes for this year:As the economy rebounds and inflation picks up, long-term bond yields will rise, which should weigh on government bonds. In a rising rate environment, corporate bonds should outperform government bonds, which is why we’ve reduced our government bond exposure in recent months.
  • I see small-cap companies outperforming large-caps this year, which is why we added them back to client portfolios last summer.
  • With stronger economic growth and a weaker US dollar, emerging market equities look set to do much better this year and I see them potentially outperforming developed markets.
  • While the growth sectors – technology and healthcare – should continue to shine, I believe value stocks will finally come to the party and perform well over the next few years.
  • REITs, after a rough 2020, should rebound nicely as people return to the shopping malls and concerns over commercial real estate subside. I see REITs as a vaccine recovery play.
  • Biotech stocks are one of our favourite growth ideas right now and we see the industry outperforming this year.
  • Oil and other commodity prices will continue to rebound as demand picks up in the second half and therefore see the lagging TSX doing better this year.

Come this time next year I believe the markets will be higher and the world will be a better place. As always, I’ll review these market calls at year-end to see if I can prove Yogi Berra’s assertion wrong.

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.

 

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Oh boy

Deep in the concrete wilds of north-central Mississauga, on a street with towering 8-foot-high trees, driveways teeming with minivans and endless vistas of same-brick mass-built houses, she sits.

This attached rowhouse (20 feet wide) was listed recently for $785,000 – slightly under market (the previous high on the street being a few weeks ago – $825,000). There was no open house, of course, since apparently there’s some kind of virus going around and that kind of thing is verboten. Nonetheless, the vendors received seventy offers. Yeah – 70.

The sale price: $966,000, or $177,000 over asking. And it represents a 17% price escalation on this street in two months. With land transfer tax ($16,000) plus closing and moving costs this is essentially a $1 million purchase. In Mississaugs. On a soulless street. No stores to walk to. Nearest cultural centre: Wal-Mart. Here it is…

“Logic and prudence has been long thrown out of the window in GTA,” says blog dog Nav. “I tend to follow the market to see what’s going on and what I’m witnessing right now is just…insane.”

He references this average run-of-the-mill townhouse as well as a detached house even further away from the urban core (a nice kamikaze 90-minute drive in normal traffic) in Milton. That place sold for a hefty $890,000 in June (seven months ago). It was listed days ago for $1.159 million, and just sold for $1,165,000. That’s a price escalation of $275,000, or 31%, in half a year – and no improvements were apparently made. Here it is…

“You remember creating a blog post a few months ago on how an average detached home costs a million dollars in Mississauga now?” Nav says.  “I think you’ll have to create one for townhouses now. Cheap money and FOMO has completely distorted the market. It’ll be interesting to see how long this lasts and what the consequences are.”

We’ve seen this movie before. It last ran in late 2016 and early 2017 when local politicians freaked over a 32% annual increase in house prices. Now that looks quaint, since this is the age of 62% annualized bloats. Back then the Ontario government brought in a raft of measures to try and curb speculation and cool things off. Those remain. Since then the province instituted an anti-spec, anti-foreigners tax covering the whole ‘golden horseshoe’ region, encompassing all of the GTA. Nope. No effect. That’s failed too.

The difference now is that there’ll be no new anti-FOMO laws enacted. Ontario – like every other province – is too consumed with Covid, an overwhelmed health care system, the tragedy happening in LTC homes and the daunting task of vaccinating entire populations. Not only that, but lockdowns, quarantines and restrictions have elevated unemployment, chewed up the economy, crushed small businesses, created a WFH frenzy and destroyed whole sectors, like travel, hospitality, tourism, food and personal service.

There is no appetite to stop what’s happening in Mississauga, Milton, Barrie, Burlington, Niagara or beyond in Brantford, London. Peterborough and even Windsor.

Why are we seeing people lose their minds, swept into a house-lusty frenzy and clearly over-paying for hinterland properties with the personality of cargo containers?

Because they think they’re going higher. And, collectively, we’ve entered a whole new stage of stupid.

RBC’s latest real estate poll tells the tale. Only 18% believe the economy’s okay, but 45% are convinced real estate will stay smokin’. The bank found 56% are keen to buy a house at the moment, with 51% wanting a detached place – even though most folks (59%) are priced out (and have been for a while). About half of all potential buyers admit they’ll have to move to a place like Milton, bedding down with the coyotes and bears in order to nab a property.

Here’s the kicker: “Even though 60 per cent said homes in their area are overvalued, 80 per cent said real estate is a good investment and 52 per cent expect prices to only go up in the immediate future.”

How do you fight this FOMO? What do you say to keep people from swallowing massive debt, spending every dollar they have and rushing into a risky one-asset financial strategy? Do they not understand the pandemic will end? That WFH will stop being a thing and the burbs fade in appeal? That 1.5% mortgages cannot last and prices always drop as rates rise? That a crash in immigration will help quell demand? That when a particle-board row house in cul-de-sacland is commanding $1 million the universe of potential buyers shrinks fast?

Nope. Hopeless. And it’s only mid-January. In a lockdown.

This will just have to play itself out. No room for logic now. And as no politician has the guts to address a cascading affordability crisis, it will only augment.

Let’s remember it’s the sellers who are reaping the windfall of a pandemic. May God have mercy on the buyers.

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Tough love

Ontario’s conflicted premier locked down the province this week. Well, sort of. Public health skeptics say little has been done to change people’s behaviours and, after all, Costco and Wal-Mart are still open. The subway’s still running. Maskless families are still jamming up the parks. And, yup, the infections are still rising, in the LTC homes among the oldies, and in the community at large.

In the country’s most populated province cases are running at about 3,000 a day. The warnings are that this will be 10,000 every 24 hours within four weeks. Then, if you need to go to the hospital for your kid’s broken leg or some breast cancer treatment, good luck. The system will no longer function. It is a disease of the few which impacts all.

Quebec’s in a state of emergency, too. Plus a curfew. These days you can’t drive through New Brunswick and stop for a pee. That’s illegal. Take a jar. Now people getting on flights to Canada will have to test negative for the virus, which the airlines say is killing them. More routes cut this week, by the way. Working from home is now mandatory in Ontario and Alberta. People entering NS have to quarantine for 14 days, but no self-isolation if you’re flying into YVR from Toronto.

The rules across the country are inconsistent, capricious, constantly changing, confusing and increasingly lethal to the economy. As it turns out, Canada is not a lot smarter, healthier or better run than the USA where states are as messed-up crazy inconsistent with Covid as they are with gun regs.

Well, here are some consequences as to how this relates to your house and net worth (what else matters, eh?).

First we might get a Bank of Canada mini-chop next Wednesday when the CB reviews its interest rate policy. If it happens, thank Doug Ford. The new state of emergency he just imposed is flawed and weird, but it will likely crush a lot more indie businesses, cost more jobs in the services industry, lead to increased retailer bankruptcies and retard the economic recovery promised by vaccines.

Is all this necessary?

You bet, if these rates of infections and deaths keep rising. Widespread vax dosing can’t come soon enough. But before herd immunity happens, we’re in for a couple of months of misery. That’s why the central bank will try to mitigate things with a cut of maybe 10 or 15 basis points, which will reduce the price of short and variable mortgages. You may be tempted. But resist.

The feds don’t control the bond market, where yields have risen. Now with free-spending Dems taking over in Washington, the cost of debt will surely be rising and the price of that debt (bonds) falling. Ad 2021 progresses and the slimy little pathogen (not Mr. Ford) retreats, mortgages will not be as they are now, at 1.3%.

Lock in. And while you’re at it, stay in. We’ll come for you in April.

         

Now about Vancouver. Wow. December was nuts. The price of a detached home is closing in on insane 2017 levels (in Toronto the market has sailed past that point). Last week this blog quoted an expert source saying the escalation was just the beginning of a big surge after three years of backsliding.

Is that credible?

Here’s an opposing view. The argument is that Covid so seriously depressed inventory levels while at the same time making people house lustier than usual (especially for properties with a door to the street and dirt) that prices distorted. The average detached valuation soared to $1.77 million – the highest since the spring of ’18 and a scant 3% below the all-time orgiastic pinnacle of $1.8 million.

YVR property bad boy analyst Dane Eitel points out that 2020 saw the smallest number of listings in 15 years, at the same time mortgage rates crashed and the nesting impulse blossomed. The perfect storm, he says. And it can’t last.

More vaxing will bring more seller confidence and increased listings, while the cost of home loans will surely rise. Mortgage arrears will rise, he adds, while the bug causes a lot of economic damage, “just as government stimulus wanes.”

The advice: wait to buy because until the number of listings swells. And if you want to bail out for top dollar, this is your come-to-Jesus moment.

“We believe the impact of a deteriorating economy will force the home prices back lower in the market cycle to test previously established price points. Going forward the key to the detached market can be reduced to one factor, supply. With home prices back up to the 2016 levels coupled with an economy that is not recovering nearly as fast as the housing market would indicate. The Covid vaccine is seemingly on the way, coupled with higher prices than 2019 and 2020, means owners who put selling their property on the back burner may refocus during 2021. Again the current inventory is only at 2,762 signalling the lowest level in 15 years. This creates an excellent selling opportunity for home owners.”

This is market-timing advice, of course. As this pathetic blog keeps saying, only buy if you really need a house and can afford it without gutting your finances or imperilling your family. But the spring of ’21 might well go down as a poor time to be making an offer. Anywhere.

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Bugenomics

It seemed weird that on the day the US Capitol was breached by a rag-tag but seriously scary mob of nutbars, delusionals, conspiracists and guys in furs and horns the stock market went up 400 points. Since then, a week ago, Mr. Market has hit even more record highs.

Here’s more weirdness. This is a global pandemic. Seventeen thousand Canadians are dead. Twenty million people are locked down. Things are getting worse and last month a steady improvement in employment was violently reversed, as 63,000 were punted. Small business is in a death spiral – and that’s the engine of job creation.

But, but, but. Personal finances have improved dramatically. Historically. Incredibly. Look at this:

  • The savings rate went from below 1% to above 25% during the health crisis, and has settled back at around 8%.
  • In the first nine months of the Year of Satan, 2020, disposable income ballooned by $100 billion while spending dropped $50 billion. Presto – $150 billion more in savings, of which two thirds sits in chequing accounts (earning nothing).
  • During the first six months of the pandemic, says StatsCan, household net worth swelled by $600 billion, in large part because of inflating real estate.

We also know the virus is widening the divide between the haves and the wants. Lower-income, service-oriented and essential-worker folks have been hardest hit by Covid. Tons of jobs have been sucked off in hospitality, travel, food service, tourism, entertainment and personal services. Meanwhile millions of white-collar WFHers have maintained their salaries, dropped their personal overhead and seen their real estate bloat, all while wearing sweats, buying puppies, showering occasionally and moving to Zoom Towns.

Okay, so what does this mean to the economy, markets, portfolios and society?

Lots. None of this is particularly fair, of course, and there’s an argument supporting the view that the attack on Congress is related to the feeling many working people have that the deck is stacked against them. And it is. Clearly. Those with salaried jobs, pensions and houses have actually benefitted from the slimy little pathogen. Others who are paid by the time worked, or are in trades, small businesses or have been trying to afford real estate are getting whacked. A giant legacy of Covid will be more social dissent, greater wealth and income disparity plus pissed-off people looking for a messiah. Hopefully a less flawed one.

For financial markets, this is all good. A chunk of that idle cash will fine its way into TFSAs, retirement savings and other investment vehicles. With corporate pensions in decline and inflation about to roar back, this is exactly what more Canadians need to do.

And the economy? Not so sure. Chrystia & The Boys have been counting on a storm of personal spending as the vax defeats the virus and pent-up demand is unleashed on car dealers, retailers, RV lots, hotels, malls and bars across the land. But a new Nik Nanos survey says three of four people plan on using the money Mr. Socks sent them, and from not having to commute, to pay down debt or save. Top priorities: 39% will trash debt; 37% will save; 13% will spend.

Hmm. Just folks lying to a pollster? Or does this accurately reflect intentions? It would be interesting to know where all the millionaires in the steerage section plan to throw their cash once the bug retreats. Save, invest or spend?

*    *    *

Here’s a follow-up on two hot topics.

First, to those who believe interest rates will never rise again and you’ll have a 1% mortgage forever… not so fast. US 10-year bonds (which ours follow) have jumped a quarter point in yield recently as the Dems won the Senate and the White House, guaranteeing more spending and inflation. This has the same effect as if the central bank had jacked its benchmark, and investors think there is another half point to come. That would equal three moves by the Fed – without the Fed moving at all.

We’ll say it again. Lock ‘er up.

Now, we can’t spend a single day without saying ‘Trump’ so here’s the latest: impeachment in the next few days, conviction later when the Senate flips, and 45 can never hold public office again while the Republicans lose their money machine. It’s a big deal.

“Corporate America is doing what the Politicians don’t have the stomach for,” says analyst Ed Pennock. “Right or wrong this is a new phase for both parties. It may further divide the country.”

Marriott, Blue Cross Blue Shield, and Commerce Bancshares — announced a suspension of donations to members of Congress who voted against election certification. Yesterday, the list expanded to Amazon, AT&T, Comcast, Airbnb, Mastercard, Verizon, and Dow, the chemical company. Hallmark has even asked for its money back from two of the senators who opposed certification, Josh Hawley and Roger Marshall.

Pausing all political spending: American Airlines (NASDAQ:AAL), Archer Daniels Midland (NYSE:ADM), BlackRock (NYSE:BLK), Boston Scientific (NYSE:BSX), BP (NYSE:BP), Charles Schwab (NYSE:SCHW), ConocoPhillips (NYSE:COP), Facebook (NASDAQ:FB), Google (GOOG, GOOGL), Kroger (NYSE:KR), Marathon Oil (NYSE:MRO), Microsoft (NASDAQ:MSFT), Union Pacific (NYSE:UNP), U.S. Bancorp (NYSE:USB) and UPS (NYSE:UPS).

Suspending donations to Republicans who objected to electoral votes specifically: Airbnb (NASDAQ:ABNB), Amazon (NASDAQ:AMZN), American Express (NYSE:AXP), AT&T (NYSE:T), Comcast (NASDAQ:CMCSA), Dow Inc. (NYSE:DOW), General Electric (NYSE:GE), Mastercard (NYSE:MA) and Verizon (NYSE:VZ).

Apparently fomenting revolution, lying about elections and seeking to disrupt the transfer of power has consequences. Who knew?

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