Grasshoppers

Tens of thousands of Canadians are out of the country after vacationing. Most are stranded now. No flights. Closed borders. And a mess of them are running out of money. Maxed credit cards. No savings. No reserves. About to be tossed from hotel rooms they cannot finance.

Ottawa is bailing them out. The holiday folks are being given $5,000 loans to pay for lodging and food.

As detailed here yesterday, up to a million tenants have indicated they cannot pay rent. How many withheld payments yesterday is unknown. But May 1st won’t be any better. No savings. No reserves.

Governments are bailing them out with a $2,000-per-month CERB payment. Applications open Monday. The web site will be flooded, mercilessly. Meanwhile claims for EI have been at unheard-of levels. More than historic. Off the charts. People are desperate for money. No savings. No emergency funds.

In the last seven days alone over 60,000 homeowners besieged a single bank asking for mortgage payment deferrals. Multiply that by five and you can see what’s happening – a quarter million people a week who have houses but lack the money to pay for them. No savings. No contingency. No funds. Just debt.

This week came word half the businesses in Edmonton will soon fold. A major hotel in Halifax has reduced its staff from over 100 to ten. Occupancy in Toronto major’s hotels is less than 5%. Restaurant revenues have declined 100%. Says the Canadian Chamber of Commerce: “We are very concerned that without a significant increase in the assistance made available to businesses to keep their employees on the payroll, we are going to see massive numbers of layoffs and tens of thousands of small businesses going out of business entirely. It will mean that when we come out the other side of the tunnel there won’t be a business for employees to go back to.”

Government’s bail-out will cost $71 billion as it underwrites 75% of payroll costs. But businesses fret they cannot come up with the other 25% to qualify. There are calls for a hundred per cent subsidy. No retained profits. No cash flow, no business. No contingency.

The latest Nik Nanos survey finds one in five people are likely to miss a major payment this month – mortgage, rent or credit card. Among those under 34, the number jumps to almost a third. No rainy day or emergency fund. No plan. Paycheque-to-paycheque.

In response, government will be increasing spending as never before and is on track for a deficit of $180 billion in a single year – 220% above what Conservatives coughed up to get through the 2008-9 crisis. Almost all of this money will go directly to individuals. Opposition leaders say it’s too little, too slow. Parliament is coming back to authorize even more spending.

Yes, unprecedented times. Nobody thought two months ago the economy would be turned off. In fact a lot of us – perhaps the majority – believed adversity would never come. We were immune. There was no reason to be ready for it. So we were not. What we made, we spent. What we lacked, we borrowed. What we wanted, we bought.

Does it sound elitist, smug and unsympathetic to talk about debt and financial promiscuity at a time like this?

You bet. So not a single leader dares do it. Certain. Political. Death. Government’s avowed role now – after preventing people from working, paying their bills and supporting their families – is to paper it all over with borrowed billions. In the next three months there’s no option. Let ‘er rip. But the long-term consequences of our collective profligacy will be, well, Biblical.

Come September, Dog willing, we’ll all be back at it. Remaining stores and businesses will be open. A few more planes flying. Brave people traveling. Offices functioning. Houses being shown, bought and sold. Financial assets restored. Double-digit unemployment nibbled lower as the recession recedes. The subsidies, grants, loans, gifts and deferrals will be trailing away. But federal government debt will be higher by as much as 30% – in less than a year. Canada’s debt-to-GDP ratio will crest 100%. The next budget could usher in toe-curling ‘emergency’ tax increases. Ironically, those who had savings, reserves, emergency funds, retained profits or prudence will be in the crosshairs.

This episode’s painful. Scary. Terrifying. A virus 95% of victims recover from has nonetheless created public panic. Media has convinced the bulk of the population they’re at imminent risk of death.

Overwhelmed health care workers have emerged as heroes. Thank you, thank you.

May every deceased patient and their family rest in our thoughts and hearts. This is awful. Loved ones were swept from you in a storm. Undeserved and tragic.

But when this is done, Canada, we need to have a serious talk.

 

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Rent day

“My local mechanic told me he might not make it, yet four weeks ago he couldn’t keep up with the work,” says Jeff. “For over 5 years that I’ve known him, he’s always been busy.  But now, a bump in the road that might set him back for 2 months is going to bankrupt him?  Makes no sense…he spent more than he made and now his future has come to collect. Garth, humanity is doomed because accountability is lost.”

The tide’s sweeping out. So many are naked.

Today’s rent day, for example. What a mess that may bring. Look what the cascading virus has brought crashing into our ill-prepared society.

As you may have heard, about a million tenants may not make their payments by sundown. After missing one or two paycheques, and before being bailed out by the feds’ $2,000 monthly payments, they’re tapped. Apparently all those blog posts and surveys here about half of folks being two hundred bucks from misery were correct.

Politicians are wading in, confusing many who believed rental real estate was a sure bet. The premier of Ontario has told renters straight-up that if it’s a choice between groceries and rent, they should choose food. That may be reasonable, but landlords also have to eat. Meanwhile several provinces (Ontario, Quebec, Alberta, BC) have nixed evictions and even shut down the dispute-resolution boards. In other words, non-payment of rent will have no consequences for a long, long time.

Big landlords, like residential REITs, have the financial reserves to withstand a no-rent storm (and several are trying to be empathetic). But the little guys may get crushed. Those who bought condos to rent out and were already in negative cash show (an estimated third of all leased Toronto condos, for example – ditto in Vancouver) will see real and immediate losses. There are mortgages to pay (the current bank deferral rules do not apply to rental units), condo fees, property taxes and insurance premiums.

About half all condo sales in recent years have gone to speculators, investors and amateur landlords. If tenants lose jobs, deplete savings, freak out at the shutdown of the economy, or just want to preserve their precious cash and withhold their rent, unit owners are powerless. They cannot collect. They cannot evict. They can’t turn off the water or the heat. They cannot appear before the landlord-tenant board, because it’s shut. They cannot get mortgage relief (unles CMHC-insured – rare).  They can only eat the losses.

Will government step in?

BC is giving tenants $500 a month. Ottawa’s CERB will start doling out two grand a month later in April, but no stipulation the cash is used for rent. Same with the EI payments claimed by almost two million people in the last few weeks. Face it – nobody has any sympathy for residential landlords. The impact this might have on urban real estate values is real.

Meanwhile, witness what Mr.Virus has done to Airbnb. Total collapse, to the point where the company is offering to pay some compensation to hosts whose properties are empty and will remain so. Bookings have evaporated along with travel, the value of airline stocks and the jobs of pilots. With hotel occupancy collapsing below 5% nationally, Airbnb operators are SOL. Those who bought properties solely to do short-term rentals are pooched – and at last count (before the pandemic) there were 22,000 of them in the GTA alone.

Suddenly the collective wisdom of holding income-producing real estate doesn’t look so wise. The costs remain. The revenue is gone. Gains from market appreciation are fully taxable. But the market has frozen, making a sale doubtful. The number of short-term rental units being listed is rising exponentially. Real estate’s Achilles heel – illiquidity – is kicking a lot of butts.

The same dilemma is unfolding with commercial real estate. Small businesses are in awful shape, with zero programs in place for landlords to get mortgage deferral consideration, or free money from the feds. Yup, T2 has offered to loan entrepreneurs up to $40,000, but that’s more debt and the process is complex. Lately even giant corps – like Canadian Tire and A&W – have been asking their landlords for six months of payment relief.

Meanwhile homeowners who can’t make their mortgage payment this month (or the next five) can defer it. But the costs are significant. Interest continues to accrue. There is then interest on that interest. All must be paid back later, in the form of an increased monthly or an inflated overall debt load upon renewal. And, by the way, mortgage rates have been going up.

In short, real estate’s no refuge. But a lot of tenants are about to live for free.

$      $      $

 
If you’re interested in what my suspender-snapping, fancy pants professional portfolio manager colleagues are thinking this week about markets, investments and what’s to come, here’s the conference call we had with clients last night. Stay strong.
 
Turner Investments Client Call, March 31 2020:
.mp3 Audio – OR – .m4a Audio

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Wild

Eeeeeeeeow! What a wild ride.

The stock market careened lower from record highs in just a few weeks by a shocking 38%. But lately it’s zipped back up an impressive 22%. Mr. Market apparently doesn’t think the world is ending. So I guess he doesn’t read the comments on this pathetic blog.

(When I walked back from the office yesterday Dorothy was a wreck. ‘What happened?’ I asked, sweeping her into my manly embrace. Finally she admitted it. “I read the comments,” she whispered. It took three awful episodes of Father Brown to cleanse her mind.)

Back on Bay Street an experienced vet says this: “We’ve had the shock and awe. The institutions are buying again. Consumer sentiment may start to improve. The bounce is technical. The market is pricing in a “V’ shaped recovery. Everybody wants one.”

People with nicely balanced and diversified portfolios who leave them alone will probably do fine. But what about the real estate market? Could the virus attack of 2020 be the catalyst for housing’s Big Reset?

Things are going from uncomfortable to excruciating for the realtor species. In Toronto, for example, showings fell 59% last week from the previous seven days. Same story for sales. Year/year deals are down 40%. The number of cancelled listings has grown by a third and new listings have plunged 33% as owners decide there’s no way germy strangers are coming through to fondle their stuff.

RBC (the biggest mortgage lender) says property values will fall. “Surging unemployment and the market’s illiquidity will compel a growing number of tight-squeezed [home] sellers to make price concessions. We think the recovery will come in stages—taking buyers up to a year to regroup and rebuild confidence amid high unemployment. Based on these assumptions, we project home resales to dive by nearly 30% this year in Canada to a 20-year low.”

Way worse in Calgary and Edmonton, of course, as Canadian oil prices crash (more to come, it seems). Meanwhile cash-strapped homeowners continue to melt down the banks’ call centres. Over a quarter million families have now asked for relief, and the calls are coming in at the rate of 80,000-120,000 per day. Staggering. Add this to the maybe-1,000,000 tenants who have indicated they can’t (or won’t) pay their rent tomorrow.

Now, here’s another flea on the dog: failed closings.

Almost 66,000 properties across Canada sold in the first eight weeks of the year, and a ton of those deals have yet to be completed. For every transaction there’s a family selling and one buying, so in the middle of a pandemic with mass unemployment and growing credit risk, many folks have a lot to worry about.

For example, the appraised value of a house may have declined between offer day and closing, jeopardizing financing. The buyer might have suddenly, unexpectedly lost a job and be unable to proceed. The mortgage broker’s funding commitment might have gone poof. Maybe an investment portfolio that was intended to finance the deal faded. Or perhaps, like so many in the blog’s steerage section, purchasers turned into paralyzed puddles of gooey anxiety. Buyer’s remorse, fear and loathing. Perchance they even got the bug.

Lots of reasons now exist for buyers to consider walking from a deal that poses risk. It’s not that dissimilar from 2017, when prices charged lower and deals disintegrated into lawsuits. Expect more, since a mere global pandemic is no legal excuse for getting out of a real estate contract. Buyers who fail to close not only give up their deposits, but also stand liable to pay the difference between their offered price and the ultimate sale price of the property in a down market. Plus legals. Ouch.

So, if you bought a house you could barely afford with a job, and are now unemployed, too bad. Even having the bank pull your funding won’t allow a clean break from the deal. With almost 10% of the entire workforce having applied for EI benefits at this point, expect some chaos.

And speaking of legal stuff, agents now need this sworn statement before they’ll even show you a house:

  • I have not travelled anywhere outside of Canada, or been in contact with anyone who has travelled outside of Canada, in the last 14 days.
  • I have not experienced any of the following symptoms in the last 14 days: fever, dry cough, shortness of breath, or difficulty breathing.
  • I have not knowingly come into contact with anyone experiencing any of the following symptoms in the last 14 days: fever, dry cough, shortness of breath, or difficulty breathing.
  • I have not knowingly come into contact with anyone with a presumptive or confirmed COVID-19 diagnosis in the last 14 days.

If you lie, the brokerage can go after you. The homeowner might, too. The cops will arrest you for non-self-isolation. The Social Distance Warriors will shame you mercilessly on FB, Insta and maybe (if they can dance) on TikTok.

Remember back when all you had to worry about were bidding wars, rockstar realtors in Audis, greedy sellers, blind auctions, runaway prices and your mom’s failed expectations? Damn, miss those days.

 

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Virus porn

 

“People are not very good at statistical analysis and probabilistic reasoning,” says blog dog Matthew. “I feel like this pandemic has now taken on a whole psychological life of its own, most citizens comply with the official story and are scared by the media, but in truth the reaction is way out of proportion to the evidence, and the ensuing damage to humanity will be staggeringly worse.”

Ya think? Just read the comment section of this pathetic blog. Apparently we’re all days away from a wheezy death. Politicians get a pass on gutting the economy and blowing a hole in finances that will take a generation to mend. Because we’re terrified.

This is not a virus blog. Let’s make that clear yet again. We have no idea where this little bugger is headed. How many of us will sicken, succumb, or the impact on our health care system – all unknown. But we can see 100% are being damaged in an engineered shutdown of epic proportions.

“To allay our fears it is so important to note that up to 1,500 Canadians die each year from seasonal flu (including kids),” Matt continues. “Covid is well and safely within that range.”

But few believe it. (Actually 12,200 Canadians were hospitalized with the flu last year while 3,500 died of it. Thus far we have had 67 Covid fatalities.)

Darker days could lie ahead. We have no idea. So let’s deal in some facts.

First, people are not prepared for this shock. Or any shock. The number applying for EI has shattered all records by a huge factor. Up to 800,000 tenants are believed unable (or unwilling) to pay their rent on Wednesday.

A survey released Monday shows 49% of us are a few hundred bucks from bankruptcy and the number worried about debt (46%) is inflating fast. A quarter couldn’t pay their monthly bills even before the lights went out two weeks ago. About 35% figured they’d soon be jobless. This is a snapshot of a nation in personal financial crisis. No savings. No reserves. No plan.

Second, if you really want something to worry about, here it is: oil.

Crude prices have slumped to twenty bucks, a 17-year low and we’re running out of places to put the stuff. This is Canada’s biggest export. It costs more to move our crude than the oil is worth. Global demand has fallen by a quarter in recent weeks thanks to Covid, and that’s a first. Despite that, Russia and the OPECers have been fighting and increasing supply. Canada, with its pipeline problems and expensive oilpatch operations, has seen its price collapse. Alberta may go with it.

Third, real estate accounts for more of the Canadian economy than all manufacturing. And guess what Virus Porn has done there? Yup, killed it dead.

For example, the following words form part of a release Royal LePage is requiring sellers to sign before an agent will show their home. Yikes.

I am requiring that my Listing REALTOR® market, provide access and show my property to third parties and potential buyers and I do so voluntarily and of my own free will without any coercion by any person or company and being fully aware that we are in the midst of a COVID?19 virus pandemic and the virus appears to be highly contagious;

I fully understand that by allowing access to third parties and buyers entering into or onto my premises that I may be exposing myself to the potential transmission of the COVID?19 virus to myself, my family or my friends and I knowingly, freely and voluntarily accept the inherent risks of this activity, including possible contamination, illness and death;

I will maintain at least a 6 foot (or 2 metre) social distance from all persons that my Listing REALTOR® or any Co?operating REALTOR® brings onto my premises during showings of my property or visits by my REALTOR® or other third parties for marketing preparation purposes;

I have been advised by my REALTOR® that upon completion of any showings of my property to any third parties that I air out the premises and disinfect and clean all surfaces in the Premises including but not limited to door handles, switches, windows, counter tops or any other surfaces. I further understand and agree that these efforts may be limited in their effectiveness of preventing viruses or diseases of any kind;

I have been fully advised by my Listing REALTOR® of the risks involved in marketing, selling and providing access to my home during the COVID?19 virus pandemic and I take full responsibility for any negative consequences resulting from continuing these efforts at this time;

No showings, no sales. No sales, no market.

Fourth, political spending is off the charts. The federal deficit was supposed to an awful $24 billion next year. It will be north of $130 billion. The legacy of tax could be breathtaking in an already high-tax nation. People are being given $2,000 a month. Businesses will be subsidized to maintain payrolls. You can be sure this is a big step towards a universal income – because people have no savings. No reserves. No plans. However, 70% own houses. Go figure.

By the way, Robert sent me this note Monday afternoon: “Just had a call from a friend whose mother in her 90s in a retirement home with supplemental private health and whose life is supported by rental income was told by her tenants, residential and commercial, that they are not paying rent April 1st. Commercial is definitely able to pay. Balanced portfolio sure would be good now.”

So, feel free to worry. But not about getting sick. We can fix that.

 

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The disease

Sunday, March 29th, 2020. Today 5,600 people have the virus in our nation. Over 4,900 (or 98%) of the cases are mild. Across Canada 120 victims are hospitalized, serious. Sixty have died. Bless them and their families.

The infection rate nationally, thus far, is 0.015%. Three weeks ago the federal health minister said it could be between 30% and 70%. That is two thousand times the current level. Thus, it’s hard to know where truth lies. Does an overwhelming deluge lie ahead? Or was shutting down the entire economy, idling millions, an error? Perhaps we shall know that, come the autumn.

Nonetheless, damage is being done. On many levels. Recovery is uncertain. Fear is the disease of choice. The infection rate is 100%.

Over the last year Dorothy rediscovered the joy of physical books. Remember them? Made of actual paper, sometimes with sensual, ragged edges. Embossed covers. Original art. Something to hold that never lights up, runs out of juice or beeps. So I bought her a frequent-user card at the friendly little bookstore down the street, and load it up on birthdays and anniversaries (the perfect guy gift).

‘No walk-ins!’ the sign said, so she called to get a new work of fiction. “It will be in a bag at the front door,” the bookstore lady said. And it was. But the clerk wouldn’t come within ten feet. “I can’t touch your card,” she said. Dread permeated the empty store. The terrified worker could not get Dorothy out fast enough – who, three weeks ago, had been embraced. Cash flow matters not, when faced with imminent death by plastic.

As you know, normal is gone. Following are the voices of some who were in touch with me this weekend.

From a blog dog in Ontario:

I had to write in to tell you a story after reading “The emergency” blog. A friend of the family, late 30s surgeon making $800,000 a year, tells my family they are applying for government benefits because they have no income after elective surgeries have been cancelled. They just spent over $250,000 on kitchen (not the whole house just the kitchen) renovations. They have no savings. Live large with big ski holidays, biking adventures and apparently single room renovations that cost more than some people’s homes.

I never thought it possible that people with this billing capacity could have no savings. But there you go. Even those responsible for the lives of others don’t have enough common sense for basic financial responsibility.  Thank you for helping all of us readers from becoming a jaw dropping example of this foolishness.

From a reader in Langley, BC, responding to a blog post on Canadians’ lack of savings:

Ok well i have about 25k in savings that me and my wife have been able to save over the last 10 years. She was a student for many of those years and we have two kids. How long do you think that savings will last us? Luckily our rent is comparatively cheap for our city. So we can go probably about 8 months with 3k per month outflow of cash. And then what?

Not to mention that my entire savings would be destroyed. Its for emergencies, so i am now using it for an emergency. But this crisis touches everyone. If i had all my savings in the stock market, would you advise i remove it when we are at historic lows? Would i have a choice if i had to buy food and rent? So spare me the condescension on how its the peoples fault. It is the riches fault, like most everything in society.

It is societies fault (driven by the rich) that the system is rigged so that people have to live paycheque to paycheque. Hopefully this will cause a massive reorganization of society where we go after all the rich who have the money, multiple properties, etc, and redistribute it to the people. Universal basic income, and taxing all investments and other vehicles that the rich use to make money for no actual work would be a great start.

Get those millionaires digging f*kn ditches for the dead. The revolution is a few missed meals away, and we are almost there.

From a reader in Montreal:

I am writing you from my now usual 3:00 am insomnia. Like the whole world, I am watching the events unfold in horror and disbelief. This new virus is shocking in how fast it is spreading, and its lethality, while not that of the bubonic plague or even the Spanish flu, took us by surprise. But viruses have always co-evolved with the human species, and over the generations, humans got sick and died and died and died until they developed a herd immunity. But we became so arrogant as a species that we’ve come to think this is unacceptable and that this “shouldn’t happen”.

Most of my revenue comes from my portfolio, that lost a third of its peak value. I am not panicking, and panicking would be totally useless anyway, since there is nothing I can do. So I try to find little gems to brighten my days (baking for friends and bringing my daily pastry to one
friend or another, while respecting social distance and hygiene rules, taking online yoga classes, volunteering for grocery/pharmacy shopping for my ageing neighbours, and marvelling at how lucky and privileged I am compared to so many.

I am reading your blog and it gives me the sane voice much needed these days. I just want to say thank you, and I hope you are not being overwhelmed by panicking or angry clients. I hope that in the midst of this global catastrophe, you take time to rest and be with your wife and beloved Bandit.

From our nation’s capital:

I just wanted to follow up on your blog post re the Service Canada Centre shutdowns.

I am a federal civil servant in Ottawa and I am just so upset about this. This is supposed to be the time that the civil service steps up and helps the country through this. Aside from being incredibly tone deaf, we are letting Canadians down at a very critical juncture.

Belonging to the civil service used to be something of which to be proud. It has become a meal ticket and we should be ashamed of ourselves.

About the picture: “I wanted to share with you a photograph my wife took a few days ago,” writes Craig. “This is the Shambles, one of the oldest shopping streets in York, UK, where we live, dating from the 15th century and which is normally a very busy and bustling place. Alas, in the lock-down, these two dogs were alone. The emptiness paints a good picture of how this virus has brought life to a halt.”

I pray we know what we’re doing.

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Closer to the bottom

RYAN   By Guest Blogger Ryan Lewenza

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Having been through three bear markets over my investment career I can now spot clear and repeatable patterns of investor behaviour. Currently, investment decisions are being made on fear and emotion (based on what people see on the TV or read on their iPhones) rather than sound economic principles or any consideration of what the economy will look like in 12 to 18 months. Given all the uncertainty right now the markets are pricing in a protracted recession and that we’ll all be locked in our homes indefinitely, when in fact by Q4 and into early 2021, economic growth could be rebounding and potentially strongly.

Credit Suisse US GDP Forecast

Source: Credit Suisse

Here’s how the pattern generally plays out.

As the market steadily rises, like we saw over the last decade, this can lead to excessive optimism and greed taking over. During these periods many investors want to take on more and more risk as they get caught up in the euphoria of the strong market gains. Then as the economy/market begins to roll over the optimism quickly changes to anxiety and fear, then to panic and capitulation, and finally full-on depression.

You can basically map this out on a curve and I believe we’re getting close to the panic/capitulation/depression stage. And this is when markets typically bottom, providing the best opportunities and future returns. Side note: I hate talking about “opportunities” when there is so much human suffering right now, but I know we’ll come out of this and I still have to look after our client’s home down-payment funds, their kids’ education accounts, and their retirement nest egg.

So what does this look like?

Examples of this include things like “Ryan, this time it’s different”, “Ryan, this is going to be a depression”, “Ryan, I’ll never get back to where I was before it fell”. Or on CNBC when this week I saw a commercial hawking gold coins stating that this is the investment to own during pandemics and recessions. I heard these exact same statements and that stupid commercial back in 2008/09.

In 2008, during the financial crisis, people said the banks were going under and the next great depression was right around the corner. But it didn’t happen. The central banks and governments came to the rescue and implemented the measures needed to turn the economy around leading to one of the strongest bull markets in history (yes with a lot more debt but we’ll deal with that in a decade).

Today the problem is different in that it’s a health/pandemic scare, which will require a different set of solutions to the problem, but ultimately we’ll figure it out like we did during the financial crisis, 9/11, tech crash, Black Monday, wars etc.

So what I’m seeing on CNBC, and what I’m hearing from some investors and clients, makes me even more convinced we’re getting closer to the bottom in the markets (peak of infection rates?) and that the economy and markets will recover from this unprecedented and historic event.

Let’s revisit that roller-coaster of investor emotions Garth published here last week. Where do you think we are now?

Typical Investor Over a Market Cycle

Source: BMO
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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Amok

Well, things changed in a week. The little grocery store now has yellow caution tape creating an entry tunnel. There’s a sign saying capacity is 25 souls. The pavement is taped and marked ‘social distancing.’ Inside sits a security guard. “Travelled?” he asks. “Are you sick? Is anyone at home sick?” He holds a clipboard. Presumably the Names of the Doomed are etched thereupon.

There are no masks here. All faces are bare. A few people keep their gloves on. The cashiers now work behind a plexiglass barrier with a money hole punched in it. Shoppers are polite, but furtive. The shelves of cold remedies and cleaning wipes are bare. Miles of toilet paper, though. People repel from each other like reversing magnets, and you can tell that behind the fear they deeply regret it.

New water heater arrived this morning. Contractor buddy, plumber, apprentice and electrician shooting the breeze in the unpoliced sanctuary of my basement furnace room. Work is disintegrating. Jobs cancelled. Real estate going stone cold and renos with it. Cash flow’s a bitch. All have laid people off. Some young employees walked, too afraid to leave home. The old, experienced guys scoff. Life will come back, they agree. But it will be damaged.

Nothing is normal. Anywhere.

The last 24 hours brought overwhelming evidence of that. The federal government will be picking up 75% of the wages of small business employees who aren’t working, plus floating no-cost loans, partially forgivable. Before that announcement the Parliamentary Budget Officer said the deficit next year would be $112 billion (the highest before that was Harper’s $56 billion in the GFC). With the subsidy it should be $139 billion. And the feds have yet to bail out the oilpatch.

World crude prices, smashed by the virus and a war between producers, has gas down to 65 cents a litre. Canadian oil prices are apparently on their way to zero. At current levels ($5-6 a barrel US) every producer is losing. Storage tanks are brimming. Alberta is in full-on crisis mode. Oil is the nation’s biggest export, and it’s never been so worthless.

It’s crude as much as virus that led the Bank of Canada into the fray again Friday. Another emergency rate cut. Another half point. That brings us within a quarter point of zero. Cheap money won’t help consumer spending, since the stores are closed. It won’t do much for housing, as that market’s shut down, too. But it does make corporate debt cheaper, and the oil guys owe more money than God. The central bank also – for the first time – started buying up bonds, government securities and corporate debt. Five billion a week, every week, until the recovery comes.

So there’s the news. Mr. Virus runs amok in the US. National finances disappear into a black hole to support an ill-prepared people. And a collapse in energy values is 2020’s version of the Dirty Thirties dust bowl. Crisis upon crisis. No wonder people are avoiding eye contact, just in case that, too, makes you sick. This is all too much for folks to process.

I found this interesting tidbit on the mortgage site RateSpy. These are the biggest increases in Google home loan-related searches:

Meanwhile, after rocketing ahead 20% in a few sessions – the best performance in 90 years – stock markets ended the week in a funk. The ultimate outcome of these times is certain, as the wizened tradespeople in my basement know. Recovery will come. Markets get that. But there’s a lot of blood and guts to wade through in the meantime. As detailed here yesterday, the bulk of society was never ready for a rainy day, let alone a tsunami of Biblical proportions. It’s sad but inevitable the wealth gap will be far wider when this sucker has passed.

Now, a note to Bill Morneau, the finance minister, who follows this pathetic blog (according to his staff): time for Canada to follow the US lead and let people access RRSP funds. Washington is passing a bill allowing folks to take up to $100,000 from their retirement plans, paying no tax as long as it’s repaid in three years. Anyone with the virus is eligible, along with those who have lost a job or need the money to look after kids or ill relatives.

Simple. Self-financing. Doesn’t add to the public debt. Immediate. Do it, Bill.

Finally, a note to the 3,360 federal civil servants with job security and defined benefit pension plans who staff the 317 Service Canada centres across the nation where folks go to apply for benefits in times of crisis: you deeply disappoint us. This week the government locked the doors of every single centre, employees on the inside, citizens on the outside after the workers refused to work.

The government caved. Worried families now have to spend hours on hold or navigate an overloaded, generic website. More stress.

If nurses, hospital cleaners, paramedics, doctors, cops, firefighters and others on the front line can step up to risk when needed and toil in the teeth of a pandemic, you can at least sit in an office chair and help your neighbours.

Some things we will not forget, when the sun returns.

 

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The emergency

You may not like this post. You might think it comes from a privileged white guy with chiseled abs, nice hair and an epic dog (well, okay, that part is true.) You may view it as elitist. Or Boomerspeak. Too much rational, too little emotional. All true, too.

But, tough. Gotta be said.

This week came the stunning, unprecedented, knock-the-socks-off news that 3.48 million Americans just applied for jobless benefits. Washington’s overwhelmed. And us?  A million Canadians asked for EI benefits in the same period. There are ten times more of them, so do the math. When it comes to financial poochedness, we rule.

The virus is a tragedy. Many will sicken. Too many will die. Health care is under attack. Life is upended. Nothing’s normal. This cannot end soon enough.

When it does, there are lessons we must learn, behaviours to change and priorities to alter. The crisis we’re living through exposes a deep vein of personal failure running through society, making things worse. While tens of thousands may suffer sickness, millions are being slapped with the consequences of their dodgy financial decisions.

Look at the news.

The Keep Your Rent movement is spreading fast as untold numbers of tenants decide they cannot, or will not, make their monthly payment on Tuesday. In the space of two weeks money has evaporated along with paycheques. No savings. No cash reserves. No plan. Now that most provinces have outlawed evictions, landlords – big property owners or small-time investors – all face their own cash flow crisis. The paycheque-to-paycheque society is folding.

As for homeowners with mortgages, the situation appears just as bleak. Since announcing they would allow six months of payment deferrals, the banks have been bombed. Almost a quarter million responses. Call centres are melting down. Four and five hours on hold. The response has been immense and historic. Who knew so many people would be unable to survive a single month in their homes without cash flow?

And now we have the CERB – Canada Emergency Response Benefit – the most dramatic, far-reaching government program, ever. Over four million people, or almost a quarter of the entire workforce, are expected to apply once the process starts a week from Monday. It will pay $2,000 a month until the autumn to anyone over the age of 15 who earned as little as $5,000 in the past twelve months and has suffered 14 or more days off because of the virus.  It’ll cost $25 billion over just 16 weeks.

Said the prime minister: “This is an unprecedented situation with an overwhelming demand by Canadians to get money as quickly as possible. We need to make sure we’re getting that money out quickly but also reliably to Canadians and that means doing things that government hasn’t done before and scaling up our processes extremely quickly.”

And, as mentioned, about a million people applied for EI this week. That’s atop the 500,000 who asked last week. Just a fraction of those claims have been settled, since the government is besieged. Meanwhile provinces are throwing in more. BC is giving renters $500 each. Ontario is sending $200 to parents for each child, among many other actions. The feds today told banks to slash credit card rates.

Now, let’s be clear. Governments have no choice. They’ve shut down society. Jobs, employers and companies are being destroyed. Economic demand is being erased. The right to make money and support your family has been stripped away in the name of public health. This is not the fault of any tenant, landlord, homeowner, small business guy or employee. It just happened. It’s unfair and life-altering.

If leaders do not support people, the economy will crater for years. It will take a generation to rebuild. This will be a revisit of the 1930s. It cannot happen. Nor will it.

But let’s call this for what it is – a nation that’s ventured down a dangerous path. For years we were warned about an economic shock and our runaway debt. Our lack of savings. Our house lust. Our bad habits. Our wants. Here it is. Witness the results.

As the jobs tide goes out, millions are exposed swimming naked. Seventy per cent of us have real estate, but no money. Just as a majority are without pensions, or savings. Did we never expect a reversal? An emergency? Now that public debt will balloon wildly to save our collective asses, we’re creating a future of diminished promise and greater tax for every child alive.

Will we learn, and change? Or will we blame landlords, the wealthy, China?

I told Dorothy I’d be writing about responsibility and consequences today. “They’ll hate you,” she said.

Probably, I answered, recalling what a lousy politician I was.

About the photo: After being released by his owner from a burning structure, the dog went back in to rescue his buddy. A kitten.

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Houseageddon?

Amidst the mayhem, quarantines, self-flagellation and bored, isolated workers chugging hand sanitizer, some people are still buying houses. But not many. In fact, the real estate market is going down for the count as the economy commits group suicide.

Here’s the latest:

  • Real estate boards all over everywhere have basically banned open houses. Good thing, because nobody’s going anyway. Even private showings are evaporating as sellers recoil from germy buyers. The latest stats from Van and the GTA show a huge crash in showings over the last week.
  • Listings are also dropping, as terminations are requested. Even in Calgary, where things are more terrifying than an Adele concert.
  • Mortgage brokers are seeing scores of approvals rejected or overturned by lenders. Why? Layoffs, job loss and income vaporization. A million people just applied for EI in one week. Never happened before. Fifty per cent of businesses say they’ll be laying off. GDP is going down by maybe 20%. Also a record. Would you approve a new mortgage right now?
  • The above means deals will start falling apart soon as buyers who thought they had approved mortgages find out otherwise when closing day approaches. Sellers have every right to keep the deposit and sue for damages and future losses. Buyers beware.
  • Mortgage rates are going up. Why, when central banks are slashing? Because of credit risk (see the above bullet points). Rates have inflated about a quarter point, and you can be sure there’s more to come.
  • Appraisals have gone bust. No more on-site visits, and few drive-bys. So appraised values are reduced, making it harder to get a mortgage approved, or a renewal.
  • Bank call centres are melting down, and the main online tool mortgage brokers use has been on the fritz. Quelle mess.

Now what about this mortgage deferral thing? How does it work and do you qualify?

If your mortgage is not insured by CMHC, get in touch with the lender and explain your circumstances. That simple. Most will let you skip one payment anyway (no questions), but if you opt to defer six of them, job loss or layoff will have to be substantiated.

This means half a year of no monthly. But it doesn’t mean you live for free. The interest accumulating on your mortgage is added to the amount outstanding, plus there is interest charged on the interest. “This means your mortgage balance will increase,” says RBC. “Your payments won’t change during the term of your mortgage. Instead, at renewal your monthly payment amount increases to account for the higher balance.”

The bank also makes this point: “Using Skip-a-payment may significantly increase your interest costs over the life of your mortgage, so it’s important to carefully evaluate your financial situation and priorities before exercising this option.”

For mortgages insured by CMHC you don’t need to prove Mr. Virus stole your job, and lenders are basically prohibited from taking legal action against defaulters. But the same terms apply – missed interest is added to the outstanding balance that ultimately must be paid.
And then there’s this:

  • Keep your rent. That movement is growing faster than Covid cases. There are calls for a national rent freeze, and apparently a ton of tenants who simply won’t hand over their stipend on April 1. You might have noticed the no-rent guys posting their strident stuff in the steerage section of this blog. It’s all laid out here.  Says a regular blog dog, “Sadly, the attack the ‘rich’ movement is becoming more and more tangible and it’s more challenging to be a landlord each day.” You bet. And this is one reason investing in income real estate is a really, really, really, really bad idea. These folks are nuts. And T2 will probably cave.
  • Now, Airbnb. It’s collapsed. Bookings have plunged along with travel. Just like hotels (now at 5-10% occupancy) this is doomed to near-zero revenues for months to come. Maybe years. Those who bought condos or houses to rent out for fat profits are now looking at fat losses. No wonder thousands of units will soon flood the market, pressuring prices. More bad news for amateur investors.
  • And speaking of condos, yuck. Who’s going to spend seven hundred thousand for a shoebox unit in a downtown tower that now feels like a science experiment? Elevators, hallways, garbage rooms, foyers, security doors – every space outside your apartment is a battleground. Do you really want to trade germs with that deviant down the hall? Nah, didn’t think so.

Well, there ya go. All factors influencing the market now, and likely to do so over the months (perhaps years) to come. Balanced against that are low rates and cheap mortgages, plus the hormonal urges that make people do strange things.

The bottom line: housing is toast. If unemployment hits 15% (it will) and the economy shrinks by an equal amount (likely), credit risk will rise, home loans get more expensive, banks grow risk-averse and buyers retrench. All this will pass in time, of course, but after an adjustment in prices. And not up.

 

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Social distance

Almost a year and a half ago the guy running our central bank said this: “The buildup of household debt and imbalances in the housing market has made our financial system more vulnerable to economic shocks.”

Few cared. Or listened. Or changed anything.

Until the shock came.

On Tuesday a big survey emerged showing what the first two solid weeks of Mr.Virus have done to Canadians…

  • Respondents feeling stressed by the crisis: 74%
  • People worried how to pay for food and rent: 40%
  • Those so stressed they’re losing sleep: 30%
  • People expecting to need more debt: 19%
  • Number reporting ‘extremely negative’ virus impact on finances: 29%
  • People with no plan to deal with this: 32%
  • Number feeling financially secure: 6%

Now that those house-horny little chickens are coming home to roost, the miserable state of public finances is laid bare. No savings. No reserve funds. Big debts. Huge monthlies. Living paycheque-to-paycheque. Even when 40% pay no net income tax and government support payments have never been higher. Financial failure abounds. And so millions are looking to politicians to rescue their sorry butts.

But not all.

Here in the proud, sovereign Nation of GreaterFool, where testosterone flows like the mighty St. Lawrence and confidence spikes like the peerless Rockies, panic and victimhood are disallowed. If yesterday’s poll is to be believed, thousands of readers not only have cash reserves, they’re planning on unleashing them in the next few months, swooping in to buy distressed assets from distressed people. The crisis may be far from over, but it appears many of you think the outcome’s a no-brainer.

Readers were asked about investing intentions, the pace of recovery and the odds of a financial calamity. Capped at 5,000 responses, it was oversubscribed in just a few hours. Highlights: 73% plan to invest in the next 90 days; most (61%) will use cash; a majority think it’ll take at least a year for everything to settle; while 43% see no depression, a quarter are unsure and a third are preparing for the worst.

Here’s the breakdown.

Click to enlarge.

NOTE: It should not be necessary on a blog that deals mostly in canines and finances to remind you that, ah, this is about dogs and dough. Not public health. Infectious medicine. Ventilators. Or viral mortality rates. None of that can we change. Don’t come here for empathy. You’ll also have to sign up and pass a stress test to get a hug.

Just remember that Stephen Poloz told us there’d be a shock. More will follow. And life will go on.

Source: BMO Financial Group

 

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