Poochedness

Photo credit: whitevalhallawolves

More than 500,000 households, at latest count, still aren’t paying their mortgages. That’s about $140 billion in debt. Thus, over $300 million per month is being added to outstanding debt, as interest piles up. Oh, plus there’s another $100 billion in LOC and credit card debt that’s gone unserviced.

In total, three million Canadians took a Covid payment holiday. That’s 25% of all the households in the nation, or 16% of employment-aged citizens. The biggest deferrers were people aged 35 to 44.

Says the bankruptcy association: “There is a large proportion of Canadians who are already technically insolvent; they are unable to pay their bills and debt repayment obligations each month. Most who are in this position are using COVID-related financial support to make ends meet. But we know that many of these individuals will need debt relief when the temporary support ends.”

It’s starting to emerge that Covid came to town at a convenient time for a lot of folks, who were sinking into a state of poochedness all on their own. The shuttered offices, job losses, recession, lockdowns and quarantines led to (a) the temporary suspension of crippling debt payments and (b) a gush of federal money, from CERB to enhanced child pogey to wage subsidies.

“Delinquency rates held up relatively well and do not reflect the sharp rise in job losses thanks to the various support mechanisms,” says credit bureau Equifax. “One in five people utilizing deferred payments were already financially stressed prior to the start of the pandemic. Some of these consumers may find it harder to recover as support mechanisms start to reduce.”

Indeed. We now know household debt is going up again. In the last year 12 million households managed to add $55 billion to the pile, now sitting at just under $2 trillion. Most of that comes from mortgages – interest on all those deferred payments plus new borrowing thanks for the Virus Housing Boom.

As stated here a few times since FOMO arrived for the second time in five years, there are reasons the current real estate frenzy will not last and buying now is a really, really, really bad idea. We’re in a recession. The jobless rate is awful and will take years to drop to early-2020 levels. Debt is off the chart. Government spending is out of control. The virus is not over. There’s no cure. Some industries are in critical condition. People are panic buying, paying too much and making rash choices. The US election could end in a protracted crisis. Mortgage deferrals are ending. And people who should know – CMHC and the Bank of Canada (among them) are warning you about an unsustainable housing market.

We know what the immediate reasons for the feeding frenzy are. Pent-up demand (Covid stole the spring market). Remote work (people think this is forever and are rushing to bigger homes, further out). Insecurity and the need to nest (the virus makes everything scary). All of these are pandemic causes. And what folks forget is that pandemics are temporary. They pass. This one will, too. Making huge lifestyle decisions and snorfling massive debt based on a temporal event is, well, one definition of human fallibility.

Beyond the virus, this also accounts for the outburst of house horniness…

Interest rates have been in a long-term decline for the last thirty years. Central banks seriously whacked the cost of money to deal with the 2008 credit crisis, and again when oil prices collapsed in 2015. Now Covid has delivered another gut-punch to the economy, and the Bank of Canada has responded by crushing the cost of debt.

Some people – many of whom come to this blog to justify bad behaviour – think interest rates will never rise again. But if they don’t, when the next financial crapstorm hits, central bankers will be out of bullets. Any downturn would be deeper, longer and fatal for indebted homeowners.

Second, what if house prices have really only gone up over the past few years because the cost of money has gone down? This pandemic is a great example. House values have flared when the economy tanked, millions lost their jobs and millions more couldn’t even pay their mortgage or credit card monthlies. That made absolutely no sense – until you realize 1.5% home loans allow more debt. More debt brings real estate appreciation. Until the drugs run out.

So if rates stay in the ditch with mortgages bottoming at these levels and the economy in a long recession why would prices rise from here? And when the next slowdown (or worse) materializes there will be no more narcotics to dole out. The debt, however, will remain.

Is this a solid personal strategy?

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Better days

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DOUG  By Guest Blogger Doug Rowat
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Given the social and economic dumpster fire that has been 2020, I take glimmers of hope where I can find them.

As a portfolio manager, I naturally focus on a long list of fundamental factors that may drive equity markets—corporate revenue and profit outlook, balance sheet strength, valuations, government and central bank stimulus, interest rate policy and, particular to this year, the progress (or lack thereof) in containing Covid-19.

But sometimes a part of my outlook is determined simply by a few strong trading days or—even better—a few strong months, particularly if they occur in the midst of a market crisis. Is such nascent positive momentum a certain predictor of future market success? Of course not. But it’s certainly worth considering.

History has shown that an unusually strong quarter, or even several unusually strong trading days, signals a shift in market sentiment, which often sparks an extended rally. Let’s start first with what a few really good market days could be telegraphing.

The table below shows the 15 best single-day returns for the S&P 500 Index since 1960 and its subsequent price performance over ensuing short- and long-term periods. Note that these good days usually occur close to the heart of a market crisis and the subsequent index price movement over future time periods is virtually always positive. The takeaway is obvious: strong market days have something very clear to say about shifts in market attitude and where markets may head in the future. Thus far in 2020, there have been five trading days that would have made this list, including two days in March where the S&P 500 had one-day gains of greater than 9%.

S&P 500 performance following its best single days

Source: First Trust; returns annualized, price performance only (no dividends).

Now, let’s shift focus to quarterly returns. As we know, the second quarter of this year was a scorcher with the S&P 500 gaining a whopping 20%, making it the fourth-best quarter for the index since 1950. What might this strong quarterly return suggest about what comes next?

According to SunTrust Advisory, following the top 10 quarters since 1950, the S&P 500 has climbed EVERY time in the next quarter with an average gain of 8%. For those who have been paying attention to market performance thus far in July and August, this perfect record looks set to continue. And with respect to S&P 500 performance one year after a blow-out quarter? The S&P 500 was higher one year later after nine of these 10 best quarters with an average gain of 15% and a median gain of 17%.

Of course, markets never track the past exactly and risks abound. But the early momentum we’ve seen since March is encouraging. As noted investor Gil Penchina once explained it: “momentum begets momentum, and the best way to start is to start.”

So we’ve started. And I believe that markets are far from finished.

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And finally, examining the actual fundamentals in detail will be a subject of a future blog, but I’ll leave you with this chart. Needless to say, the massive amount of global stimulus and its divergence with financial asset prices supports our bullish outlook into next year:

Global liquidity growth vs world financial asset prices (US$ terms, 1981-2020)

Source: CrossBorder Capital; liquidity is defined as all cash and credit available to financial markets including liquidity provided by central bankers.

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And finally (for real), it’s that time of year again when hurricanes get the continuous nightly-news treatment. While no one would argue the damaging and often deadly consequences of hurricanes, what I’ve always questioned is the disproportionate amount of attention that they receive in the financial media. Every year, this kind of imagery gets plastered across the business newsfeeds:

It’s the end of the world… or is it?

Source: Bloomberg

However, as I point out every year, the actual consequences of hurricanes to markets are negligible. Fear always generates viewership, but keep the below table in mind when the frightening hurricane newsflow continues over the next few months:

While hurricanes always make the financial news, they don’t actually impact markets

Click to enlarge. Source: Bloomberg, National Oceanic and Atmospheric Administration, Turner Investments. Total return shown. Damages not adjusted for inflation.
Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.

 

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Reality. Check.

This week stocks laid an egg. The pros weren’t much surprised.

We were overcooked, after all, with investors getting ahead of themselves and pushing valuations – especially for inflated tech companies and sexy corps like Tesla – into the stratosphere. Mobs of moist little day-traders clicking on their Robin Hood apps didn’t help much. Lately speculation has been everywhere. Equity markets hit record highs earlier  this week, and the S&P 500 had gained 60% since March. Sixty per cent. That’s about nine years of normal growth. Stunning.

So markets are taking a reality check.

Do we still have a global pandemic? Check.

Almost 190,000 Americans have died of Covid, right? Check.

There are some 30 million unemployed Americans on the dole? Check.

The federal deficit in Ottawa is 12 times bigger than expected? Check.

Washington is spending $3.3 trillion more than it’s collecting this year? Check.

These are numbers the world has never seen before, is that correct? You bet, check.

The jobless rate in Canada tops 10% even after the latest gains? Check.

This is the worst recession since at least World War Two? Check.

The US is trying to pick between a burned-out 77-year-old career politician and a quixotic, race-baiting misogynist billionaire reality TV real estate guy? Who’s 74? Uh-huh. Check.

So, stock markets are reassessing their froth. Good thing. A correction of 10% or so would be understandable. Even welcome. The world is still brimming with uncertainties. A second virus wave could come. The American election could degenerate into chaos. The online stocks are smelling a lot like the dot-coms did twenty years ago, more flash than cash flow. After riding an incredible tsunami since the virus first hit, professional fund managers are happy to hit the sell button, take risk off the table and wait for the economy to catch up.

Average investors can try the same, but it’s probably not a great idea. Let the Robin Hood kids get whipsawed around by Mr. Market. For most people with an eye on retirement, for example, the best strategy is to set up a B&D portfolio, tweak it every year or six months, and forget it the rest of the time. A bunch of gains since March could be reversed, but they will be restored over time. And you have absolutely no idea on what day big advances or declines will take place. So stop trying to time it.

Now what differentiates putting money into a financial portfolio from investing in a house comes down to one word. Debt. Or leverage. People buy ETFs with money they have. They grab houses with wealth they don’t have. Using 10x or 20x leverage is common. When the real estate you bought with leverage rises in value, you win. If you paid too much in a frenzy and the value falls, you’re pooched.

So if stock investors were overly ambitious and are now being spanked, why can’t that happen with real property? After all the same conditions exist – pandemic, recession, big unemployment, political instability and debt. How much danger is there that this housing market could correct, far faster and sooner than many expect?

Hmmm. Beats me. But look at this:

In Toronto in August prices hit an all-time record high. That was the second record in two months. Sales were up 40%, the average selling price gained 20% year/year and a ho-hum detached gained 19%, to $1.2 million. Toronto, by the way, has an unemployment rate of 13%. Fewer people went on vacation in August this year because of the pandemic and job loss, says the real estate board, so they stayed in the city and bought houses. Sure, makes sense. Toilet paper, Zoom downloads, houses. Whatever.

In Vancouver sales were 20 times higher than the 10-year average. The benchmark price topped $1.04 million. Both detached and attached houses saw sales more than double from the same month a year ago. Prices were up 5%. The realtors said, “Low interest rates and limited overall supply of homes for sale are creating competition in today’s housing market.”

In Victoria there were 48% more sales in August, while listings fell and prices gained over 5%. To its credit, the local board has been realistic, suggesting this stuff will not last: “This is not a trend, but our market at this moment in time during a unique situation. It is a challenging time to define what is happening in the market given so many factors that don’t exist in a normal year. We have been surprised by the pace of the summer market and are grappling with the evolving socio-economic effects of the pandemic and how these underlying factors will influence our fall real estate market.”

In Ottawa there were 17% more sales last month amid the biggest surge in listings in five years. House prices shot ahead 22% and the values of condos swelled 24%. Multiple offers abound and the realtors are calling it “a perfect storm.” Adds real estate board boss Deb Burgoyne: “This is an extremely challenging market for many, especially those on the buying side. Many are experiencing what we call ‘buyer burnout’, having placed many offers without success.”

Other cities – Halifax, Montreal, Winnipeg – have yet to report, but the story’s expected to be the same. The disconnect between what people perceive and what exists is huge. It’s unprecedented that in a recession, amid job and employer carnage and in the grip of a public health crisis, battling a virus with no cure, that FOMO would foment.

Some people have come here to slough off warnings about a real estate bubble, saying if it exists, stocks must be there, too.

Maybe so. But one is far more lethal.

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Bears

“We’re scared,” Terry told me yesterday.  “Yeah, I know it’s emotional, but it’s real. Whaddya think we should do?”

The Toronto entertainment exec called me to share his family’s angst over the most tragic thing any household could ever consider. Leaving Toronto. Seriously. It’s tearing them up. Of course (like everything else) this is Covid-related. The bug hit, sent Terry and Jane into remote-working mode, shuttered the schools their three kids were attending and, incredibly, set the value of their mid-town house on fire.

Here’s the debate: should they sell, move down the 401 to London and start a new life on more secure footing, distant from the megalopolis?

Cough it up, I said. Tell me everything. Then you get an opinion.

So they’re mid-forties, three pre-teenagers with a family income just south of $160,000. No pensions, save the usual crappy insurance-company mutual fund-laden group RRSP. No non-registered account. And about four hundred thousand in bank mutuals across tax-free accounts, RRSPs and an RESP for the spawn. Monthly savings (with three expensive children) is zero. When the last one is finishing up uni, Terry and Jane will be wanting to retire. Income then will be inadequate, without selling the house.

That property, by the way, is now worth about $2 million, or double the value of a decade ago – and has raced higher over the last two months as the Virus Boom hit Toronto. Fueled by cheap money, pent-up demand and panic buying of detached homes that people can turn into germ-free bunkers, sales have exploded 40% with prices up by a fifth and the average detached now fetching $1.2 million.

Plan A, then, is do nothing. Be frugal. Pray the kids go to university via the subway, not in another province. Stay employed. Hope like hell the property market holds on to its value even when the FOMO ends, mortgage rates advance and economic reality sets in.

Plan B is London. That city (pop 450,000) is a mini-version of Toronto, but without gridlock, 75-storey condo towers, Drake or a silly basketball team. The average house costs less than $500,000, even after a 17% year/year price surge. I told Terry I’d lived there a couple of times, both instances in the historic, leafy north end which smells a lot like Rosedale or Shaughnessy. Houses that cost $3 million in mid-town Toronto go for about seven large.

The advice? Simple. No brainer.

Sell in TO for two mill. Buy for seven. Invest one point three in a balanced, diversified, well-managed portfolio earning six or seven percent over the next decade and end up by age 60 with at least three million. That should throw off close to $200,000 in annual income for Terry and his squeeze for the rest of their lives, while they live in a paid-off home and have several million dollars of liquid assets.

What possible reason can you dream up for not doing this? I asked.

His best two were: (a) it’s very scary leaving Toronto (there could be bears in London) and (b) my 13-year-old daughter will miss her friends.

After I recovered, we reviewed things.

Of course, staying put – taking no risk on the unknown – likely constitutes the greatest risk. Job loss (in a volatile industry) would be catastrophic for a family of five. It’d likely necessitate a house sale, hopefully when the market is still robust. A second wave and lockdown would change everything, trapping their equity and capping choices. Terry and Jane don’t have enough saved for retirement, lack good pensions and have big financial demands coming. Why not grab windfall capital gains now and put the money to work? Will their $2 million beater house become a $4 million mcmansion in another decade? Will middle-class incomes double or triple by then to support that price? Can mortgages get any cheaper? Or is this, logically, the apex? If so, why not grab on?

The trade: one inflated house in a big city for a better house in a smaller place, plus income and financial security for life. Duh. How is it even debatable?

But could the stock market plop over time along with residential real estate? Sure, although there’s never been a ten-year period since WW2 in which markets finished lower after a decade. Besides, a B&D portfolio contains no individual stocks, has global exposure, at least 40% safe assets, generates income whether equities rise or fall and – unlike a house – doesn’t have everything concentrated in one asset on one street in one city.

“Don’t be such a wuss,” I gently and compassionately counseled. “And tell your spoiled kid to get over it. Sheesh.”

He hung up. I may have to work on my technique.

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Never goin’ back

Two days ago we detailed the housing boom now gripping North America. It’s everywhere. It’s real. It both defies the pandemic and feeds from it. It’s potentially dangerous. And buyers need to be incredibly careful. For this has the potential to turn on a dime.

As stated, there are valid economic reasons for the surge (cheap mortgages and pent-up demand), but mostly the phenom is emotional. Nesting. Cocooning. Dog bonding. The flight to security in an insecure world. Fear of the virus. Most of this has been fueled by remote working. Time will surely show this is a temporary thing that most people believe is permanent. Big mistake.

Did you see the latest clickbait survey?

A new poll (ADP) found almost two-thirds of Millennials hate the office. Instead they prefer flexibility, a Zoom existence with only the occasional visit to the cubicle farm. But they expect to be paid as usual. Naturally. Seventy per cent say flexibility should come with full compensation. A quarter of the remoters are afraid of catching Covid at the office, which is interesting since the national infection rate is currently one third of one per cent. Thanks, media.

Okay, so trend No. 1 fueling the housing market is an altered perception of ‘home’. Now it means a Leave-it-to-Beaver, leafy street with detached houses and minivans, rather than sleek condos in a hip urban tower with a bicycle elevator. Remote employment makes people want more space, privacy and physical comfort, since home is work and work is home. It’s led a lot of folks to borrow excessively and spend immodestly.

Look at central Toronto, for example. In August average prices increased 26%, sales were ahead 38% and four in ten properties sold for more than the asking price. This is ridiculous during the month of the year traditionally peppered with vacations and sloth.

Trend No.2 is also emotional at its core. The flight to the burbs. It’s a meme now, and outer-urban areas – like Toronto’s 905 belt, or the sprawling suburban areas around Montreal – are seeing strong sales and popping prices. The biggest stumbling block to moving to Mississauga, for example – commuting and spending four hours a day on the clogged QEW – is gone. At least for now. And as the survey above shows, a ton of Mills think it’s gone forever.

Data doesn’t actually support this.

For example, Zillow found in the States (same conditions as here at the moment) sales of both urban and suburban homes are brisk. And about equal. DOM comparable. Above-asking sales the same. Average price increases similar. Detached prices are growing faster than those of condos (as here), and this is the summary for real estate searches:

Suburban home listings are not seeing any more attention on Zillow than they were last year, relative to urban or rural listings. Suburban homes made up 62.2% of all Zillow pageviews of for-sale listings in June 2020, down just slightly from 62.6% in June 2019. Urban and rural pageviews each climbed 0.2 percentage points from last year

In Canada condo inventories are up, thanks to a whack of new units hitting the market, the collapse of Airbnb and the shutdown of Landlord-Tenant boards which led to non-payment of rent and panic for many amateur landlords. Of course, the virus has impacted too, since masks are now mandatory items even when heading for the garbage chute. Ugh.

Having said that, condo prices are not falling. Detached inventories are running higher. And the prices of SFHs are, frankly, outrageous. The amount of additional debt required is scary. When all those buyers today with sub-2% mortgages are renewing in 2025, well, it might be a shock.

Can the work-from-home, I-loathe-the-office, suburban-no-commute thing carry on indefinitely? Even post-Covid? In a neo-Zoom world?

We’ll see. But it’s doubtful. As stated here before, cities developed for a reason. People come together to work for a reason. People want to live in proximity to each other and services for a reason. Productivity and efficiency are higher in group settings, for a reason.

Meanwhile, pandemic job loss, restructuring of industries, curtailing of immigration, no-school child-care woes and the ending of epic government cash and mortgage deferrals have yet to be felt by the housing market. Emotions, like FOMO and cocooning, can start a real estate fire. But to keep burning, it takes employment security and confidence about the future.

Moisters hiding from the boss in the guest bedroom? It means we’re not even close at the moment. Govern your urges accordingly.

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The brawl

Donald Trump went to Kenosha, that small city in Wisconsin where a police officer shot a black man in the back seven times, igniting protests, violence and, ultimately, death. The visit was not designed to invoke calm. It was a symbol. As such, perhaps a turning point in an election like no other, in a year without equal.

Markets have been digesting the worst recession since the 1930s, Depression-era unemployment numbers, crushed interest rates, unprecedented government spending and the first global pandemic in a century which by November 3rd may have taken 200,000 American lives – they are all real.

Despite that, equities have surged 50% since March and sit near all-time highs. Some companies – Apple, Tesla, Zoom to name three – have exploded in value. Day-trading is the rage of Robin Hood-loving novice investors. There’s a real estate boom all over everywhere (except Alberta). Despite a big, smoky hole in the GDP and millions on government benefits plus an historic public health emergency, Trump could win. That event would cap 2020 as the year of infinite irony.

This was the news out of financial giant JP Morgan yesterday. Strategist Marko Kolanovic wrote a report reflecting a growing sentiment on Wall Street that Joe Biden could be smoked, not for economic reasons, but emotional ones. Lots of people are afraid of violence and disorder. Talk of defunding police scares them. It’s a threat, and the master of social media, Trump, knows it. Hence the Kenosha trip. Turmoil serves him.

The strategist muses that a seismic shift of five to 10 points in polls, from Democrats to Republicans, could occur if the public perception of protests morphs from peaceful to violent. That’s a big change from three months ago when Black Lives Matter won widespread support and the president’s approval rating slumped. Kolanovic also argues polls showing a Biden lead could be inaccurate as people lie. Apparently that happens. Imagine.

“Certainly a lot can happen in the next ~60 days to change the odds, but we currently believe that momentum in favor of Trump will continue, while most investors are still positioned for a Biden win.”

Okay, so what does this mean to your portfolio? (This is not a social justice blog, remember. We care only about filthy lucre. And dogs.)

First, what if Biden’s numbers are solid and he wins the prize? Does this open the door to American socialism and a tax fiesta?

Nah. Mr. Market thinks not.

Since the polls have telegraphed a Biden win for several months, and markets have steadily marched higher, the Democratic threat seems muted, if it even exists. Remember that equities are forward-looking and they have not bought the Trump warning that stocks would “disintegrate…drop down to nothing” is Joe is President.

What about taxes? Biden has proposed to roll back a big chunk of Trump’s corporate tax cut, raising the rate to 28% from the current 21%. That would hurt profits and slow economic recovery coming out of the Covid crisis, but this also has been brushed aside by investors as a negative outcome. It’s too unreasonable that anyone would jack taxes and damage a recovery that cost trillions of public dollars to create. JP Morgan says this, actually: ““We see Biden winning as neutral to slight positive.”

And what if Trump succeeds?

Well, what you see is what you get. He is no longer an unknown, dark, looming question mark. The market knows him now as a pro-growth, nationalist, inflationary business protagonist. Often flaky, unpredictable, impetuous, divisive and disappointing, nonetheless he extended the Obama recovery to achieve full employment, record markets and corporate bliss.

In short, for Wall Street, Bay Street and your balanced portfolio, this is no black-&-white contest. Either guy, about the same outcome. As my buddy Ryan has detailed here in recent weeks, the US economy has actually done a little better historically under the Dems. And Biden is no wild-eyed young reformer.

So what’s the threat?

Uncertainty. Like twenty years ago when the Bush-Gore slugfest took ages to settle, during which time the market tumbled 12%. Given Trump’s statements about mail-in ballots being ripe for fraud (no evidence of that exists) plus his reluctance to say he’ll accept the electoral outcome have raised this specter. If he doesn’t win, will he not leave anyway while an army of lawyers swarm losing states? That would suck.

Strategy?

Don’t gamble. Putting too much net worth into a few stocks – especially the inflated ones – would be foolhardy. So would rolling the dice on forex, or jumping onto precious metals. Stay invested in a balanced way, with 40% safe stuff and the rest spread out globally – between Canada the US and international. Buy low-cost, liquid major market index ETFs. Don’t hunker in cash, silly HISAs or comatose GICs. 2021 will be a year of virus recovery, reopening, growth and catch-up. Rising global growth will likely kick up commodities, and fuel Bay Street. And once a proven vaccine emerges and spreads, stand back. Eruption.

  BTW, be glad you live in serene Canada. Don’t lose your head.

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Nesting

Ottawa. Victoria. Niagara. Kelowna. Montreal, Toronto and Vancouver. Mississauga, Burnaby, Etobicoke, Abby and PoCo. It’s the same story everywhere. House sales exploded in July and August. Prices have risen to meet demand, since inventory levels in most markets were at a Covid low.

Logically, this is nuts. Unemployment in Canada is north of 10%. In centres like the GTA, a lot worse. Millions remain on government pogey and hundreds of thousands have been unable to pay existing mortgages. Small shops, restaurants and factories have been whacked and many will never reopen. Tourism is dead. So are conventions, sports and travel. The country’s in the midst of the worst recession since the 1930s. Nine thousand people have died of a contagious virus for which we have no cure. Social distancing and masks have crucified retail and are destroying eateries. Downtown cores are dusty wastelands. Schools have been shut for six months. Airport passenger levels are down 90%.

And yet, a real estate feeding frenzy. Debt levels are surging. Bidding wars, blind auctions, bully offers and people grabbing houses they’ve only Zoomed or FaceTimed. It’s all happening. It’s real. It defies reason.

And it’s not just isolated, a unique Canadian affliction. Check out these headlines from my daily feed:

Why the Indiana housing market remains so hot during the pandemic
The Indianapolis Star
New Yorkers are Fleeing to the Suburbs. ‘The demand is insane’
The New York Times
Hot Property newsletter: Hot times in the real estate market
Los Angeles Times
Why residential real estate is becoming more attractive in the suburbs
Montgomery County Paper
Real estate market soars despite pandemic
Roanoke Times
Real estate sales reaching lofty heights
The Anna Maria Island Sun
Why residential real estate in South Bay is red hot despite the pandemic’
San Jose Spotlight
Act fast to land a home in today’s market
Orange County Register
Expert: Panic buying hits Denver housing market
Westword
Housing market continues to soar in southwest Michigan
ABC 57 News
Portland broker see rebound in housing market during pandemic
KGW.com
Millennials help power this year’s housing-market rebound
Wall Street Journal
Record sales, record prices in Colorado’s real estate market’
9news.com KUSA
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If we can understand why this is happening, perhaps we can determine if it’ll last. Knowing that could answer this question: are today’s virus buyers savvy or senseless?

The obvious first reason houses are going up is that interest rates have come down. Cheap mortgages allow folks to borrow more, spend more, and squeeze prices higher. Second, we had no spring market. It was lockdown time, so pent-up demand exploded like a sailor on shore leave. Third, demographics have been pushing real estate. The largest cohort in society are the Millennials, all 9.8 million of them. That’s 27% of the population, and they’re all horny. For houses.

But those are just the reasonable reasons. There are a slew of unreasonable ones, too. They have to go with a certain global pandemic. Maybe you heard.

Covid has infected millions of brains, inserting fear and a sense of victimization. In a scary, out-of-control world which is beyond the experience of anyone alive, people are seeking shelter, refuge, safety and all the predictability they can get. Nesting. Cocooning. Owning a home seems like gaining control over your own surroundings and destiny. In the fog of emotion it seems if you lost your job, or society continued to unravel, you’d be better off as an owner than a renter who could be turfed. Of course that ignores the far higher costs of owning than leasing, but this is no time for logic.

Then there’s the direct virus impact. Millions are working remotely, so the dwelling becomes their world, 24/7 & 365/yr. They want more space from kids and spouse. The office downtown is shut now and may be for a year. So they can move to the burbs or a small hinterland city and finance more house. Meanwhile fear of germs, strangers in the hallway, sticky elevator buttons and scary garbage rooms have fueled a flight from high-rise condos into low-rise semis, towns and detacheds.

Layer on this a thick coating of financial illiteracy. Most people have no liquid investments, have never invested, think the stock market is a casino and only know their parents made a fortune on a house they bought in 1978. So what if they need a $1 million mortgage now? Nobody actually expects it off since you’re renting money as you move up the property ladder with equity the market hands you. every year.

Lastly, all of the above has created FOMO. Fear of missing out. It’s a huge driver of the emotions which lead people to take irrational actions. Toronto agent Steven Fudge has written about this convincingly:

Fear evokes a visceral reaction, which focuses entirely on the moment (fight or flight). FOMO has incredible strength and ability to separate people from their logical assessment of a property. Things like budget, property inspection and even the concept of debt are pushed directly to the side as the homebuyer focuses on the task at hand and is willing to do what it takes to secure a purchase.

As a result, in the midst of a pandemic and the worst downtown in our lives, house prices have peaked and household debt is soaring when rates are at an historic low and can only increase. What could possibly go wrong?

       

Well, the mortgage deferrals are done. No more. Now we get to understand the consequences.

Earlier today the federal regulator dropped the hammer, telling banks any new deferrals they grant will be treated as non-performing loans, requiring them to raise more capital. In effect, it signals the end of a six-month period in which almost 800,000 families stopped paying their obligations.

The program will be phased out over the next 90 days with the bulk of deferrals ending next month. “Banks are now in a better position to employ their business-as-usual alternatives to support troubled borrowers,” the regulator said. In general that means moaning and weeping.

It’s begun.

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Prepare

Chrystia. Justin. Taxes. A trillion in debt. Biden-Trump mashup. Second wave, maybe? Mortgage deferral cliff. Millions on the dole. BLM in the streets. Cops defunded. Statues falling. Vigilantes. Masks protests. Historic deficits. 847,659 deaths. Closed borders. And a real estate boom. Oy, whadda world this is.

The afflicted believe governments should support them. The paleos think commies are taking over. The left-right divide is gaping just like the wealth disparity. The pandemic came along and crushed the indebted, the unprepared and the uninvested. The same crisis propelled markets as stimulus flowed and portfolios plumped. Now it’s all political. The rest of 2020 will be even more arresting than the first eight months.

Determined not to waste this crisis, the prime minister punted his Bay Street finance minister, installed a lefty journalist, shut down Parliament and is preparing a ‘go big’ plan for a green new deal. Details in four weeks. Then a badass budget. Meanwhile the USA is in the grip of a presidential contest that resembles a brawl. And the virus continues.

Last week this pathetic blog naively asked, how to prepare? How to ready for a world that promises more government, more tax and greater wealth distribution? As you know, most citizens are pooched and expect politicians to bail them out. They continue to save nothing while over-spending on real estate. Theirs is a world of hopium. And they all vote. Yikes.

Some suggestions…

Emergency fund – a perennial tenet of financial advisors, but does it really make sense to have enough money for six months of living expenses sitting in a HISA paying one-half of one per cent (taxable)? Ah, no. A better option is to ensure you have a personal line of credit established with your bank or CU, and invest that emergency money in your TFSA in some nice, cheap, diversified ETFs.

The LOC costs zero to set up and zero to maintain. The only interest payable is on the money actually drawn from the line, and odds are an emergency will never occur. If one does, just look needy and the feds will send you money!

Refinance debt. This is the time. Rates are in the ditch and will stay there for months. Maybe a year or two, until inflation starts being a threat. Lock in the mortgage at less than 2%. Don’t be a cowboy and go variable to save a few thin basis points. If an existing mortgage is 3% or more, talk to your lender about blending and extending the loan. This will reduce the overall rate, push out the renewal date and avoid a mortgage break fee.

Capital gains. Take them soon. Most observers (this blog included) think the odds are high T2/Chrystia will up the inclusion rate from 50% to maybe 75%. That’s a mother of an increase. Today half of gains are tax-free with the other half added to your income and taxed at your own marginal rate. So upping this to three-quarters is punitive.

The amount of revenue the tax raises is inconsequential in the face of a $350 billion annual deficit, but it’s a political move designed to message those with no investments (but a house) that the 1%ers are being shellacked. While it’s possible the change could be retroactive to the beginning of the year, it’s doubtful, given a budget won’t come until October at the earliest. We’ll see.

Or you can wait until Erin O’Toole is prime minister. Ha.

Other portfolio moves: keep at least 20% in US$-denominated assets. Once the American election is done and the virus starts to fade, the greenback is likely to appreciate while our balance sheet is weighted down by public spending. The loonie could weaken – but it’s always a good idea to hedge against our currency.

Also keep your registered accounts – TFSA, RRSP, RESP – topped up. Growth within them is tax-free with no worries about a rising capital gains inclusion rate. The tax-free account especially is a valuable tool for now and forever since income can flow without affecting your marginal rate. Never put a brain-dead GC in there, but focus the TFSA instead on equity-based ETFs. Lend your spouse money for his/her account. And your adult children (so long as they give it back).

Income-splitting: the advice oft-stated here is repeated. Establish and fund a spousal RRSP if one of you makes substantially less. Set up a spousal loan to give him/her/them/its (we are a pronoun-sensitive, modern blog) money to invest since the rate is ridiculous (1%) and no attribution is involved. Make the less-taxed spouse the investor while the higher-earner pays family expenses.

Take the cash: open an RESP for your kids and get a 20% grant from the feds each year (some provinces also give money). Apply for and enjoy CPP payments starting at age 60. It’s not worth waiting until later since  years of monthly payments can be stuffed into growth assets in your TFSA.

Have a mortgage at less than 2%? Then stop aggressively paying it off. Investment portfolios have been returning three times this amount for decades, so direct the cash there, building net worth faster (and establishing valuable liquidity). Always invest via a diversified and balanced portfolio. No individual stocks (too much volatility). No mutual funds (rapacious fees). If you fear a second wave of Covid,  quietly stock up now. Each week double the staples you buy at the supermarket. The drug store. The pet food place.

Finally, if you can’t easily pay your mortgage or the deferral is ending and your job is iffy, list the place. There’s an insane, FOMO-fuelled real estate bash going on, a better price may never arrive. Besides, you’ll trash debt, free up liquidity and shed ownership costs. By the way, rents are going down and tenants are now driving the bus.

Gold and guns? Sorry, wrong blog. Try this.

 

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America update

RYAN   By Guest Blogger Ryan Lewenza
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Some of you may be wondering how the heck have the markets recovered so strongly and the S&P 500 recently making a new all-time high, when the US/global economy is still mired in the worst economic downturn in decades. Well the answer is actually quite simple – the unprecedented government stimulus that has been injected into the system and that the US/global economy looks to have bottomed and is slowly turning around.

I’ve been very fortunate over my career to have worked with and been mentored by a number of brilliant and experienced investment professionals. One of those was our old Chief US Investment Strategist out of St Petersburg, FL, Jeff Sault, who not only is an interesting and entertaining guy (I did a road show with him across Canada and boy do I have some good stories from that trip!), but is also a market genius and someone I learned a lot from.

One particular piece of market wisdom was, “Ryan, markets don’t care whether the economy is good or bad, they care whether things are getting better or worse”. Meaning it’s not about the actual number (i.e., the US unemployment rate is at 10%), it’s whether the unemployment rate is moving from 10% to 9%. In the business we call this “second derivative” change and as I’ll cover today, the US economy is rebounding, which in part explains why the markets have recovered so strongly in recent months.

As Covid-19 worsened and morphed into a global pandemic, the global economy was brought to its knees as governments around the world enforced unprecedented lockdown measures to help contain the breakout. As a consequence millions of people lost their jobs, whole industries have been rocked and we’re stuck in the deepest economic downturn in many decades. But, the worst looks to be behind us.

In recent months we’ve seen a sharp rebound in major components of the US economy. For example, the US housing market is roaring back with housing starts rising by 22% M/M in July, housing sentiment among builders is at the highest level in years, and new home sales up 14% M/M in the latest report.

Manufacturing is also on the mend with the ISM manufacturing index jumping to 54.2 in July, now indicating expansion in the US manufacturing sector. Some of this is being driven by the US auto sector, which saw monthly production surge from just 1,800 units in April to over 140,000 in June.

While important areas like the travel and leisure industry continue to feel a lot of pain, other key areas like housing, manufacturing and retail sales are showing real strength, suggesting to us, the worst may be behind us.

US Housing and Manufacturing Are Surging Back

Source: Bloomberg, Turner Investments

All of this is then being reflected in the GDP data. In the second quarter we saw the US economy contract by an unprecedented 33% Q/Q annualized. To put this print into context, my data goes back to 1950 and the next worse quarterly GDP figure was -10% in Q1 of 1958. This number is borderline apocalyptic and illustrates just how much the US economy has been impacted by this pandemic.

But I believe that Q2 may represent the low in this downturn, and see the US economy returning to growth in the third quarter. Currently consensus estimates point to a 20% rebound in Q3 and 6% growth for Q4.

The recovery is not going to be perfect and there will be setbacks along the way, but based on what I’m seeing in the current economic data, and my expectations going forward, I believe we’ve hit the low in this economic downturn.

US Economy Is Expected to Return to Growth in Q3

Source: Bloomberg, Turner Investments

While I’m optimistic for a return to growth in the coming quarters there remain a number challenges to the global economy that could imperil the recovery. As I’ve been telling clients in our market updates I see three key risks to our outlook:

First, and stating the obvious is the next phase of this virus. As the global economy reopens and we begin interacting more closely and freguently with eachother, it’s only logical that we could see a ramp up of infection rates. The virus is no less contagious today and with us heading into the flu season, this fall/winter could prove to be a difficult time. If we were to see a massive increase in Covid infection rates and deaths, this could cause government officials to slowdown reopening measures, hampering the recovery and our call for a return to growth. Our base case view is we just work through the increases in rates, as the economic toll is just too grave.

Second are all the bankrupties that are likey to occur. J Crew, Chesapeake Energy, and Hertz to name just a few that have filed for Chapter 7 and many more are expected to do the same in the months ahead. Edward Altman, an expert on corporate bankruptcy, sees bankrucptices from this downturn eclipsing that seen durign the financial crsis. And it is estimated that 30-50% of all restuarants and bars could go under as a result of this pandemic. That will mean a lot of lost jobs and income for millions of people.

Lastly, I believe more government assistance is likely needed in the US as the employment insurance $600 top-up has expired and many Americans have already blow through their one-time $1,200 government payment.

Below is a chart of US personal income, which includes all the wages and salaries, investment income and government benefits that Americans receive in total. Note the dip, then surge in income as the US government dolled out billions of financial assistance for millions who were let go from their jobs. Without this, consumer spending would have collapsed and the US economy would have been even harder hit than the -33% contraction. Now much of this assistance has rolled off as the two parties were unable to reach an agreement on a second stimulus plan. Without another round of support this could signficantly weigh on consumer spending and the recovery in the coming quarters.

While there are clear risks to the economy and markets, as there always is, I see more pluses than minuses and see the US economy slowly recovering in the coming quarters.

US Income Has Been Supported by Government Assistance

Source: Bloomberg, Turner Investments
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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CBs and thee

The biggest impact central banks have for most people is setting the cost of money. That’s called interest. It’s what you pay to get money or the amount you receive when you lend it.

The CBs in Canada and the US for decades have worried about inflation, as it jacks prices and wages making money worth less. So they used higher rates to empower money, thereby corralling the rising cost of living. Maybe you’re old enough to remember about ugly inflation in the early 1980s. If so, you might recall 15% GICs and 22% mortgages. The Bank of Canada pulled out all the stops to crash prices.

It worked. Real estate went from boom to bust lickety-split.

Lately the central bankers crushed rates in order to save the economy from virus-induced deflation. Look at today’s Canadian GDP stats. Fugly. The economic crash in the second quarter equaled 38.7% on an annualized basis. Worst ever. And while things have been creeping back in July and August, it will be months (or years) before the jobless numbers restore to early-2020 levels.

What have those cheap rates done? Exactly. Fuel real estate. In fact, the pandemic itself is throwing gas on the housing market, especially the detached, suburban, minivan-infused former cow pastures where children sprout and adventure dies. People want safe. Boring. Fences. Sales in Barrie jumped 84% in July, where the top adrenalin-pumper is bowling and there’s a Polaris in every garage.

Now, more changes coming.

Yesterday, while the Corona president was giving a speech to a thousand people without masks or social distancing the American CB, the Fed, made a big move. Inflation won’t be the main focus anymore, it suggested. Rates won’t automatically start to rise when the core inflation rate hits the long-standing threshold of 2%. Instead, the cost of living will be allowed to grow ‘moderately’ above that, even if full employment is achieved again, leading to wage demands.

A biggie, this is. The policy shift suggests the Fed’s worried about virus backsliding taking place and is signalling it’s prepared to keep rates supressed for a long time. “Yesterday’s action by the Fed likely provides risk-assets with the assurance they need — easy money is here to stay,” Bloomberg reported a Wall Street strategist as reacting. As a result, bond yields went down and bond prices went up. Stocks continued to advance toward record highs (where else is money going to go?). The US dollar declined, which meant commodities like gold advanced. And people kept on buying houses in Barrie even as StatsCan was reporting the economy croaked.

Now, all this means we are getting closer and closer to free money. The implications are legion. As reported days ago, it’s possible to nab a five-year, fixed-rate insured mortgage for 1.5% in some places. (Even the big banks are handing out 1.9% money to everyone with a mask and a pulse.) Now, for the first time, comes a 1.4% one-year home loan – which is less than half the cost of 18 months ago. In fact, this rate for a fixed-term mortgage is cheaper than the cheapest variable-rate loan – another first.

Of course 1.4% is still 1.3% more than the going inflation rate in Canada, which should give everybody pause. Despite higher gas prices, food costs, insurance premiums, communications charges and surging house prices, we’re just a hair above deflation. That’s what keeps our CB boss, Tiff Macklem, up at night. It’s why the Fed’s abandoning its carved-in-stone, anti-inflation mandate, why mortgage money and bond yields have dug a hole and why this is a potential disaster for indebted homeowners and hapless savers.

The inverse relationship between real estate and rates is driving property prices up, taking debt along with it. The amount of money Canadians owe has been swelling relentlessly throughout the pandemic. First from job loss and the inability to service credit card debt. Second, from 800,000 households not making mortgage payments, adding unpaid interest to their principal. And now with an avalanche of new borrowing as people scramble to get cheap home loans and pay record prices for detached houses and space in the boonies.

Money may stay cheap for a few years. But not forever. Big debt could be a big problem. For the nation. For your family. If a second wave hits, lockdowns happen or job numbers reverse… well… you know.

For savers, there’s no place to hide. High-interest savings accounts pay nothing. GICs are a disaster. Bond yields are in the ditch. Unless you already have a big enough pile to finance the rest of your life, there’s no alternative but to swallow some risk and invest in assets with the potential for growth (like equity-based ETFs) or a tax-efficient income stream five times higher than a guaranteed investment certificate (like preferred shares). The best bet for a world gone nuts, where up is down and rules change weekly, is a balanced portfolio (with both safe and growth elements) and one that’s diversified (index holdings and global exposure).

Or, you can blow your savings and take on epic debt to get a fortress in the sticks. Save enough for camo undies.

About the picture: Covid nixed your group yoga class? Well, there’s always dog yoga with Sunny, adopted from an indigenous community and now romping through Red Deer. “He held that dog in the palm of his hand when he adopted it,” says the proud dog-blog parent who sent this to me. “I’ve never known him to love something that much or be committed to something so fully. Imagine if he felt that way about me?!”

 

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