Game changers

Derek Holt’s a smart egg. We used to hang out together doing interviews when he was a budding econo rockstar at RBC, with strong views on real estate.

In those days I ran and owned a TV production company from a studio I’d built on Bay Street in the financial canyons of Toronto. The business model was simple: produce network-quality shows with original content, buy blocks of time from Global, CTV and specialty channels, then resell some of that time to advertisers. For a few years, it was a dream gig. An investment show. A real estate program. One for rebellious sk8r kids. And my fav, a dog show. Twenty employees – reporters, editors, writers, sales guys – and good profits. Then online killed television. So I went online. Went on tour. Started a wealth management company. Bought a general store. Then a bank. And came here.

Well, back to Holt. Now he’s famous. Vice-president, head of Capital Markets Economics and chief visionary dude for Scotiabank. His voice has emerged as one of the most reasonable and believable – not shilling for his bank. No Pollyannaish musings designed to pimp mortgages and car loans.  Just a realistic appraisal of the world, backed up with copious dollops of thinking and research.

Friday morning he dropped an 8,000-word epistle on the nation. Every person borrowing their butt off to buy real estate inflated by cheap mortgages, a belief that Covid has changed the world forever or pure FOMO, should read it. But they never will. So here are the highlights. Then the reasons why.

His conclusions;

  • Central bankers were fibbing when they said no rate hikes until at least 2023.
  • The Bank of Canada will be the first major bank to jack the cost of money and taper back on its bond-buying program.
  • Interest rates will start rising, officially, in the second half of 2022. The initial jump will take place by October.
  • The US will see inflation return and full employment restored by the end of next year.
  • Bond yields will swell. Mortgage rates will, too.
  • The economy is far stronger than most people realize. Growth in Canada will be well over 5% this year. That’s huge. (And a reason to expect an election in June.)
  • The vaccines, and Biden, will change everything.

Holt points out that over 9 billion vax doses will be turned out this year, enough to jab 5.8 billion people, or close to 75% of the world. Herd immunity (seventy per cent) for the globe could happen by the end of the year. Total game-changer.

But hasn’t Canada botched the dosing? Nope, says Holt:

The narrative that is heard in some quarters that vaccine roll-out has been a failure is patently false. Vaccines arrived on the order of at least 6–12 months ahead of common assumptions up to just before positive trial announcements began to roll in during November. Current roll-out plans point toward full inoculation of the Canadian population over 2021H2. Expectations have shifted as the bar got raised and that’s understandable given the exigency of the challenges at hand, but progress is meaningfully more impressive than some of the opportunistic coverage suggests. In fact, as vaccine delivery recovers from temporary delays, Canada is in the sweetest spot of all with relatively fewer cases per capita and much higher coverage through production orders while the US has higher cases but is also above average in terms of securing vaccine contracts.

Also adding to the bullishness is a heap of pent-up demand, not only in Canada and the States, but everywhere. Covid cash was showered on Canadians. WFH has reduced costs and improved cash flow for millions. The US savings rate has doubled and household debt payments fallen. “A powerful economic force,” says Holt.

And then there’s Biden. The Dems. The big government spending spigot turned on full. An estimated $2.4 trillion in stimulus money is about to wash over the American economy, just as the vaccinations ramp up and the slimy little pathogen is offed. “That amounts to 11–13% of present nominal US GDP,” says the economist, ”with much of that occurring this year while blowing away prior episodes of fiscal stimulus.”

Given all this, CBs are not going to keep spending gazillions buying up bonds to suppress yields. That QE (quantitative easing) activity will taper away and the price of bonds will fall as those yields increase. Five-year fixed rate mortgage costs will increase. Says loans broker/blogger Rob McLister: “Five-year forward rates are now over one percentage point above 5-year bond yields. That’s the biggest gap since May 2017, and confirmation that rates are likely headed higher, so thinks the market. All that is to say, while this may not be the last hurrah for 5-year fixed rates, there are fewer and fewer hurrahs left.”

So, concludes Derek the Seer:

The BoC may well end up hiking ahead of the Fed again in this cycle. Canada’s COVID-19 cases have been vastly lower than in the US, it is much more hedged through vaccine commitments than the US and expected to catch up on administered doses, and both fiscal and monetary stimulus responded more aggressively in Canada than the US with an earlier forecast closure of spare capacity. Canada should also benefit vicariously from US fiscal stimulus.

Translation: the future’s coming back. Think twice before you sauté in debt and move to Hick City.


The wild west

In October a skinny detached, face-brick house in Brampton with a garage stuck on its snout was listed for $699,000 The neighbours were a tad started when it sold for $795,000. The sale price, in other words, was 114% of asking for the 31-by-100 property.

This month 10 Eastview Gate came back to market, about 100 days after that last deal. The asking price this time was $899,000. The hood chattered. And then it sold for $1,065,000. So in four months the street value of this place rose $366,000, or 52%. That’s an annualized gain of 157%.

Here it is…

Is this place, deep in the northern reaches of the outer GTA, worth seven figures? After all, the regional real estate board has just forecast that sometime in 2021 the average property – detacheds, semis and condos included – will jump that hurdle in the entire metropolis of six  million souls.

Well, maybe. But the point of this example (like a few others presented here lately) is that we’re in the grips of perhaps the greatest wave of residential real estate speculation in Canadian history – at least here, in the nation’s biggest market. You know why. Covid has turned people into nesting maniacs thinking that the virus will never penetrate a detached house. The WFH thing makes folks believe they can buy in the outer burbs, securing more space, because they’ll never have to trundle downtown again. Mortgages at an historic low of 1.5% allow families to pile on far more debt for the same monthly payment. And FOMO is rampant. The more prices escalate, the greater the emotion swells. Houseless couples in their thirties are convinced if they don’t grab real estate now – no matter the cost – they’ll have it never.

This is how a $699,000 house on a featureless, distant street turns into a $1 million object of desire. And as it happens, housing affordability erodes further. The divide grows between the haves and the havenots. Family indebtedness balloons. Liquid assets and savings – in RRSPs, TFSAs, bank accounts and non-registered investments – shrink. As a society we become more indebted, less diversified, assume greater risk and watch the growing gamification of real estate.

Brampton, by the way, is torrid. The average property is worth $102,355 more, or 12%, in the last two months. Detacheds now sell for an average of $1.168 million. Sales are up a stunning 50% year/year. It’s a zoo. Check this out…

How is government dealing with this speculation?

Not well. Most short-term sellers will claim the PR exemption to escape capital gains tax on the windfall. Some will be caught by the CRA and the profit declared business revenue, added to the seller’s annual income and taxed at that marginal rate (ouch). Others will get away with it. So far this has been an uneven approach. The bottom line is governments have been completely impotent to corral home flipping, even when politicians pay lip service to housing as a human right.

Meanwhile governments help make real estate even more costly. Look at the land transfer tax in Toronto – a prime example. A so-so $1.5 million property in 416 attracts $52,950 in tax on closing day. Money for nothing. And already it takes a couple with a combined income of $180,000 twenty-four years to save enough to buy a $1 million property. Now Toronto is about to jack the tax on so-called ‘luxury’ homes selling for $2 million or more. The LTT tax on a two mill hovel (now absolutely common in places like North Toronto) would be $96,475, combined with the provincial tax.

Ridiculous, say the critics. Nobody ever made houses more accessible by taxing them more. This will stem up-sizing by the elite WFH readers of this blog, thereby reducing overall inventory and squeezing prices higher. Real estate liquidity in the city could be affected, resulting in fewer homes coming available in lower price ranges.

In a word, dumb. But it goes to the meme that real estate is real wealth, and the rich are evil. Added to this is the vacancy tax, now in effect in Vancouver (at a whithering 3%) and set for Toronto next year. If you don’t rack up 180 sleeps in your home in any given year, it’ll be deemed empty and you’ll be taxed. The average Toronto condo bill will be about $7,000 a year, and $15,000 for detacheds or semis. Yup, more costs. More overhead.

The taxers say levies raised will be used for affordable housing. And while we need that, none of it will be made available to working, middle-class folk. They must continue to cope with higher valuations, squeezed inventories and the impact of unbridled cowboy speculation of the kind being played out in the wild west of Brampton. Ultimately the inability to buy leads more families to rent. That’s a valid (and less expensive) choice, but it also means more demand and increased lease rates.

Meanwhile, as this blog has been yakking about, mortgages are not going to stay at 1.5%. As the vaccines eventually defeat the virus, growth and inflation will goose bond yields and boost the cost of fixed-rate home loans. This may stall price escalation and nip the flippers, but it won’t crash valuations.

The conclusion? If affordable real estate is good and speculation is evil, why are we not taxing it? How does sucking off tens of thousands in transfer taxes and vacancy charges do anything but make houses cost more? The absurdity may have hit its zenith with BC’s ‘speculation tax’ that allows people to buy and flip properties (no tax) within a year but then whacks non-resident families who have owned and used places for decades.

Sheesh. We need new leaders.

About the picture: “I know you love dogs,” writes Jeff, “and feature dog pictures in your daily blog (I’m sorry to hear of Bandit’s passing a few months ago). During the pandemic, my dog has found a new pack to romp with in the local park.  One of the dog’s humans is a professional photographer who shot this photo of my dog Tola, an almost nine year old mostly Border Collie, on a very cold day. I thought it might make for a good picture for your blog, particularly if the theme was intensity, because Tola has a very focused stare. If you use it, can you please credit the photographer, Mark Krocz.” Done.


Comin’ for you

Time for a little catch-up on stuff we’ve mulled here in recent days. The world continues to evolve. It’s dizzying.

First to BTC. As reported yesterday, crazy & rich Elon Musk has thrown a giant wad of money into Bitcoin and says he’ll take the digital ‘currency’ in exchange for a new Tesla, except if you live in Alberta where it’s minus 45 and even the elk are running out of juice.

Predictably, Elon fans and dangerous young people came here to argue Bitcoin (and its offspring) are the future, that fiat currencies will collapse and coders will inherit the earth. The counter-argument is that governments, politicians and central banks will allow a private, unregulated alternative currency to become mainstream just as soon as Doug Ford starts doing Pilates. So, fuggedaboutit.

Well, we have news. If you just bought into BTC at this week’s insane level, too bad. If you made some bank on it, cash in. It’s only a matter of time before CBs squish crypto – at least as it is currently traded.

The recent valuations of Bitcoin, says the Bank of Canada’s deputy government Tim Lane, is “speculative mania.” In fact in a big speech the top banker just linked BTC to tweets, making us all think of Hoodies and Redditers. “The recent spike in prices looks less like a trend and more like a speculative mania — an atmosphere in which one high-profile tweet is enough to trigger a sudden jump in price,” he stated. And this: “Our view remains unchanged: a digital currency is by no means a foregone conclusion.”

What does this mean?

Simple. Digital currencies which are a part of the existing payment system and represent a true medium of exchange as well as a storehouse of value will actually come into existence. But it ain’t Bitcoin. Or Dogecoin. Or Ethereum. Or any of the myriad of others currently being invented by people with manbuns and tats.

Instead, digital money will be brought to you by the same people who are printing the paper (plastic) stuff. It’s no secret of Fed and the BoC, as well as the ECB in Europe have been working on this. Lane admits that the virus and the massive kick that’s given to online commerce is a catalyst. He’s also sending out a signal that if BTC and its spawn become too pervasive, that will also hasten the move.

So CBs will likely give us ‘stablecoins’, digital money whose value is not determined by a Wild West coin exchange (like now) where an Elon Musk message can inflate things instantly, but by an “external asset.” Like fiat money. And if people want digital money, adds Lane, it should be central banks that issue it because, “Only a central bank can guarantee complete safety and universal access, and with public interest — not profits — as the top priority. We will issue such a currency only if and when the time is right.”

More on this is apparently coming tomorrow. Hit the sell button, kids. If you remember your password.


Speaking of rubes, let’s turn to GameStop for comic relief.

Was it only a week ago we were watching the failed retailer’s stock rocket to the moon in a great example of crowdfunding manipulation and greater fool theory at work? What a tale. The Hoodies got hoodwinked by r/wallstreetbets promoters and ponzis on Reddit, bought the improbable story that this was about punishing bad hedgies (instead of greed) and piled into an inflated asset with the fundamentals of a road apple.

The inevitable happened. Here it is.

GME stock has been drifting around the $50 mark, which means some $30 billion (a billion is a thousand times a million) in value has been erased since January 21st. Volume of trades has halved and (naturally) the bulk of people who bought on the way up sold on the way down and lost some, most or about all of their money. GameStop has shed 90% of its capitalized value.

Did you learn anything?


Okay, so last year the virus gave us a big tax present, which was a long, long delay in paying outstanding balances. Instead of April 30th, it turned into September 1st. But no such luck so far in 2021.

One big item for a lot of people (over half the readers of this pathetic blog, according to our recent survey) is deductions for WFH. There are two ways of claiming them. The easy way is to grab the flat-rate $400 by completing Form T777S and claiming two bucks for every day worked from home. Technically you had to be a WFHer for over 50% of the time during at least four weeks, but nobody’s going to check. So all who want the four hundred dollar deduction can take it.

The less-easy way is to have your employer issue a T2200(S) form declaring you were required to toil outside the workplace at least half the time and expected to pay for related expenses. This allows deductions for all of the costs of an outside private office, or a portion of rent, power, heat, internet fees and maintenance if you work from home (on a square-foot basis). If your compensation is all commission, also claim a portion of insurance, property taxes or equipment leasing costs. No mortgage interest, though.

Don’t make stuff up. Keep receipts. Like with a yellow lab, the odds are low the CRA will kill you. But they’re not zero.

About the picture: John, a left coaster who sometimes contributes here writes: “The reason I’m home is my wife has 5 comorbidities, and we have two special needs children who are going to school.  As my wife has to live in the basement, I’m doing the WFH, plus being MR. Mom.  My daughter’s service dog has not made it into her new school yet this year due to Covid (staff training issues).  So he is at home with me.  The picture is of him telling me to take a movement break and go for a walk. Feel free to use it on your blog. His name is Wilbur, the autism service dog.”


Pump & dump

Reddit’s five-second, what-the-hell-was-that? Superbowl ad was judged as a brilliant marketing move the next day. If you missed it, that was almost the point. First a logo, then a bunch of words which flashed by too fast to read them. A Millennial, GenZ thing. Most Boomers were in the can at the time.

Of course the Redditers were capitalizing on the explosion of interest – by media and newbie day traders – of its r/wallstreetbets chat room. Not only was the site responsible for a massive crowdfunding manipulation of several stocks (most notably GME, GameStop), it also just raised $250 million in private equity to help expansion. By the way, Robinhood, the free-trading app most favoured by the Reddit mob, also ran a spot on the football extravaganza. But this is what people strained to see…

While speaking about market manipulation, media exploitation and investor frenzy, we can’t ignore Elon Musk. The gazillionaire EV-space travel-tunnel digging-digital visionary and idol of the moment invested $1.5 billion in crypto while making it know he’d sell Teslas for Bitcoins. This helped propel BTC to new all-time highs, as it steamed towards the $50,000 US mark in an eruption of orgiastic rocket–thrusting enthusiasm.

Some people think crypto will replace fiat currency, now forever corrupted by bad government decisions, central bank bungling and unrepayable sovereign debt. Of course, they’re wrong. But that’s a topic for another day.

What’s notable about Musk is that he’s a promoter. A great one. Not only has he juiced BTC, but he purposefully did the same for GME, and even a puppy-crypto that was started as a joke (dogecoin). His theatrics meanwhile have made Tesla the most-capitalized car company on the planet when it’s not even in the top ten vehicle producers. It’s stunning what some well-placed hype will do when wooing investors. Especially the moist ones.

So, Reddit. The Hoodies. GME, AMC, silver, BTC and Elon tweets. It’s an old lesson that keeps being relearned. If getting rich without working for it (because you’re smarter than everybody else) was actually a strategy then this blog would be all over it. But, alas, in the real world we call it ‘pump & dump.’ It’s why there are regulators. And why they’re a bit pissed.

The latest news comes out of BC, where there’s been a long, long history of selling crap assets to gullible rubes. For 92 years the province was home to the Wild West of Canadian equity markets, the VSE, where any of the dodgiest mining deals in the country were struck. For most of those decades being a ‘promoter’ was almost respectable, and there sure were a lot of them. Think silk vests, string ties, handlebar staches, shiny horses, babes and moneyclips. Oh, and bags of gold nuggets, rushed in by mule from the latest big hole.

So the BC Securities Commission is now all over Reddit. “The pump and dump game has changed,” says the regulator, “in a world dominated by social media.” And this sums it up nicely: “The simple idea is this: somebody shouldn’t be able to lie on social media about a stock.”

A big problem with GME on Reddit, for example, was that people with positions in the stock – even corporate insiders with a significant holding – were able to say whatever they wanted, without consequences, making broad claims and exhorting the aroused masses to load up. (On Tuesday a remorseful woman admitted to me that she bought 25 shares at $447 a pop. That’s about $400 a piece more than they’re now worth – for a one-week loss of $10,000.)

So the regulator is mulling a requirement which would force anyone who is pumping or dumping a stock to publicly disclose if they have a long or short position in that company. In the interests of transparency the commish points out it doesn’t have to actually prove any statement moved the price of an equity, only that a reasonable investor might find that information important in making a buy/sell decision. That’s a big hammer. And the odds are this would be adopted Canada-wide by the Canadian Securities Administrators and IIROC (the very scary dudes with quasi-judicial powers who regulate quivering financial advisors like moi).

Last week, in the wake of the Reddit mash-up, they said this: “We will take appropriate regulatory action to protect investors if we identify that abusive or manipulative trading activity may be taking place.” Yup, and there’s zero reason not to believe what happened with GME or AMC (or other target assets) was pure manipulation. The last total I saw for cumulative GameStop losses was $18 billion. Most of it out of the pockets, rent money and credit cards of people who mistook gambling for investing, and trusted some sleaze on a chat board. Like always (now with Bitcoin), a few will pig out enormously. The many will be Hoovered.

By the way, don’t bother slamming the comments section to say I’m a paleo who doesn’t understand fintech, blockchain technology, web3, the inevitability of cyrpto or the evil of naked shorts. I do. But that’s not the issue. It’s about cheating people, especially those who can least afford it.

Smirk away. You’ll still burn.

About the picture: “I have had German Shepherds all my life as companions/guard dogs,” says Carson, the tow truck guy. “Loved them all dearly. 8 to be exact. Had no interest in lap dogs… too girlie for me.  I love your dog photos and can tell you are a person who loves man’s best friend of the larger more manly kind.  Well, attached is my downgraded version of canine friends.  Sandra made me get them. Maybe you can use it. Their names are Goliath and Samson.”


To the moon

Were they false flags?

The big negatives of last week included (a) rotten jobs numbers with 213,000 more positions lost causing the unemployment rate to course back above 9%, and (b) the even rottener job the feds are doing with the vax rollout. That was capped off with a Bloomberg estimate that at this rate it will take 7.4 years to dose the world and get us back to normal. Holy crap!

Well, don’t believe it. Financial markets are betting that things move a lot faster and further. The case for optimism is growing, despite Covid variants, bumbling politicians, minus 47 in Alberta, Robin Hoodies and the prospect this might all mean Drake and Adele start performing again.

First, look at the equity markets. Record levels in New York. A homerun for the Nasdaq. And, wow, an all-time high on Bay Street, too. Commodity prices (oil, copper) are going up on the expectation of rising global demand as economies reopen. The memory of both Trump and 1/6 are fading fast (despite the impeachment trial); Biden’s boffo stimulus package will pass; and US treasury secretary Janet Yellen is forecasting full employment by next year (that will halve the current jobless rate).

Look at the S&P 500, for example. It’s ahead 4% so far this year (it’s barely February) and 19% year/year. Same for the Dow and the TSX in Toronto. The tech-heavy Nasdaq has gained 8% in 2021 and is 47% past where it sat a year ago. Even a boring, pedantic, don’t-wake-me-up balanced & diversified portfolio gained close to 8% in 2020 when Covid ripped through every expectation that humanity had.

Hey, and did you check out what Mr. Bond Market’s been up to?

Despite the lousy news last week, and even in the face of a new all-time mortgage low of just 1.25% for a fiver posted on Thursday, bond guys are aroused. The 30-year US Treasury has hit 2% – a big deal – and in Canada it’s expected our five-year debt will soon break out of a tight trading range, and not look back.


Simple, the market expects economic reopening, growth and inflation in the second half of 2021. The belief is that (a) government stimulus will continue, (b) the dosing of the herd will accelerate dramatically, (c) consumer spending will leap higher as blinking WFH shut-ins emerge into the sunlight flush with saved cash and (d) central banks will taper off their wild bond-buying as the pandemic panic fades.

By the way, have a gander at preferreds. Rate reset prefs rise along with interest rates (or the expectation of them) and lately they’ve been heading north. These were flaming bargains last year as the cost of money plunged, giving investors not only a steady, tax-efficient 5% dividend, but also the certainty of a capital gain once Covid started to succumb to vaccines. And it’s begun.

Says mortgage broker guru blogger Rob McLister: “Economists believe that the greater the percentage of vaccinated Canadians, the greater the probability that rates creep higher. Mortgage shoppers who buy into that argument must ask themselves, how much longer do I want to gamble on falling rates? Our answer would be, not much longer.”

You bet. And a mess of buyers aren’t waiting. Look at the latest real estate stats.

January sales in the largest market leapt 54% year/year and the average selling price increased over 15%. It’s expected to top $1 million in the next couple of months. Demand for detached houses grew 34% and prices ballooned by an annual 31%. Yes, we’re back into 2017 Bubble territory, but this time governments will be standing on the sidelines, looking in the other direction. No intervention. No cooling measures. No more vexing about affordability.

Governments at all levels are quite prepared to let ‘er rip, since houses most people can’t afford plus an out-of-control market is preferable to what we’ve just been enduring.

Says the board’s realtor/economist: “Looking ahead, a strengthening economy and renewed GTA population growth following widespread vaccinations will support the continued demand for both ownership and rental housing.” And did you catch the condo numbers? Sheesh. Sales ahead 85% in January, and exceeding listings growth. Apparently a mess of people haven’t heard that urbanity is toast.

“Big cities are not dead,” says broker Stephen Glaysher. “Humans are social animals and when downtown regains its appeal, people will come back. Work from home is not for everyone. Office towers will still be needed. In fact, Shopify and Amazon have just committed to lease another 200,000 sq. ft. of space downtown.”

His forecast: herd immunity happens by July. The international students and new immigrants arrive by September. And then some of the condo prices seen in late 2020 will look quaint.

What does all this mean?

Expect froth. In 2021, everything goes up. Golden retriever pups are already $3,000.


What they know

We remember what T2 did to TFSA contributions when he took over from Stephen Harper. In the autumn of 2015, back where we all naïve, there was no virus and a Toronto property cost 48% less than during Covid, Justin Trudeau said this of the limit:

“It is irresponsible. It’s only the wealthiest Canadians who have $10,000 laying around at the end of the year that they can put into that.”

It was pure politics, of course. As a direct result of the Libs chopping contributions by about half in 2016, Canadians saved less. There’s also ample evidence they started shovelling more into real estate. In fact, property escalation has been epic.

But here’s an interesting fact you might not know. While Harper-era TFSA contribution limits have been gutted because “only the wealthiest Canadians who have $10,000 laying around,” RRSP contributions have been goosed – by almost 12%. And, ironically, this (not the TFSA) is the preferred tax-slashing vehicle of the wealthy. The richer you are, in fact, the more the RRSP gives.

For 2020 the max allowed is $27,830, or four-and-a-half times the tax-free account limit. Not only that, but for every dollar put into an RRSP, the feds will reduce your income tax bill – a benefit TFSA investors don’t get. So if a filthy-rich, capitalist swine, oligarch blog owner in the 54% tax bracket did the max, he’d get a tax break of just over $15,000. Moreover, the twenty-seven grand can be invested in growth assets for decades, earning tax-free capital gains. At age 71 it can be converted into a RRIF, and continue to make taxless annual advances in value, with only a tiny amount (5%) required to be taken as taxable income.

Thus, the more you make, the better the deal an RRSP contribution is. And unless there’s a fat govy defined-benefit pension involved, in retirement most wealthy people can juggle assets and income to minimize the tax bite on registered investments. It’s even possible to chop or eliminate the tax through a melt-down strategy.

All this is why we have the following situation:

While the total number sticking money into the retirement plans is fading, the amount rich folks are stuffing in there is bloating. The average age is rising (now 46). The number of contributors earning over $80,000 has more than doubled (from about 30% to 70%). The amount of money placed in these plans yearly is up by double digits (to almost $45 billion).

So, a shift. Fewer people using RRSPs. But more well-off contributors. Bigger tax savings. A larger wealth divide. It’s ironic the most democratic tax shelter in this country – the TFSA, where everyone gets the same limit just for living here – was politicized and attacked by the populist, nail-the-rich prime minister while the one favouring overlord dudes like me was increased.

This isn’t fair, of course. But politics is about optics, not equality. And there are always consequences.

RRSPs are tax-shifting vehicles. Not just for retirement. If you stuff a plan during employed years it can be used to support you during layoffs, maternity leaves, sabbaticals or the next pandemic (shudder). Money can be taken out, tax-free, to go back to school or used as a property down payment. If you have your RRSP managed, fees will be subsidized by taxpayers (since those withdrawals are not counted as income). If you use existing assets to make an RRSP contribution, a tax break will come for selling yourself things already owned. If a loan is taken to make a deposit, the tax refund can be used to pay it down. And a spousal plan lets a high-income, high-tax spouse move big gobs of money to a less-taxed partner and still get 100% of the tax deduction. The money can later be removed for a big benefit.

Well, we all know what’s happened since the Trudeau attack on the notion of tax shelters. Financial illiteracy is rampant, and the feds haven’t helped one bit. Only one in five of us now makes an RRSP contribution. Close to 80% of all TFSA money is in cash or interest-bearing, brain-dead assets. Most people use them as glorified savings accounts. And, as we all know, Canadians would rather roll the dice, have a one-asset strategy, snorfle dripping dollops of debt and go all-in on a house.

By the way, 70% of RRSP contributors are now men. Yikes. What does this tell us?

The deadline is just sixteen business days away. Miss it at your peril.

About the picture: “Here’s a pic of Sherman (Silver Lab),” says Todd. “We would all look like this if we were walked 2 miles in the morning. Then 2 miles at night and ate only from a crockpot ! He’s a 120 lbs of pure lovin! Took this pic by Boundary Bay.”


Horrible bosses

DOUG  By Guest Blogger Doug Rowat

WeWork’s former CEO Adam Neumann is, pun intended, a piece of work.

The pot-smoking, Maybach-driving, personal-trainer-punching CEO almost singlehandedly decimated WeWork’s chances of a successful IPO in 2019. Some of Neumann’s excesses included using US$13 million in company funds to invest in an artificial-wave pool company, financing former professional surfer Laird Hamilton’s “functional mushrooms” health food venture and spending US$60 million on a corporate jet that was often used to take his family to surf spots around the world. See a theme? Yes, Neumann is a surfer dude.

Unfortunately, he apparently wasn’t much of a chief executive. Eventually, the corporate bankers and venture capitalists realized that his erratic behaviour and lack of real management skill was sinking the company and, with the help of SoftBank, they arranged his ouster. Unfortunately, it cost billions including a US$725 million personal payout to Neumann himself.

Sadly, according to the Wall Street Journal, the deal effectively made worthless stocks and stock options for about 90% of the company’s employees. A WeWork senior executive bluntly told The New Yorker: “The employees got screwed.”

WeWork’s disastrous example aside, owning company stock isn’t necessarily a bad thing. In fact, I recommend it to most of my clients because the favourable strike prices (or other pricing discounts) and/or employer matching often make owning company shares a compelling investment. However, concentration risk is always the danger.

While management fiascos (or other economic or operational catastrophes) are uncommon, they do happen. Just ask Enron, Lehman Brothers, Bear Stearns, Sears, Encana, Nortel, Bombardier, BlackBerry, Bear Stearns or General Electric employees.

General Electric, in fact, provides a particularly useful case study. In 2016, General Electric stock represented more than one-third of the company 401(k). Unfortunately, just one year later the company struggled. In 2017, operational issues and particularly weak results from its power generation business resulted in a massive 50% cut to its dividend and ultimately to a spectacular 45% drop in its share price. What made this drop even more stunning was that it occurred in a year when the Dow Jones Industrial Average actually gained 25%. It’s a pretty safe bet that if your company’s share price plummets this dramatically in a non-bear-market year that it’s unlikely to recover quickly, if at all. And, indeed, GE’s share price has never recovered.

I prepared the chart below to illustrate how otherwise balanced and diversified portfolios can be negatively impacted by a 45% decline in a single-stock position. If we assume a year where the portfolio’s balanced component returns 7%—a healthy gain—zero downside protection is provided if this portfolio also includes a plummeting single stock at even just a 20% weighting. The chart also gives you a sense of the hole that many of these over-concentrated GE employees dug for themselves.

Outsized impact: if a single stock drops 45%, an otherwise balanced portfolio still suffers significantly.

Source: Turner Investments; Assumptions: a $1 million portfolio with a 7% gain for the balanced component offset by a 45% loss for the single stock

Remember also that in addition to owning your company’s equity, you also work there. A declining share price’s not only bad for your finances, but it’s probably also bad for your job security. You’re effectively doubling up your risk. Needless to say, as GE’s share price plummeted in 2017, tens of thousands of workers were subsequently laid off.

Further, maintain perspective on your company’s size. You may love the particular department that you work for and believe that your department’s indicative of an overall well-run company, but recognize your department’s relative size. Big picture, your department probably doesn’t amount to much. Unless you’re actually senior enough to sit in board meetings and are privy to detailed, high-level internal information, you don’t, in fact, have any larger perspective or insight into your company’s actual fortunes.

So, the advice?

Keep company equity exposure below 10% of your overall assets. Schwab Stock Plan Services conducted a survey in 2018 which indicated that US employees with access to company stock options and employee stock purchase plans have about 29% of their overall net worth tied up in these assets. Consider if you fall into this category. Then examine my chart above. Your downside risk is excessive. When you get the opportunity to redeem shares or exercise options, rotate these funds into a balanced and diversified portfolio.

Finally, you may also read favourable press about your company, which may further tempt you to increase your stake in it.

But this favourable media attention, while comforting, is also worthless:

Would this face lie?

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



And the Street ran red

American economist Allison Schrager had some interesting things to say about GameStop, Robinhood and the testo-drenched mob over at WallStreetBets on Reddit. People confuse investing with gambling. So maybe they shouldn’t be allowed to own stocks.

“Investing in individual stocks is risky, and most people would be better off owning an index fund. If they did, they’d make more money on average and face less risk at the same time. Day-trading options are even riskier.”

How crazy is it to ban the ownership/trading of individual equities? Just so people don’t blow themselves up?

Well, look what happened to all those young Hoodie turks who believed their digital overlords and jumped into GameStop at $300 a pop. Or four hundred. Or even two hundred. The vast majority were fleeced. Losses are estimated to be in the hundreds of millions.

The GameStop lesson: it’s not a game. So stop.

Poor kiddos. They wanted to get rich fast without working for it (isn’t that called ‘gambling’?) and also bought into the Trumpesque fiction that it was a moral act to punish Wall Street. Of course, the Street won. It always does. And that’s why day traders are usually squished.

Look at the stats. Plain as the nose on your face.

A study in Brazil two years ago found one in three day traders were making bank after a single day of flipping stocks. By day 300, that had dropped to 3% with the other 97% poorer than when they started. The conclusion: the longer people do this, the stupider they get and the bigger their losses.

Another study in Asia lasted 12 years and had a similar result – only 5% of day traders were in the black and two-thirds were consistently in the red. Ditto in the US, where the stats show those who invest, stay invested, get comatose or forget they ever invested, do better than those who trade and try to time markets. In fact, a famous Fidelity analysis showed the best-performing accounts over a decade belonged to dead people. They tend to buy and hold.

Here’s more: over two decades the US stock market advanced close to 600% (a return of over 9% a year), but day traders who missed the 30 best days (out of 5,000 trading sessions) had – incredibly – a negative return. Invariably those good days came after crappy ones, so DIY investors who went to cash to avoid market declines (because they’re smarter than everybody else) usually missed the recoveries. Lesson: stay invested. Be diversified. Stop making financial decisions with your pants.

Adds economist Schrager:

“Owning individual stocks is inefficient for most people. We’d have more money and less risk if we just owned funds, and if we want to encourage more people to invest in the market, that’s what we should aim for. I’m all for democratizing the markets, but for me, that means wider ownership of efficient stock portfolios.”

Of course, Reddit and the Hoodies haven’t democratized finance. They’ve gamified it. Despite the short-term swings in their target stocks (GameStop staunched the bloodletting for a while on Friday), most of them will get played.

Here’s another lesson: during the 2008-10 credit crisis disaster the stock market shed 55% of its value at one point, and took seven years to fully recover. During that time a balanced & diversified portfolio (no individual stocks) lost 20%, recovered in a year, then advanced 17%. So investors who completely ignored the financial markets and played with their dogs instead ended up with an average 5% yearly return. Not shabby.

Anybody can ignore history, data, human experience and the stats, thinking they’re smarter than the herd, and day trade. Anybody can go to r/wallstreetbets, join the rabble and try to profit through market manipulation. We’re all free to get hot stock tips from a BIL, a news feed, stock blog or Twitter. Now with a cutesy trading app, we’re just a swipe and a click away from buying something whose value changes by the minute.

And look at this pathetic blog. Cowboys can’t wait to come on here and tell you how awesome they are because of the stock picks they’ve made. They dangle wins, and get amnesia when it comes to losses. It’s all about competition, superiority and (I’ll say it…) toxic masculinity. As the Hoodies have been posting lately, “we’re gonna get rich or die trying.”




This will be a rutting season unlike any other. But will the hormonal beasts pawing and trampling their way through the suburban underbrush be making wise nesting decisions? Maybe not.

Let’s review the facts.

Non-urban real estate has been goosed beyond reason by the slimy little pathogen. Houses in godforsaken places like Abbotsford and Scugog, Squamish and Caledon have seen massive increases in sales and prices. As this blog has detailed of late, crazed people are paying a million for a semi in Pickering and well into seven figures for a particle board factory house in Milton. Even Nanaimo and Kamloops are smoldering.

In fact, the virus has caused the absolute reverse of a long-standing rule, “drive until you qualify.” Now house price increases are the greatest the further you stray from urbanity. Look at the Ontario experience – places where it’s impossible to commute from (Guelph, Kingston, Woodstock, Barrie, Waterloo) have seen double-digit hikes, shocking the locals. In far-flung King, for example, sales jumped 75% in the last nine months and prices climbed 20% – al the way to $1.798 million. Yeah, to live with cows. The average in Caledon is now $1.3 million. And it still takes an hour in light traffic and a fast car to get downtown.

But wait. The core’s dead, right?

Not so fast, says a new report from the geniuses at CIBC. When Covid crashes, the economists believe, the suburban thing may come down with it. “Should COVID fade into the background, as is expected, the vibrancy of cities will return and so will the demand for housing within them,” they state. “Workers who think they’ll be allowed to work remotely forever may be making a bad bet. The question for many employers is not if they will end work-from-home policies, rather it’s simply a question of when they will require employees to return to the office.”

Whoa. Drive from Abby to downtown YVR every day? Or face a trek from the top of Death Highway 400 back into Toronto’s core? Are they nuts?

Well, here’s the argument…

  • Workplaces will reopen quickly and routinely once the herd is dosed, like in Q3 of 2021. After all, employers have been sitting on expensive real estate for more than a year, and have watched worker productivity crash as people get comfortable spending hunks of their days with dogs, kids, groceries, yoga & laundry. And gin.
  • The reopening might well be on a hybrid basis – two or three days a week. But still, what a change that will be for the sweatpants cohort.
  • Cities are coming back. Repopulating offices will do that. So will the ending of lockdowns that have crippled service industries, keeping bars, retailers, restaurants, gyms and hair salons shut. Plus immigration. The feds plan on making up for virus restrictions by allowing 400,000 new Canadians to join us. Most will be urbanites. They’ll need places to live.
  • “The population numbers make the case that fundamental demand for city living wasn’t as bad as perceived,” says CIBC, “and some of the fears surrounding downside risks for real estate tied to urban population growth might be overdone.” You bet. As detailed here yesterday with recent city condo sales stats, it’s already happening.
  • As the virus fades, tourism will return. Plus business travel. And pro sports. All of that is urban-centric and none of it involves horses, tractors or root vegetables.
  • The escalation in suburban and Hicksville real estate was so extreme, so sudden, so overdone, that the traditional price differential between urban and rural properties is gone. So if you have to commute 100 km to get to work, shortening your life, why not just move back into town?
  • The economics of real estate are about to change. Interest and mortgage rates will be rising far, far sooner the most people realize. No spike, but the start of a gradual tightening that will change property pricing as more potential buyers are punted. Already, as National Bank points out, the average family can’t afford the average house as it takes 5 years to save a down payment. This is the worst situation ever. It tops the 1989 real estate apex, which led to the 1992 housing crash.
  • So? Lower affordability and declining valuations for non-urban property mean the universe of buyers for houses in the pastures and distant cities will shrink. Fast. Likely in 2022.

Hmmm. It suggests some surprises may be in store. If a temporary but intense event like a global pandemic can cause this weirdness – large-scale WFH and rural real estate escalation – then its exit can bring the opposite. It also begs a question: how could so many people be so naïve as to believe they’d never go back to work, continue to be paid, and could move to a bucolic glade in the woods? Have the folks stampeding into bidding wars for hinterland houses that inflated 50% or more in ten months lost their minds?

Well, it’s February. Spring cometh. As we say on this pathetic blog, be careful when the saps flow.


Empathy city

Some weeks ago there were 14 condo units for sale in a prime low-rise, downtown, chi-chi 416 building. Then, in January, just a couple. Now, zero. The average selling price-per-foot vacillated wildly. From a thousand bucks last summer, it dipped briefly as low as $750. The final couple of sales were back to a grand.

In the last three months of the Year of Satan, condo sales in the nation’s biggest market zipped higher by 20.7% year/year even as the number of available units mushroomed. But look at this: the pace of condos newly rented jumped 86%. Rents are down by an average of 16.5%. And new rental listings keep piling up. (BTW, rents in SF are off 28%, down 23% in NYC and up 2% in YVR.)

Hmm. A sales surge does not quite jibe with the narrative that the virus, the looming vacancy tax, the lockdown, the collapse of Airbnb, the dearth of students and immigrants and the shuttering of the office towers would spell the end of urban real estate. So, what’s going on here?

Well, there are changes afoot. Demographic ones, which reflect what’s happening in the wider real estate market – where people are being priced out of $1 million semis in the burbs and by bidding wars in the far-flung boonies for houses they never envisioned themselves buying.

Yes, more condo owners are bailing. Yup, rents are falling and a slew of tenants are benefitting from that. But buyers have reappeared. The best units are being snorfled up. And it appears these buyers are end-users (in general), not investors this time.

No big surprise there since owning a rental apartment is a recipe for negative cash flow and heartache. As mentioned, rents have cascaded lower – right back to levels unseen for most of a decade. Meanwhile ownership costs – taxes and condo fees – continue to march higher. And as in several provinces, evictions have been outlawed as the virus continues to plague us. So if a deadbeat tenant decides to stop paying, well, tough. Moreover, now that the hammer has come down on short-term vacation rentals, the tourists and uni students are gone and arrivals at Pearson airport are treated like crime syndicate bosses, the economics of condo investing have changed.

Ergo, condos as homes. What a radical idea. The bottom rung of the property ladder is once again emerging in the urban core, now that Covid, nesting and WFH have pushed ticky-tacky suburban houses into the seven-figure cloud.

But wait, isn’t the core supposed to be a morgue? An economic dead zone? About to be repopulated by raccoons, coyotes and fierce falcons nesting in the crumbling crevices of what used to be bank towers? I mean, just look at how people have stopped moving around, and going to work.

Truth be told, urbanity has big pandemic issues right now. In Toronto, as mentioned a few times, the giant underground PATH, home to hundreds of small businesses is an empty (if glitzy) tunnel of despair. The commercial vacancy rate, a tight 2% pre-Covid, has zipped higher to more than 7% – and hundreds of thousands of feet of new commercial space (like in the CBIC complex and Google’s new digs on King Street) are under construction. (There are also massive, towering condo developments proceeding.)

And look at how depopulation has taken place, 11 months after our world rolled over.  There’s new evidence the WFH crowd is doing okay, and has retreated from the downtown while the hourly-paid workies have taken it on the chin. StatsCan says of the 80,000 jobs lost at the end of 2020, the drop was “entirely attributable” to those folks who punch a clock and earn significantly less than the salaried elite. “The number of hourly paid employees was 8.7% below its pre-COVID level, compared with 3.7% below the pre-COVID level for salaried employees.”

Okay, we get it. No restaurants, clubs, bars, gyms, hair salons, entertainment or events taking place. Vacant office space piling up. Rents falling. Investor-landlords freaking.

So, again, how do we explain condo sales rising and prices restoring?

Seems those buying these units as principal residences believe what we’re being told by the authorities. New infections are declining and daily cases dropping. A number of effective vaccines are being pumped out. Every Canadian who wants a shot will have one in their arm by the end of September – eight months from now, says the prime minister. The kids will be going back to school in person in all of Ontario (like the rest of Canada) next week.

We all knew the pandemic would be temporary. No, we did not expect it to last more than a year. But now there’s an end date. Our leaders say when the autumn comes, we’ll be okay. This has also been borne out by financial markets, pushing equity values to all-time highs on the expectation the second half of 2021 and next year will be wicked. Good wicked. Not the Satanic kind.

The expectation: this will be a year of decreasing anxiety about the virus. The herd will eventually get dosed. All service industries will be allowed to operate. Gathering sizes will remain restricted, but increasingly expanded as the year winds down. Schools will not close again. The hospitalization/ICU/health care system crisis will fade. Offices will reopen, most with a hybrid workplace/WFH schedule. Suburbia will lose its cachet. The city will renaissance. Urban streets will fill again. So will subway cars and commuter trains. Food courts. Sidewalks. Highways.

It will be slow, but relentless. From February of 2020 to the end of the virus could be three years. We are one-third there. But by far, this was the worst chapter.

What can go wrong? They’re lying to us.

About the picture: The ceramic mutts which form Toronto’s iconic downtown Dog Fountain, amidst a forest of condos, have been masked for Covid. The virus has apparently muzzled everyone.