The nothing burger

The financial media briefly had a cow yesterday when Canada lost its perfect credit rating. This blog chose to bury the news in a riveting post about, well, we forget the topic. Anyway, it was outstanding.

Why kinda ignore the Triple-A thing?

Because it was so inevitable. We may be the first western economy to get slapped around by a bond-rating agency over Covid, but nobody here should be surprised. The Trudeau government has spent more money than Drake did on his new bathroom – a deficit of maybe $300 billion by the time the year’s out. The accumulated debt will pass $1 trillion. Mr. Socks-&-Whiskas will go down as the spendiest PM ever.

In response to the news from Fitch the Canadian dollar swooned a little, but shrugged it off. The next day Bay Street had already forgotten, and stocks traded higher. Bond yields actually went down, which was the opposite of normal. Downgrades should mean higher interest rates. Not this time.

The raters said this: “Pandemic lockdown measures and depressed global oil demand will cause a severe recession of the Canadian economy.” Our debt-to-economy ratio will zip from 88% to 115%. So, yes, the country’s finances are starting to look just as pooched as those of most Canadians.

But wait. This sounds serious. So why is even the Parliamentary Budget Officer – a wily, suspicious, dark and rebellious figure – saying, “it’s not that big of a deal in my opinion, and not something that comes up as a big surprise”?

Because it’s not. We keep an AA rating with Fitch and a better one with the other two big credit-rating agencies. Ottawa will have no more difficulty flogging its debt. The dollar wasn’t too whacked. Of course, long-term, somebody has to shell out to pay the servicing costs on over a trillion in debt, but the Boomers couldn’t care less. It won’t be them.

So if Mr. Market isn’t vexing over credit ratings, historic debt and your financially-eviscerated grandchildren, what’s the focus on?

The restoration of economic activity. Period. Jobless claims numbers in the US announced on Thursday were okay. No big surprises. The virus is ripping through a few US states faster than anticipated, but that has not seriously stopped any of those regions from lifting social and business restrictions. In Canada the Royal Bank is lauding Trudeau’s CERB bucks, saying that they’ve moved us towards a “V-shaped recovery,” – exactly what the stock market’s been telegraphing.

Latest stats show a surge in consumer spending in the fist half of this month, as eight million people took their two-grand-a-month pogey and blew it. “We didn’t expect it to come back that fast,” says the bank’s CEO. “We’re positively surprised…”

No wonder. So far CERB has flowed more than $52 billion into the hands of those who claim to have been impacted by the virus – lost incomes, sickness, caring for others or child support. The impact has been astounding – from an average -25% income drop before CERB and when Covid hit, to a +16% jump in cash flow and a hike in spending.

“They are actually helping to simulate the economy with some of the extra cash flow,” the bank boss told a certain TV network that you should never watch (BNN). “So, from that perspective, you’re seeing those CERB recipients continuing to spend and not just save the money.”

Of course, it’s what Canadians do. Spend. Forget savings or paying down the debt that creamed you in the first place. The tat parlours are open again. How can you not go?

Well, there is a problem, however. The economic recovery may be moving ahead and will gather much more speed when Ontario lifts its state of emergency order and travel restrictions ease, but what about when the CERB ends? What happens to people making more moolah staying home than going to a job? After all, a husband and wife both on the Trudeau virus dole, plus collecting enhanced CB for a couple of kids can have a monthly (untaxed) income of almost $5,000. No daycare costs, either. No commuting. Not princely. But not poverty. Enough to ignite a V-shaped spending boom, apparently.

It’s also enough for people running restaurants, grocery stores, pizza palaces, factories and retail outlets to have jobs go begging. Enough for students to work a few weeks then quit to collect during the rest of the summer. Enough to do serious damage to the work ethic. Just as masks and distancing are shredding the social one.

The dawn is coming, yes. Do not discount the cost.

About the picture: “I’m a long time reader and fan of your wit and wisdom,” writes Enzo. “We’re tucked away in the southern gulf islands between YVR and Victoria weathering the storms comfortably thanks to your sage insights.  My nephew sent me this photo and claimed that it was taken after the brushing.”


The residue

Recently I fessed to having a corner office on the 53rd floor of a swaggering bank tower in downtown Toronto where I can see across Lake Ontario all the way to Nova Scotia.

Well, okay, Scarborough. But it’s a bitchin’ view, anyway.

The point is, I’m not there. Nobody is. Empty floor. Everybody – all my suspender-snapping portfolio manager smartypants colleagues and their assistants – are at home. Working remotely. Zooming, texting, VPNing, phoning and emailing each other and the clients they care for. The corporate overlords shut the place in March. Then the entire giant, 68-story edifice closed. People were told they’d go back at the end of May. Didn’t happen. The mayor begged employers in the downtown core to keep employees away until September. And the betting now is that just a trickle will return, even then.

So, yes, it’s a changed world. When this pandemic is finally over it’s only rational that a corporation which functioned 100% okay for six months with a dispersed workforce will rethink things. After all, people at home buy their own hand sanitizer, pay for their own connections, power their own A/C and arrange their own toilet paper.

The rethink, however, may go beyond how much pricey, leased space an organization needs. How about what people are paid?

Facebook’s Zuckerberg kicked this conversation into overdrive by telling 48,000 associates in May that people working remotely, living in the boonies where things cost less, could expect a pay adjustment. Down. The rationale was simple. First, the pandemic has gutted business models, wiped out profits and made corporations think hard about survival in a changed world. Cutting costs, reducing structural overhead (rent, salaries, benefits) is essential. Second, equity. If people can work from a location where real estate costs 50% less than in Menlo Park, or SF, or 416 or YVR, they should pocket less than colleagues in the city. Only fair. After all, no commuting, cheaper rents or prices and a lower cost of living.

This is but one result of the pandemic we’re all living through. Over the last four months so many new realities have emerged. Empty city cores. Commercial real estate doubts. Millions on government benefits. Remote employment. Mass mortgage deferrals. Hardened provincial and national borders.

The longer the virus hangs around the more certain that structural change will ensue. The latest news from the US is grim – record new cases in several areas, a surprise restriction of inter-state travel to places like New York and New Jersey and a warning from the famous Dr. Fauci that America is suddenly losing the Covid battle – truly bad tidings for the president. Meanwhile global infections are spiraling higher, thanks in part to the rightist dinglenuts who runs Brazil.

So while a lot of Canada is virus-free and the curve here was pummeled down, we’re not immune to the broad implications. Mr. Market signaled that on Wednesday, taking a dive lower after a breathtaking ascent of 42% since the end of March. Pandemics are temporary, and this will pass. But 2020 might mark the end of certain things. Fun air travel. Conventions. Adele and Drake concerts (there are benefits, too). Sixty-storey condos. Commuting. Open offices. Airbnb. Expect higher taxes and lower immigration. Structural unemployment. More government. A raft of business failures in 2021. Tighter credit. And a significant impact on real estate.

This week CMHC was at it again, warning people not to misinterpret the current burst of housing activity resulting from 90 days of pent-up demand being unleashed, particularly in Toronto. We should expect “severe declines” in both sales and construction activity, it said. How could it be otherwise when unemployment sits at double digits and incomes have taken a hit? The agency says it will be two years before things might restore to pre-Covid levels.

“We do not yet have a grasp on the answers to questions, such as the impact of greater work from home, differing impacts across industries, the effect of less mobility across provincial boundaries and the decline and immigration following cutbacks and international aviation,” it adds. CMHC also suggests rents will be fading with fewer immigrants, more difficult mobility within Canada and a ton of new condos coming to market which were started prior to the virus eating society. Lower rents are the last thing hundreds of thousands of amateur landlords need – people already stung by negative cash flow.

Meanwhile, especially in the GTA, it appears to be greater fool time. Sales are increasing, prices are inflating and June could set a new record for valuations. That’s the result of plunged inventory, cheap mortgages and hormonal demand after the markets was Covid-crushed in April and May. If you’re caught up in this, believing the faerie poop Remax is peddling, be careful. Logic tells us this won’t last. Normal is not close by.

On Wednesday StatsCan released a report on what the virus doing to the economy, and the lasting impact. “The degree to which COVID-19 results in permanent layoffs will have a major impact on how the pandemic affects Canadian workers over the longer term,” it concludes. “Looking back over recent decades, at least one in five Canadian workers who was permanently laid-off experienced earnings declines of at least 25% five years after the job loss.” BTW, Westjet laid off 3,300 more people today. And Canada just lost its Triple-A credit rating.

Next week is July. When the virus hit there was snow in the air. We’ll still be talking about the damn bug when the leaves are gone. So, don’t buy anything big. Borrow nothing. Build your financial reserves. And really suck up to your boss.


No normal

There’s no virus in broad swaths of Canada. The east is basically Covid-free. No cases. BC is good. The North, too. Seems once Ontario and Quebec get their outbreaks over (drawing closer) the nation will not only have flattened the curve but kicked the little bug’s germy butt.

This is in stark contrast to the US, where active cases are romping higher in many areas (including red states). Globally, the WHO says things are worsening. There have been 9.2 million cases with a little more than half recovered thus far. Over 475,000 have died, and a quarter of those in one country – America. Officials say the toll there will double by autumn. It’s an indictment – of something.

Covid brought unemployment of between 13% and 17% to Canada. The economy has taken a huge hit. Public finances are a mess. About 20% of people can’t/won’t pay their mortgages. Eight million are on public emergency benefits. These are unprecedented times.

The good news? I got my hair cut last weekend. No longer do I look like the homeless drummer for a ‘80s metal band. Or like my dog.

We know pandemics are temporary and will pass. Stock markets and investors have obviously been counting on that (the S&P 500 is ahead 42% since March and up 8% year/year). But what about public psychology? When will things go back to normal? What changes are in the offing? How long will recovery take?

This much is clear: public health officials and governments did a great job of changing behaviours. This has done three things: (a) punt the virus, (b) crater the economy and (c) scare the crap out of everyone.

Look at the latest Leger poll results. Astonishing.

Most (66%) of people don’t want social distancing to end. And they’d like it kept at two metres, double what the WHO recommends. That pretty much pooches restaurants, which need higher occupancies to survive. Ditto for airplanes, concerts, bars, sporting events and a lot of stores. Overwhelmingly (74%) Canadians expect a second wave of Covid to hit and 51% think they might get it.

But to date only one-third of 1% of the population has been infected – a little over 100,000 cases in a population of 36,000,000. So far 65,000 people are healthy again and the recovery rate is 92%. In other words, the fear and the stats don’t hunt. (Total cases per million is almost three times higher in the States.)

The key question: is this a public health triumph and are people correct to stay vigilant, or was this an example of epic overreaction and government overreach?

Beats me. You don’t know, either. Nor will anyone for a few years. But we do know a lot of people are freaked out, diving around in their cars wearing masks, leaping off the sidewalk when you approach, avoiding stores or just staying home. Leger found 46% of folks are stressed when they have to leave the couch. Six in ten believe ‘normal’ is a long ways off. A third say it’s gone forever.

What are the implications of this?

Full economic recovery will take longer in Canada than the US, where many more will be stricken by Covid. People will still be jumping off the sidewalk when there’s snow on it. Stands to reason that the Canadian equity market will reflect this (already happening).

It will be two years (likely) before Canadian interest rates crawl out of their near-zero ditch. The new Bank of Canada boss, Tiff, has made that clear. This was reflected in the advent of the lowest-ever mortgage rate this week – 1.65% for a one-year term. Yup, below inflation. Free money.

Cheap loans coupled with financial illiteracy and house lust will, sadly, set up more people as victims in the next economic bust. Will we never learn that a one-asset strategy and over-leveraging are dangerous? Of course not.

We may lose an airline. Without a doubt there’ll be blood running down the gutters of many towns and regions that live/die on the tourist trade. It’s July next week. Millions of people have been home for three months. Kids off school since March. The line between work/ not-work has been erased and family vacations are a quaint notion in 2020. Just going shopping is a life-altering experience.

For investors, this means keeping your maple exposure in check. Yes, you need Canadian assets because you live here, in Canadian dollars, and want the tax advantage of domestic assets. But our nation has rapidly eroded its fiscal position, will recover more slowly from the virus, is likely to extend social benefits longer than anyone imagined and is turning into more of a high-tax regime. Plus there will be a federal election in 2021 with a Liberal majority, followed by a UBI.

That’s the real message of the Leger poll, in case you missed it. And you thought it was just a pandemic.


Is this it?

Memo to self: never, ever again (ever) write about Trump. Juices and prejudices have made debate or analysis impossible. The deplorables win. Pass the ammo.


Last week we parsed the mortgage deferral thingy. Do not, this pathetic blog warned you, stop making payments and think there’ll be no consequences. That’s not a rational position and there’s zero chance lenders being stiffed on $180 billion worth of loans will just turn the other cheek. Ditto for credit cards. You’re being watched. Scored. Monitored. Recorded.

Astonishingly, three-quarters of a million households (as of Friday) had stopped paying their home loans. Another 450,000 people have deferred payments on cards. Never before has such a mass delinquency happened, which is the result of a once-in-a-century global pandemic.

If you’re truly pooched and must decide between food and the mortgage, then choose to feed your family instead of the bank. When the crisis ends and normalcy returns, sell the house. Obviously you can’t afford it. Trash the debt, rent, and focus on building up liquid assets. Never again let yourself be wooed into an asset beyond your means.

But the evidence suggests many are deferring because they think this ‘saves’ them money or that it’s essentially a payment ‘holiday.’ Un-huh. You still owe every cent deferred, which is added to the outstanding debt, and it’s highly unlikely (probably impossible) the grace period will be extended. This is the ‘deferral cliff’ CMHC’s badass boss, evil Evan Siddall, warned the nation about a few weeks ago. It’s coming. Many believe it will result in a flood of new listings in, say, October. That could have a lasting market impact.

Let’s review.

Credit agencies (we have but two of them) are 100% automated with few actual humans wandering around and there’s a decent chance deferred payments will be classified as missed. Bad news for your credit score. Even if they’re correctly marked as deferred, your lender knows what you did – claiming a payment reprieve because of financial distress. Do you seriously think this will not go on your record and have some bearing in the future? Then I have some great magic beans for you, back at the ice cream truck with the unicorn.

Mortgage renewals could be less automatic as you are asked for additional employment verification and details. Maybe a new net worth statement. The lender may want to know if you took the CERB, and why. Renewal rates could be adjusted if you’re judged to be in a higher-risk profession or (horrors) self-employed or paid via commissions. You might be refused. You might pay more. As we have no clear idea what the future holds, nor how banks may be re-assessing their risk tolerances, why would you create potential credit issues if you don’t have to?

Meanwhile, property listings continue to mushroom – up about 70% last month. They’re significantly outpacing sales, suggesting the current situation (multiple bids, rising prices in many urban hoods) cannot last. This could reflect people selling due to job loss, of course. Tweeted CMHC’s Siddall a day or two ago: “House prices lag economic events. Current price resilience proves nothing: don’t take comfort from low-volume price action. Multiple offers are consistent with a huge decline in new listings. Government support programs have deferred (& reduced) an inevitable economic adjustment.”

There are alternatives to deferring your mortgage, in essence abrogating your contract (and irritating the bank). For example, make your amortization period longer. A $400,000 loan with a 2.6% rate will cost $1,820 a month amortized over 25 years and $1,600 when the period is extended to 30 years. That helps. If you have a HELOC in place, take money from it to help make mortgage payments. Those funds don’t need to be repaid into the line of credit, requiring interest-only servicing until you’re back on your feet and can pay it off. No messing around with your credit score or unblemished payment record.

Most of all, reconsider your fixation with property. Is this really the best place to put the bulk of your net worth, leveraged up the wazoo?

The proportion of households with mortgage debt who have deferred is staggering – 20%. If they’re all in trouble, ouch. It took but 8% of US property owners who were over-extended and in distress to topple that market, creating a 32% plunge in overall values (it was 70% in some areas, like Phoenix and Florida’s Gulf coast).

By the way, in its most recent report the Bank of Canada said this: About 20 percent of all mortgage borrowers do not have enough liquid assets to cover two months of mortgage payments.

And what percentage are currently not paying? Yup, 20%.

The folks who loaned them billions, now collecting nothing, have some ‘splaining to do.

  Hey, a whole post and I didn’t say ‘Trump.’ This is progress.


The fail

What a blog. My snappy portfolio manager buddy Ryan set you up for Trump’s pivotal Tulsa rally with his astute, research-based post yesterday. And today I will clean up the damage.

Not from Mr. R, of course, but Mr. T. What an awesome mess the 45th president of the United States has left in the wake of his Oklahoma excursion, and it’ll be interesting to see how financial markets react over the coming days and weeks.

First, the hype. The Trump campaign, the man himself and lots of his parrots and cockatoos on this site chirped about one million people having requested tickets for a mass rally of historic proportions. Well, didn’t happen. About ten thousand showed up. That’s a mess of people, for sure, but it left half the seats empty and amounts to 1% of one million. There was no overflow outside, when the campaign had suggested perhaps 40,000 might clog the streets. So a speech by Trump in that location was scrapped. The elaborate outdoor stage was dismantled. And claims that MAGA fans had been turned back by protestors was showed, live on TV, to be false.

In short, a disaster. One of the biggest fails in modern campaign history. The base did not rally. No flocks of new supporters. A sea of vacant blue seats.

Turns out hundreds of thousands of tickets were reserved by TikTok dancing kiddies and K-poppers doing mischief. Imagine, using the Internet for political reasons. Like Trump on Twitter (‘Hillary is a criminal!’, “Joe has dementia!”). The real worry for Republicans is (a) how the most sophisticated and data-oriented campaign ever didn’t pick this up and (b) why Trump and others fell for and promoted it – a million attendees in the middle of a pandemic. Duh.

Second, Covid. Truly scary, since Oklahoma has recently seen a spike in cases and public health officials warned against a rally, complete with a Presidential mosh pit. In fact, this was the largest mass gathering on the planet since the pandemic arrived – which so far has infected almost 9 million and  killed 467,000, a quarter of them in the US alone.

Most people did not wear masks. Maybe 10%. During his speech Trump said he’d asked officials to “slow down testing’ for the virus because too many new cases were being discovered, making him look bad. And yet every public health official everywhere has said without testing the virus spreads undetected and cannot be halted. Less testing, more deaths.

In fact, pre-rally we learned six Trump campaign staffers have Covid. They were removed, of course, and it was reported today 45 was livid this news had been allowed to leak.

On stage he called the virus ‘Kung Flu’, a racially-charged epithet. Coming amidst the mass protests against racism on three continents, this was a shocker. While the president likely thought he was just dumping on China (again), this is not what Americans of Asian heritage (23 million) want to hear. More polarization, blame, discrimination and hate in US society. Not what you expect from the boss.

Today Trump has more to worry about than he did Saturday afternoon. His campaign let him down. He looks weaker, less relevant. John Bolton’s tell-all will be published Tuesday. Tulsa suggests there’s no silent majority, but a reckless minority. And no amount of inflamed rhetoric or oratorical passion can chase off the demons the president faces.

Forty million Americans are out of work, as the jobless toll swelled from an historic low to Depression-era levels. Public finances have been creamed as Washington spends trillions to stave off decline. Economic growth has turned into a GDP crater. It’ll take years to climb out of the hole. Half of Americans are still terrified of Covid and say they’re not ready to go back to work, fly or eat out. Finally, hundreds of thousands of people of all backgrounds, ages and races have been in the streets since the death of George Floyd in a movement the guy in charge does not acknowledge.

Whatever your leaning – right or left, con or lib, GOP or Dem – facts are facts. Trump narrows his base of support daily in mishandling these pivotal challenges. Tulsa was meant to be a symbol of renewal and rebuilding. Now it suggests naivety and ego. He looks remote, out of touch. More extreme. Every time he calls his opponents a ‘mob,’ he drifts further from the mainstream of voters, who worry more about their health, their jobs, their families. Joe Biden may be ancient and a tad creepy, but he’s no rad.

Mr. Market preferred Trump. Expect change.


Elections and the markets

RYAN   By Guest Blogger Ryan Lewenza


In the very immediate future, the US presidential election is about to kick-in to high gear and will be a focal point for investors and the markets. Currently, investor focus is on COVID and new infection rates, the reopening of the US/global economy, the unrest in the US, and all the government stimulus announcements. However, soon investors and the markets will be turning their attention to the US election and what the outcome could portend for the economy and equity markets. In this week’s post I examine the historical impact of presidents on the US equity markets and review the key policies that could impact the US economy, equity markets and Canada.

Currently, Trump is on his back heels with Biden being the clear front runner based on numerous polls and betting websites. Below are the current odds of winning the Electoral College from The Economist. Based on their models they have Biden winning 341 electoral votes to Trump’s 197 votes, and have Biden at an 85% probability of winning the Electoral College and becoming the 46th US president.

Now a lot can change from now till then, and as we saw in the 2017 election, polls don’t always get it right. But given these current readings and Trump’s recent setbacks (e.g., handling of the pandemic, the ongoing recession, and his response to the recent protests), I believe Trump faces an uphill battle to securing a second term. This is not a political statement, rather my current assessment of the US presidential race.

What are the implications of a Biden win (if I’m right) or a Trump win (if I’m wrong)?

Chance of Winning the Electoral College

Source: The Economist

There is a commonly held view that the US equity markets perform better under republican control given the party’s focus on lower taxes, deregulations, and overall being more business friendly. Well the facts don’t support this thesis, as based on my analysis, the equity markets have performed better under democratic presidents.

Below is a great chart that illustrates this. I calculated the average performance of the S&P 500 over the four-year president term since 1945 under both democratic and republican presidents. The results are surprising. On average, the S&P 500 has gained 56% (price return only) under a democratic president versus 27% under a republican president.

Now it’s important to stress that luck and circumstances also plays a role in these returns. For example, President Obama took over after a terrible bear market under Bush II, and saw great returns over his 8-year term in office. But even with this, given the numbers we’re dealing with (8 democratic and 9 republican presidents) this is a decent sample size, and I believe has some investment merit.

Key point here is, don’t jump to conclusions and think that if Biden pulls out the win and becomes the next US President that the stock market and economy are going to go into the crapper. In fact, this analysis shows quite the opposite.

S&P 500 Performance under Different US Presidents

Source: Bloomberg, Turner Investments. Based on S&P 500 data from 1945 to present

The most significant impact to the equity markets, should Biden win in November could be with corporate tax rates and their impact on corporate earnings. Biden proposes raising the US corporate tax rate from 21% to 28%, reversing some of the huge Trump tax cuts that went into effect in 2018 (Trump and the republicans cut the corporate tax rate from 35% to 21%).

If Biden wins and is able to pass this legislation then this will surely impact corporate profitability, which is a key long-term driver of equity returns.

Expectations for S&P 500 earnings next year are $162/share, which equates to a 29 Y/Y growth rate, based on 2020 estimates of $125/share. If Biden hikes tax rates then this could shave off 5% or $9-10/share in earnings next year. Basically, this could cut potential earnings growth from 29% Y/Y to 22% next year, which doesn’t help stock prices.

The upside of these tax cuts (assuming he doesn’t just redirect all the higher tax revenue to increased spending) would help to cut their massive deficit, which is a big concern of mine.

All else equal, a Biden corporate tax hike would be negative for US stocks, if enacted.

Next up is China, which is critically important as it appears that a cold war is brewing between these two competing, hegemonic nations. Trump has taken a very hardline approach (some of it I agree with) with China through aggressive trade policies and tariff increases. I do see some long-term benefits of these aggressive moves (e.g., onshoring manufacturing, having more control over supply lines) but Trump’s strongman approach brings some negative reactions as well as there is greater uncertainty, and global tensions, which is never good for the economy and stock markets. We saw numerous market declines over Trump’s first term, which were a byproduct of his aggressive moves with China.

While I don’t see Biden as a pushover, I think he would take a less hostile and combative approach than Trump with China, which I see as a positive for the US/global economy and equity markets.

Lastly, a Biden win would be bad for our already battered energy sector, as he’s been very direct about his opposition to TC Energy’s (TransCanada) Keystone pipeline, a position shared by his old boss President Obama. Biden recently stated “I’ve been against Keystone from the beginning. It is tarsands that we don’t need — that in fact is very, very high pollutant,” in an interview with CNBC. It wouldn’t be a death blow to our energy sector, especially with TransMountain gearing up, but it definitely wouldn’t help it either.

I see pros and cons for both Biden and Trump on the economy and markets (my focus on this blog is finance and investments and I try to leave my political opinions/biases aside), and I see the US election playing a bigger role in the media and markets in the coming months. A lot’s at stake in this upcoming election so it’s going to be interesting. Buckle up!

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.



Cash cows

There are 12,500,000 households (more or less) in the nation. Of those, 206,600 have managed to accumulate $5 million in assets, or more. That’s 1.6% of the population. Together they own 28% of all the wealth. Some of them – fewer than 3,000 families – have a ton of dough, $100 million or more. Under a dozen have a billion.

How did 1.6% of people get 28% of the money? Some inherited it. Most did not. And the bulk of the wealth isn’t in cash, but invested in businesses. Some of those employ armies of people. Like Galen Weston, for example, currently a punching-bag of the leftists. He’s worth about $8 billion (largely in corporate stock) and employs just under 150,000 Canadians.

But billionaires are rare. We could use more of these job-creating titans. And wealthy people are cash cows for the government. The top 10% now pay 54% of all the income taxes. That allows forty per cent of households to pay nothing, net of government benefits.

Wat did Covid teach us?

Lots, sadly. Eight million people (of a workforce of 19 million) went on the dole. Close to a million households (of the 3.65 million who own houses with mortgages) decided they couldn’t make payments. It took less than a month after the virus arrived for a crisis to emerge. Now the federal government has discovered (no surprise) that it can’t turn the tap off. It will be Christmas before the CERB expires – and no guarantee that will happen.

For a dog’s age, this blog has argued a real estate obsession has lured people into historic debt, caused them to spend money unwisely, cratered savings, set up a retirement crisis, created a dangerous one-asset financial plan and actually fed financial insecurity. If you need proof of this, read the paragraph above once more. On average Canadians have $1.50 in debt for every buck earned. Debt ratios are 450% of income among new homebuyers in Toronto and Vancouver. Interest rates are at historic lows. Just imagine in a few years when the virus is a memory, economies are restored and the cost of money begins to rise.

The payroll guys found repeatedly that over 40% of households were one paycheque from disaster. Now we know it’s true. Credit bureau surveys discovered, pre-virus, that six in ten families felt they might not be able to pay their monthlies, because of debt. Also true. Over half of all households are vulnerable financially – in a country where 70% own houses. Remarkably, this comes after the greatest-ever run-up in real estate values. Instead of harvesting profits and diversifying, Canadians kept buying up the property ladder, hiking debt and danger. Incomes have matched neither spending nor appetites. Debt filled the gap. Now the reckoning.

Meanwhile the wealth gap spreads. Families with diversified assets have had a far different Covid experience. Thanks to dramatic government fiscal stimulus and historic levels of central bank monetary stimulus, capital markets have recovered fast from the virus. As interest rates collapsed, more money has gone into equities – since fixed income pays squat. And Mr.Market accepts that pandemics are temporary, so the economy will inevitably reopen and corporate profitability restored.

This is what investors, therefore, have seen happen while millions of real estate-indebted families struggle. The gauge of fear and volatility, the VIX, has tumbled dramatically from its March peak.

The gauge of fear tumbles…

Concurrently, equity markets have rebounded dramatically, as shown here by the S&P 500. We’ve just seen the fastest, steepest ascent from bear market territory in history. Those people who panicked and sold in late March took a paper loss and made it oh-so real. Those who ignored the drop are seeing their portfolios restored.

…while market confidence grows

Does this still look like a V-shaped recovery? Investors think so, despite the damage lockdowns and quarantines did to the economy, despite huge unemployment, despite the potential of a second wave and that weird guy in the White House. As society reopens the negatives will diminish while the fiscal and monetary stimulus continues. What would cause markets to stumble and fall – that we’ve not already faced?

Stay invested. Ignore the “stocks are too risky” discredited moaning of those (including advisors) who totally missed the rebound. Balance, diversification & liquidity are the three muses of the 1%ers. They’re making the wealthy wealthier. And no realtors involved.



The dilemma

Dipper leader Jagmeet Singh did a victory lap on Parliament Hill this week after blackmailing the Trudeauites into another $34 billion in CERB payments. The program will have dished out roughly $90 billion to workers claiming a virus impact by the time it ends (Christmas).

In exchange for allowing the T2 gang to survive a money vote (confidence), Singh demanded – and received – the 16-week benefits extension. And so the most costly short-term social program in Canadian history continues. Rest assured his next demand will be for UBI. If the Libs don’t agree to start crafting a universal basic income, well, we get an election. Ironically that could wipe out the lefties and usher in a Liberal majority. (Peter? Erin? Anybody home?)

The deficit for 2020 may well be $300 billion (the indie PBO says $256 billion so far). The federal debt will squirt past $1 trillion. The debt-to-GDP ratio will rise from the mid-30% range to 50%. With provincial borrowing added, the number becomes 90%. Still better than the US (110%) but poor contrasted with Germany (60%). Expect these comparisons when Bill Morneau gives his ‘fiscal snapshot’ on July 8th arguing that it’s no big deal when the deficit increases by a factor of 10 in a single year or that one administration adds more new debt than any which has gone before.

Chances are most voters will agree. After all, eight million households are getting direct deposits of two grand a month. Four in ten already pay no net tax. Child support benefits have inflated bigly. Wrinklies receive more, too. Plus billions going to companies to subsidize the wages of people who aren’t working, and business loans a quarter of which is forgivable.

It’s all astonishing. And as Galen Weston found out in the last few days, you can never take back what you generously gave. Society has turned. Not for the better.

Well, let’s dive into a single little example in the life of one woman to ascertain the impact of CERB. It’s spring, so we’ll call her Iris. She lives in Ontario, reads this blog and admits being pissed.

Your last post was about CERB extension, so I thought you might be interested in posting just another view. The math is very disturbing. I lost my job due to COVID. I am eligible for unemployment benefit, but was forced to get CERB instead.

Now the interesting part – I was offered a part-time job. First 2 months it paid $2600 and now less hours offered and the pay – $1300. Should I refuse it? It just doesn’t make any sense to work for $1300 when you can get $2000 for doing nothing, right? And the room for extra earning is max $1000 under CERB. However, under old EI benefit more extra earnings allowed, I would get $3592 the first 2 months and $2942 for the third and forth. So overall for 6 months I would lose 2×292 + 2×992 + 2×1642 = $5852

First time in my 20 plus years career I am collecting benefits and so very disappointed and angry. I don’t know what to do. Shouldn’t we all have a choice to collect CERB vs EI? Do I start a petition?

Iris is miffed CERB replaced EI (although she can go back on unemployment benefits when the emergency money ends). This, she argues, is unfair. She feels entitled to the larger amount after twenty years of making EI contributions. But by the time CERB ends, Iris will have collected $16,000, and paid no tax. With an average income of $30,000, it would take 33 years of EI contributions to equal that amount. She’s way ahead of the game. But wants more. Another Galen Moment.

Here is the dilemma. Accepting a job and going to work isn’t even an option in her mind. Why work for less when the government will pay you more to watch Netflix?  It’s a question many are asking since the virus came to town and the direct bank account deposits started.

There are answers, Iris.

Accepting a position can lead to advancement, more hours, better pay and responsibility. Sitting at home watching Space Force does not. Never will. You stay unemployed.

Working means human contact and interaction with others (even with social distancing). To do this you must put your pants on (well, usually), wash your hair, leave the couch and practice social skills. Or you can stay home and hoover cheezies.

Being employed gives daily meaning and context to a life. ‘And what do you do?’ is a universal question. ‘I brush the cat’, is a bad answer. There is a sense of dignity and self-worth that comes when you are paid and have a task. No pogey payment can provide that.

Having a job means building a resume. Staying employed and gainful during a global pandemic will probably be noticed, admired even, by future employers. Staying on the CERB will be noticed, too. So, Iris, why not collect a grand a month for part-time hours, plus an equal amount from Ottawa, and let it be known that you’d like a full-time gig?

Some people worry leaders like Singh (and now, Trudeau) are hastening the destruction of our work ethic. Moreover, they’re helping ensure small business failure. When people get more to do nothing than take temporary, part-time or entry-level employment, what are entrepreneurs to do? Just pay more? But many cannot and stay viable. The failure rate – even in good times – proves the fragility of Main Street.

Yes, millions of people need temporary relief. Covid’s been a bitch. But Iris gives us a small example of the unintended consequences of political actions.

Workers who don’t work. Employers who can’t hire. Soon, taxpayers on the brink.


Tiff talk

Tiff would be a swell name for a guy on your rowing team at Harvard. Or as CO of the cadet corps at your boarding school. Ditto for your daughter’s tennis or dressage instructor at the Club.

Well, here he is. Patrician, steady, old-school solid. Now in charge of the Bank of Canada, Tiff Macklem is all about creds, not surprises. Economist. Banker. PhD. His father was CFO at Birks. Nurtured in Montreal’s tony Westmount. He’s worked in the Department of Finance, headed a major business school, repped us at the G7 and has served as deputy governor of the central bank. If you’re looking for a good time, lose his number.

Now Tiff is presiding over an economy on its knees. No BoC boss ever – save the guy who just left, briefly – had to deal with a global pandemic, eight million people on the dole, a cratering GDP, forced economic shutdown or a tripling of the jobless rate in two months. There is no playbook. No precedent. Nobody to ask for advice. What the Tiffer does next will impact a slew of citizens.

He testified before our lame, hobbled, shameful, held-to-ransom Parliament this week. “What we really want to avoid,” he said, “is a non-recovery.”

“The biggest risk to Canadians becoming insolvent is not having a job. Monetary policy has lowered interest rates to reduce the interest costs Canadians are facing. That is the best contribution we can make to getting Canadians back to work, which is the best thing we can do to prevent Canadians from going insolvent.”

Okay, that’s why the yield on the benchmark Government of Canada bond currently looks like this. See what’s happened since the virus came to town in March?

Also note the language used by Macklem. Canadians are not ‘struggling’ or confronting ‘financial stress.’ Instead they risk “going insolvent”, thanks to excessive debt-snorfling, over-leveraging, house-horniness and the kind of financial acumen usually associated with small, burrowing rodents. In other words, interest costs must be plunged or else many will drown in their own payments.

But, is it too late?

Robert Hogue, a biggie economist at RBC, is suggesting this may be the case. Look at real estate listings, he says. Getting scary.

Realtors across the country reported a jump of almost 70% in properties hitting the market in May after a barren April. Says Hogue: “There are early signs demand and supply are decoupling. We expect further decoupling in the period ahead. Economic hardship is no doubt taking a toll on a number of current homeowners — including investors. Some of them could be running out of options once government support programs and mortgage payment deferrals end, and may be compelled to sell their property.”

Yes, as a certain pathetic blog has been yammering about for weeks now, the decision by almost a million homeowners to stop making mortgage payments is consequential. If these people lost employment and income and became unable to service their loans after a month or two, it shows deep financial failure. If some decided to cease servicing their debts out of economic uncertainty, well, nothing has changed. The jobless rate will stay elevated and society seriously abnormal for months to come. When payments on $180 billion in abandoned mortgages restart, the stress will return. And more may realize the burden and risk posed by housing debt in a post-pandemic world.

Says RBC: prices will fall in most markets in the coming months. “Strong starting points in Ottawa, Montreal, Toronto and Halifax will provide these markets with a temporary buffer. Prices are already declining in Alberta, and Newfoundland and Labrador. Nationwide, we expect benchmark prices to fall 7% by the middle of 2021 though believe a widespread collapse in property values is unlikely.” Recall that CMHC is forecasting a decline of up to 18%. CIBC says 10%. Moody’s says 30%. Remax says phooey.

Meanwhile, have you noticed what crashed interest rates have done to financial assets?

From the virus-infused low on March 23rd, US stocks have gained 42%. Bay Street is ahead 38%. The S&P 500 has given investors who ignored the pandemic an 11% year/year return. Amazing, and many people wonder how stocks can be so disconnected from the real economy.

One reason is this: where else is money going to go? Bonds pay diddly. Cash and GICs have zero returns. Commercial real estate is suddenly looking dodgy. Houses are the inflated tools of the indebted, chattering class. Landlording’s a death wish. So even with a pesky virus nibbling the planet, diversified and balanced portfolios of financial assets seem more secure – and have performed admirably.

And now here’s Tiff. Expect low rates, he says, until things start looking the way they were way back in February. The best guess? Two years. The next Bank of Canada move up will take place in 2022, the odds suggest. That means low bond yields, cheapo corporate financing, buckets of monetary stimulus, central bank bond-buying and more dough migrating into growth assets.

As for real estate, the soma of the masses, it all comes down to jobs. If they come back fast, then the market holds (after the current boomlet). If millions are still collecting CERB in October, expect rampant poochedness. The non-recovery.



Pixie dough

It’s official. Eight more weeks of CERB. Estimated (additional) cost: $34 billion. As mentioned last week, that’s almost twice what the army, navy and air force cost to operate for a full year. Never before has one social program sucked off this much – $94 billion or so by the time the CERB ends and our cerbitude begins.

Surveys show Boomers worry about this stuff. Millennials don’t much. GenZers couldn’t care less. There’s a growing cadre of kids who believe the Bank of Canada is full of pixies who just print money, give it to Justin who then gives it to them. This has a name – ‘modern monetary theory’ – and MMT’s now at the heart of Democratic politics in the US. It’s the rationale for justifying UBI, a universal basic income. In a rich country like America, the progressives ask, why can’t wealth be created for citizens as easily as the Fed spends $250 billion buying corporate bonds?

But the US owns the world’s reserve currency. Our dollars are essentially priced in theirs. Creating more dilutes the value of all existing loonies, which leads to inflation. If you think buying a house is hard in Vancouver or Toronto now, just wait. MMT promises wealth for all, but could end up being a wealth destroyer.

Anyway, the federal deficit is on its way to $300 billion now. Next month there’s an economic statement. In the spring, a budget. In 2021, higher taxes plus an election. Remember the advice proffered here yesterday. Things I’m hearing about: a new tax bracket, some diddling with TFSAs, a higher capital gains tax inclusion rate and a ‘temporary’ Covid-19 tax. Yeah, temporary like income tax was in 1917.


The virus has sure changed real estate. Sales plunged in April, staggered back in May and low inventory levels have kept values level. Forecasts of big price declines abound, but housing is an emotion-driven commodity and if people feel confident buying, they will. Even when unemployment is high and the economy unsure.

Insufferable Tyler, a regular blog dog, sends along this report from his Toronto hood:

I have been following the for rent/for sale market for the last two months in Etobicoke.

April 6: For Sale = 5,772; For Rent = 6,302
June 5: For Sale = 7,043; For Rent = 9,444 (22% and 50% up).

“For rent” availability has been steadily increasing but the increase in “for sale” availability is mostly since mid/late May. I wonder if it’s a trend or just seasonality. We’ll see in a few months I guess… An anecdote: in our complex (three buildings) there is usually 1 condo available at any given time. Now it’s 5-6. One 2bed/2bath was originally $3,200/m (May 14). Now it’s $2,850 (since June 3).

Negatives for big-city real estate include the virus (duh) which tarnishes condos, especially those soaring downtown germ factories; the collapse of Airbnb, bring more rentals and listings to market; now-structural unemployment; tighter CMHC restrictions; and banks pissed-off by a million mortgage deferrals and in no mood to give credit to sketchy borrowers. Positives include the lowest mortgage rates in memory; seriously pent-up demand and, well, that’s it.

But what about all these virtual tours and the inability of buyers to actually go and see what they’re purchasing? Surely that is a huge obstacle to selling something as visceral, physical and tactile as real estate?

Nah. No more.

A survey by Ontario realtors reveals 42% of people are open to buying digs they’ve only seen on their iPads. Just a third indicate they want to open cupboard drawers, peer into basement corners, check out the yard, flip around the electrical panel and look behind the dryer.

Of course, this is insane. Sellers and their agents spend big bucks ensuring virtual tours are gauzy, fetching, evocative, compelling, emotive works of marketing art. They stress décor and lifestyle, glossing over or ignoring stuff like amperage, insulation, moisture penetration or if the neighbour raises illegal livestock. Just as nobody sane should buy a pre-con unit from plans with a builder’s contract, nor should they go firm based on a YouTube production. At least get your agent (not the seller’s agent) to walk through FaceTiming the place, and make the offer conditional on a proper home inspection.

Oh, and here are two more reasons to delay buying. Almost 40% of homeowners surveyed had planned to list their homes pre-virus. Now the majority say they’ll wait until Covid is “officially over”. Expect a torrent in the fall. Plus 40% expect prices to fall somewhat or “a lot.”

Sheesh. Might as well self-isolate in the apartment, collect free money and refuse to pay rent. Like the government wants.