In twenty-twenty this pathetic blog posted 364 columns (missed one last week – suck it up) containing about over 290,000 words, of which far too many were ‘Covid’, ‘virus’, ‘pathogen’, or ‘pandemic’. There are now 703,200 comments published here. Four irritating posters were banned, one was suspended pending a note from his mom while anti-maskers and anti-vaxers earned hundreds of deletes and ghostings.

In this year public finances were shot to hell. Millions lost jobs. Real estate nesting was an obsession. Interest rates collapsed. So did travel, tourism, restaurants and small business. The stock market hit a record high. Over twenty million Canadians finished the year in lockdown and 15,000 died in nine months of the you-know-what. WFH became a thing. In Toronto the local board of trade estimated downtown workers at 5% of usual levels. Commuter train travel fell 93%. Airports saw 10% capacity. Porter Airlines hasn’t had a single flight since March. Westjet pulled out of Atlantic Canada, where there are virtually no infections. Balanced portfolios had a great year. Trump was neutered by a guy he claimed was in a basement, half-dead and senile. Trudeau spent $383 billion he didn’t have. Brexit finally happened. China finished 2020 in high gear. And stress. Everybody got stress. Today we’re all snappy, pissed, cagey and dangerously bored.

Now what?

Given the current state of the world, predictions (as stated here a few days ago) are arrogant and useless. But the following seems safe (and predictable)…

First, things will get worse for a while. The bug is winning and the vax rollout so far has been botched. January and February will not be a happy time in the healthcare system, so keep your damn mask on. What’s coming on Monday in Ontario may shock a lot of people who thought 2021 would immediately bring vaccine lift and rainbows.

Second, the housing madness of 2020 will certainly spill into the new year. Sales and prices up as mortgage rates actually decline a little further after the CB drops its benchmark a few more basis points. It’s a dodgy time to be loading up on a ton of new real estate debt with prices at historic highs and rates in the ditch, but the hormones are flowing. This spring will send detached values to a fresh extreme, and push urban condos to a multi-year fallow. So you can buy high or you can buy low.

Third, cheap money, new heaps of fiscal stimulus (thanks, Joe & Justin) and the expectation of widespread inoculations, along with dancing robots, Elon Musk and the WFH tech stocks will likely propel equity markets higher. A lot higher. With bonds, GICs, high-interest savings accounts and other riskless assets paying nothing where else is money going to flow? Stay invested.

Fourth, the tussle between deflation and inflation will end. Twenty trillion dollars in government stimulus spending around the world plus cratered interest rates and central bank bond-buying did the trick. No depression. 2021 will probably kick off at least a half-decade of rising corporate profits, higher GDP and inflation. Lots of it. If you think your 1.5% five-year mortgage won’t renew at double the rate in 2025, you’re not paying attention. So get ready.

Fifth, expect a federal election in 2021 as the Libs take advantage of their spending largesse. Odds are high for a Trudeau majority (given the polls), so the Chyrstia budget following that will be a 1%er’s nightmare. The capital gains inclusion rate may rise. Dividend income may be hit. A new uber tax bracket created. The tilt left continues. And high-income or wealthy people will enjoy zero public sympathy. Make sure you max your TFSA next week and your RRSP by March 1st. Create a spousal plan, and maybe a spousal loan. Income-split pensions. Set up a joint non-registered account. Consider a tax-deductible HELOC investment loan. This is war. Suit up.

Finally, if the satanic 2020 taught us anything, it’s the futility of trying to know what comes next. We don’t. We can’t. We won’t. Our world was just eaten by an invisible globlet, and nobody saw that coming. Did you know a year ago a disease would wildly inflate house prices in the boonies? Or that Christmas would be canceled and Toronto locked down? Or the prime minister would give $18,500 in free money to people who earned just $5,000 the year before? Or that 70% of those who voted for the guy who lost the US presidential election wouldn’t believe it? That there‘d be no hockey? Or university classes? And people would get arrested for having parties? All because a dude somewhere maybe ate a bat?

Nah. Fuggedaboutit. Impossible. Too stupid.

So let’s just get together and go out on the town drinking tonight.



Of lust and virus

Call him Jake. Seems he lives in BC. On the island, maybe. Perhaps you noticed the comment that he left here yesterday:

Just wanted to say I collected CERB. I’m not proud of it but it was necessary. I also deferred my mortgage for 6 months back in April. I renewed my mortgage 2 weeks ago at 1.65% 5 year fixed. Even though I was on the dole since April and deferred my mortgage obligations for 6 months…they didn’t care! They even offered me a $20K LOC. I have been in the house since 1998 and have way more skin in the game then the C/U (lender). I declined the LOC and have been working full time since October. Shit happens…I didn’t want any of this.

We have no idea of J’s circumstances. Single, married, kids or not. Don’t know what his house is worth, nor the heft of his mortgage. Income or pension. Age or occupation. No idea. So being judgmental is pointless.

But we do know this: the virus whacked him. He lost his job and his income. He was forced to live on $2,000-a-month government pogey. For seven months he had no other means of support. He couldn’t pay his mortgage for six months. His home is still financed after 22 years of living there. His new job is just two months old.

Those are facts. Clearly the virus that so many on this blog try to minimize, ignore and trivialize has far-reaching economic and societal impacts that won’t be gone until the pandemic ends. So politicians who flaunt the rules and go on vacations or parents who stuff their kids onto crowded toboggan runs without masks just prolong the misery Jake’s lived through. Shame on you.

But this comment also makes you wonder a little about the credit union financing his house. It extended a rock-bottom, long-term, fixed-rate mortgage to a borrower who was (a) unemployed and on government assistance for many months and (b) had no financial assets, forced into mortgage forbearance. Jake also mentioned he has more equity than debt, so the loan was probably not CMHC-insured. In other words, the CU members took on all of the risk.

So what, you say? Isn’t this a good thing that a lender helped out a guy who was, through no fault of his own, run over by a pandemic?

Yep. It’s sweet of them. Maybe a bank wouldn’t have been as forgiving. But this sure underscores how we’ve allowed a real estate-based economy to emerge and now dominate our culture. Many credit unions have monster mortgage portfolios that, in the event of a real estate decline, would crush them. Jake sounds like a credit risk, yet was handed the gold-pated, cheapo, best-in-the-house loan rate. Is this prudence on the part of the mortgagor? Or does every borrowing like this chip away a little at the financial stability of the country?

I also wonder about the decisions our guy made. A house owned for two decades in BC, given the real estate insanity of Canada – and especially that part of it – would have soared in value over the years. The windfall gain would be free of tax. And during the Year of the Virus house values have exploded as people fled cities, craved more space and detached homes, shunned condos and obsessed over nesting.

In other words, if Jake had no earned income, no assets and couldn’t pay the mortgage, why would he not bail out of the real estate at the top of the market and collect taxless bags of money to survive a once-in-a-gen crisis? It might well be enough, invested, to provide lifelong security. Obviously having a single-asset financial strategy just failed him. So why not change that?

Yeah, I know. We’re smitten. Canadians would rather eat bugs and drink from the eavestrough than sell their homes. Instead of making us reassess values, the crisis this slimy little pathogen created has exacerbated the real estate lust in our hearts. Look at this week’s Nanos survey…

Canadians are the most confident in more than three years that real estate prices will continue to rise, according to weekly telephone polling, a positive signal for the recovery. About half of respondents, or 49.2 per cent, see home prices climbing over the next six months, the highest share since May 2017.  “Consumer confidence in Canada continues to gain strength with news on vaccines. Forward perceptions on both the strength of the economy and the value of residential real estate gained a full five percentage points in the past four weeks of tracking.”

The survey also found less than 15% of people think they’re better off financially than a year ago, while their job security has recently declined. No wonder. More than 20 million are currently locked down because of the second wave, as virus deaths pass 15,000 and infections set new daily records (3,000 in Ontario alone on Tuesday). The economy is being set up for another April-style hit with a vast swath of the small business sector on life support.

And guess what? We’re one day away from recording the best December in history for real estate sales and prices in the nation’s largest market. Household borrowing and debt have been expanding faster than during the housing bubble of 2017 – when governments were forced into action to corral house horniness. Now politicians have showered $250 billion on folks like Jake and overseen a collapse in the cost of mortgages.

Strange days, indeed. Stranger still that we think they’ll end well.

Like Jake, we’re not too good at learning stuff.


Torch it

But a few more sleeps ‘til this miserable year expires. I hear there are calendar-bonfire parties planned. No wonder. A pox on it.

In many ways 2020 has defied logic. We’re ending the year with three-quarters of the Canadian population in a gritty, frozen lockdown. Millions have lost their jobs. Small businesses are collapsing. Governments are broke. Fifteen thousand dead from something we never heard of eleven months ago.

And yet the financial markers are historic. House prices hit a record high this year. The personal savings rate soared as never before. The cost of a mortgage sits at the lowest point ever. The federal deficit is the fattest in history. And stock markets have leapt to a new plateau – in the same year they fell into bear territory at the fastest pace in memory.

Wow. Look at the S&P 500 so far this year.

So here we are in the final days. Your balanced portfolio made good money. Your real estate is (probably) worth more. If you WFH your costs are way down and personal finances better. The virus is worse, not better, and nobody in July expected Christmas would be cancelled. Now we’re into the teeth of winter and you can’t even go sit in a Timmies.

Anyone who tried to make good predictions a year ago was daft. In fact, attemptong to foretell the future is moronic, foolhardy, arrogant and brazen. So, here we go…

Equity markets.
Hard to imagine a new string of record highs will not occur. The biggest inoculation in global history is being rolled out and the slimy little pathogen will ultimately retreat. The world’s economy will sputter to life again, led by the USA. More demand means higher commodity prices which is good for Canada. Pent-up demand after months of lockdowns and quarantines will combine with high savings to fuel consumer spending. Corporate profits will reflect this and meanwhile the virus poured gas on a whole new tranche of online businesses. 2021 will not be a year to sit in cash.

The cost of money.
What you see is what you’ll get. Central banks are too freaked out to move their benchmarks for at least a full year, maybe two. They’ll also keep buying up government bonds to suppress yields, flood the world with liquidity and keep the lights on. Mortgages in the 1.5% range are here for most of 2021. But not forever. As inflation becomes a thing again bond market investors will be demanding protection, goosing yields no matter what the CBs want. So, yes, lock in.

It’s been one of the most defining features of the year of the virus. Four in ten Canadians ended up beavering from home. Offices closed. Downtowns emptied. Commuting, dogwalking, dry cleaning and child care costs sunk. Millennials suffering from recency bias moved away to the burbs. The work-life balance debate tipped dramatically towards sweatpants. Animal shelters emptied with a run on pets. Careers turned into jobs. But soon the scales will tip again. By this time in 2021 most people will be back in the workplace, at least on a sked. So, you’ll need a new car.

Real estate.
The spring market will be nuts, and start soon after the virus numbers crest and the lockdowns end. Mortgages are dirt cheap. Cash savings abound. House horniness is elevated because of the bug and its nesting impact. No matter how much risk is involved, people will continue to throw the bulk of their net worth into a single asset. The trends: more suburban price/sales gains in the first few months with further declines in deals/rents for urban condos. Then, mid-year, a sea change. Should be dramatic.

Meanwhile in 2021 there’s Trump to finally bury – that will be messy – and it’s a certainty Canadians will suffer a federal election. Then a budget you won’t like much (so crystallize some capital gains before March), and the Covid emergency will kind of slide into a climate emergency because politicians feed off chaos.

But compared to this year, pffft, piece of cake. Get the matches ready.



That’s Winston. He’s a border collie, raised, bred-in-the-bone and trained to herd sheep. But, of course, now he works from home. Via Zoom. Full pay, plus an employer-matched RRSP. It’s all good. And, like most workers under the age of 34 (Winston is four) he’s in no hurry to get back to the pasture and have the boss whistle commands. It’s the new normal, he insists. Just text me.

WFH may be forever. Or it may be the Beanie Baby of our times. But it’s weird.

My corporate colleagues went home in mid-March when the soaring Bay Street tower where they toil shut down amid the first Covid onslaught. They’re still at home. (Meanwhile my immediate co-workers and employees have been at their desks in the wee-bank-by-the-sea since the end of April. Actually I had a few chains installed. Just for effect. There’s also a vault…)

The vaccine will rout the virus at some point, likely in the second half of 2021. Then WFH – which affected up to 40% of the workforce – will pose a serious dilemma for many whose overlords expect them to come back to the office – at least on a rotational basis to start. Lots of urban employees moved to the burbs and beyond as nesting and isolation became their goals. They never thought about commuting since, you know, WFH was forever. Soon they may have to spend hours on the road, move back to urbanity or ferret out another job.

The folks who believe the downtown spires will stay vacant are delusional. The same can be said of those who don’t see cascading condo values as a potential opportunity. Once restaurants, students, immigrants, business travelers, office serfs and tourists return, everything changes.

In the meantime, we’re at the end of 2020 and millions have been ‘working’ remotely without pants for up to nine months. They’ve logged on through their own Internet connections, bought their own highlighters and post-it notes and used their own laptops, printers, scanners and cells. And while many WFHers have saved a bundle not driving to work, not bothering to dryclean their clothes or maybe not paying a dog-walker or day care provider, they think these work-related expenses should bring compensation.

There are two ways of doing this.

First, Mr. Socks is no dummy. He won the adulation of the unemployed with tens of billions in direct CERB payments. Now he’s out to win WFH hearts as well, with an instant tax break. Called the Simplified Temporary Flat Rate Method, it lets you claim two bucks for each day worked remotely over at least a four week period. The allowable total is $400 for 2020, yielding a tax reduction of about $100 for most people. The best part – no receipts required.

The more serious and detailed way of dealing with expenses – and a lot more of them – is to get your employer to issue a T2200 form. It declares you were required to work in your jammies in the spare room in order to earn income. This is a normal thing for commissioned employees who usually incur a raft of personal expenses and whose compensation is variable and performance-oriented. It’s less common for salaried folks, but 2020 hasn’t been a common year.

Here’s part of my my 2019 T2200…

You might, like me, decide to buy a former Bank of Montreal branch and hire assistants – in which case building costs are legitimate expenses – or you can work from home and deduct residential costs from your taxable income. (The CRA has just published a new, short Covid version of the form. Here it is.) Allowable deductions include a pro-rated portion (usually based on square footage) of electricity charges, monthly rent, repairs plus office and computer supplies. Not included would be property tax, insurance, renos, mortgage payments or furniture.

And now a few words from a blog dog with decades of experience in the HR business.

“I’ve spent a career in human resources,” she says. “When someone starts working from home, their homeplace suddenly became a workplace, and unbeknown to many employees or employers, the employer must still accept the liability should the employee become injured while on the job.”

A lot of workplace comp claims are related to ergonomics.  Back pain from lousy chairs, carpel tunnel from keyboarding, tripping in the icy parking lot.  Little stuff, but costly stuff.

When we had an employee assigned to work from home, we used to send the Health and Safety Officer in to inspect where in the home they’d be working.  We’d often buy furniture to set up an ergonomically sound workstation.  We also told them they were not allowed to do laundry, cook, run errands or generally putter about the house during work hours, because if they tripped on the basement steps while hauling a load of laundry up from the basement, or slipped in their driveway while they were shovelling snow, or hurt themselves doing anything domestic, when instead they should have been working, then we as an employer would be liable for the accident if we couldn’t prove the employee was doing laundry, cleaning the driveway or baking a pie.

I’ll bet money that just about every employer that currently has employees working from home, has not conducted any due diligence when assigning those employees to WFH.  And I can assure you that if you’ve been working from home, hunched over a laptop at the kitchen table while sitting on a crappy stool from Home Depot for the last 10 months, then you’re a WSIB back or carpel tunnel or neck strain or chronic pain or fibromyalgia claim just waiting to be processed.

So there ya go, WFH dudes. Tell the boss to fork over that executed T2200 Covid form so you can deduct all expenses, or you might fall off your chair while Googling, ‘how to file a workers comp claim’.

Hey, is it 2021 yet?


Move towards your fear

DOUG  By Guest Blogger Doug Rowat

In July, we received this email:

[We] have come to the decision that we would like to stay on the sidelines in the stock market until the long-term effects of COVID go away.
We are avid followers of Garth’s weekly conference calls and we are well aware that it is never a good strategy to try to time the market. However, we fundamentally do not share Garth’s near-future positive outlook on the markets, despite the silver-lining good news about recovery, pandemics are temporary, etc.

What we would like is to liquidate all assets in all accounts and keep the proceeds as cash in their respective accounts until further notice from us (which could be a while).

When markets are volatile and news headlines are frightening such client emails are not uncommon. But the problem with decisions like the one above are two-fold:

1) It’s an unambiguous wager on market direction (“liquidate all assets in all accounts”). This couple is saying with 100% certainty that they know where markets will go next (in this case, lower). But, of course, no one can be certain. I’ve been in the investment industry for decades and I’m never, ever positive of market direction. This is why we maintain balanced portfolios for our clients—to hedge against the unexpected. And, as if the investing gods wanted to illustrate the danger of an unequivocal outlook, markets have, of course, skyrocketed since this email.
2) It’s almost always the better long-term decision to invest MORE into the market when you’re feeling uncomfortable rather than less.

It’s the second point that I want to focus on here.

More wealth is created by moving towards fear than away from it. Investment journalist and author Ben Carlson notes that the best returns come when “the economy is getting body slammed” and he illustrates this point via the table below, which compares the US unemployment rate and market returns:

S&P 500 returns versus US unemployment rates

Source: A Wealth of Common Sense

Naturally, when the unemployment rate is elevated there’s greater discomfort surrounding investing, but that’s the point: when you feel most uncomfortable is usually when you should be investing more in the market. Similarly, in the midst of a recession it’s an emotionally difficult decision to add funds to your portfolio, but history tells us that that’s exactly what should be done.

Carlson examined US recessions going back to 1945 and noted that, remarkably, the S&P 500 trades higher more than 60% of the time DURING the actual recession itself with an average gain of 3.8%. Following the recession, of course, the returns are even more impressive. Given that recessions historically last less than 11 months, it’s pointless to try and market-time your way around them. On the contrary, it makes more sense to simply add to your portfolio (or at least rebalance it) during one. This will position it even better for the recovery:

S&P 500 performance post-recession

Source: A Wealth of Common Sense

I’ve made similar observations about the importance of buying on weakness and struggling through the uneasiness that accompanies such decisions by simply looking at the worst single-day declines for the S&P 500 over the past five decades. Should you run in fear when the S&P 500 plunges by 5%, 10% or even 20% in a single trading day? The massive pit in your stomach may make this your first impulse, but history says to use these opportunities to back up the truck:

The worst S&P 500 single-day returns over the past 50 years…

Source: Bloomberg, Turner Investments

There were actually four more days from 2020 that would have made the list above (see table below); however, we’ve not yet had a subsequent full-year of return history. However, here’s what the returns have been thus far:

…and a few more from 2020 as well

Source: Bloomberg, Turner Investments

Anyone want to bet that the returns won’t still be strongly positive when we get to the one-year mark? It would have been a very uncomfortable decision back in March to add funds to your portfolio, but investing on weakness (or at least rebalancing on weakness) was, once again, despite the discomfort, the correct strategy.

Helen Keller famously said that “avoiding danger is no safer in the long run than outright exposure”. And so it is with investing. You’ll feel better (temporarily) by raising cash, but such a decision will very likely only make you poorer in the long run. And with respect to your market re-entry point, waiting on the sidelines “until the dust settles” really means waiting “until my fear’s gone away”. But by the time your fear’s subsided, it’s already too late. The market’s passed you by.

There’s nothing wrong with being afraid. Just don’t let the fear win.

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



Of loss and gain

An Internet sensation is the dating video of Satan and 2020. A perfect match. Nobody saw this coming back in the halcyon days of late twenty nineteen. We had no idea how long and deeply we’d be tested.

The last time there was a global pandemic of this extent was a century ago. The last time financial markets crashed 30% and recovered just as fast was never. Sickness has not enveloped the globe this way before. And at no time in history was a potential cure found so quickly. This year the world’s economy ground to a halt. Millions lost their jobs. Trillions was spent trying to fix it. Too many died, despite it all.

The year brought division, stress, social unrest, conspiracy nuts and political polarization to a new zenith. An election which seemed to never end. States of emergency in every province. Lockdowns, quarantines, stay-at-home orders, isolations. And masks. Did you ever imagine last Christmas we would look like this? Or, in fact, we’d not have a Christmas? I see a local church delivered little plastic bags of communion wafers to believers this week so they can share communion online later today. By Zoom. Seriously.

Physical, social distancing is not what humans are used to. Working from home. Jumping off the sidewalk. Following the floor arrows. Lining up at the liquor store six feet apart. Next week two-thirds of the nation will be shut in. Winter is bad enough. This is cruel. Satanic.

But it will get better. We all know that. There is hope now, as the solstice passes and the light filters through. Pandemics pass. The masks will eventually fall. We’ll embrace again.

The year from Hell. Its profound losses, irreversible, will not soon fade. So much gone.

Let’s resolve to move ahead, more chastened, less angry, thankful for any normalcy that returns, accepting with grace what we cannot change. It’s still a good world.

Merry Christmas.

About the picture: Bandit, Noel 2017.


Merry Vaxmas

Christmas Eve eve. We crave good news. So, here we go.

It’s got a few names. Like, ‘vaccine lift.’ And ‘game-changer.’ Of course there’s the standard, ‘pent-up demand.’ The always-welcomed, ‘unleashed torrent’. And my new fav, ‘permanent reopening.’

This is the current econo-lingo being used to describe where we are, where we’re going. So even as the country swoons into a series of maudlin Christmas days, snow, lockdowns, gray and red zones, Zoomy, boozy days, mutated pathogens and hockey deprivation, there is hope. Tons of it. All pandemics are temporary. They pass. You know this. And the 2020 version – say the economists – will soon start puddling away like disgusting moist little bat drool that it is.

Now why the optimism in the midst of a Second Wave that has Jason Kenney and Doug Ford sounding like socialists?

Well, the virus was always going to fade but the historic development of new vaccines has put everything on fast-forward. First Pfizer. Today Moderna, Then the Oxford serum. Millions then billions of doses being turned out, distributed and administered, creating herd immunity, lessening the instance and severity of disease, rescuing the health care system, allowing lockdowns to end, bolstering consumer confidence, reigniting human society, fluffing the GDP and, yes, unleashing that torrent of money governments have thrown around.

The result, according to the latest Bloomberg survey, is for annualized GDP growth of almost 5.5% in the last three quarters (nine months) of 2021. That’s yuge. A big hike over the 3.8% last forecast. It’s historically significant. Compare it (5.5%) to growth of just 2% in 2017, 3% in 2016 and 1% in 2017. In fact the last time we hit a number like this was back in 2007.

The vax is the flame. But the tinder is money.

There’s a big pile of it. Just look at the stories lately of cake-ladies and students who earned barely $5,000 in 2019 but were sent CERB cheques totalling $12,000 or $18,500 in 2020. The feds doled out more than $250 billion in direct cash transfers to individuals, which CIBC says has resulted in a $90 billion pile of money in savings accounts. In fact Bloomberg now estimates there is $103 billion sitting in Canadians’ personal chequing accounts – a 34% ballooning in a single year, and the most in three decades. Yikes.

Now in Canadians’ chequing accounts: $103 billion

When will the money-hoarding stop and the spending begin?

Not until the stores open again, of course. In locked-down Ontario that will happen around the end of January. Combined with this there needs to be a lot of vaxing on a wide-scale basis, plus some indication Covid infections have peaked and started to wane. Even now there are faint glimmers. NB’s premier says his province will be virus-free and open again in mere weeks. In NS there are but 35 souls out of a million population who are sick, with zero in hospital. Are these harbingers?

The economists add they’re sure the T2 gang will keep on spending as no government in history has done before. Your grandchildren may curse and blasphemy you, but in the meantime it’s a free-money-no-pants-fiesta. So combined with the mountain of personal savings and a central bank that crashed rates and is buying up $4 billion a week in government bonds to artificially suppress yields, this is a formula for growth.

Laurentian Bank economist Dominique Lapointe sums it nicely: “In the case of a permanent reopening starting toward the end of the second half of 2021, the elevated household savings rate could unleash major pent-up demand, especially on the services side of the economy.”

There it is: ‘permanent reopening.’

So what could go wrong to prevent this from happening?

Two things.

The vax might not work. Or you might not take it.

Then we send that dog to slime your face.

About the picture: Mochi ‘Mo’ Rickert is a female St Bernard from South Dakota with a tongue that is officially, vet-measured, at 7.3 inches. That is the longest pink oral canine appendage in the world. “Mo is resilient, comical, loving and eternally grateful and loyal to us – her forever family,” say her owners.  “This once abused and neglected pup has taught us that it’s okay to be different. We are proud of her unique feature.”


Going wild

The slimy little pathogen has changed much. For those who have not actually been infected or punted from their job or business as a result, the next greatest impact is surely with real estate. Not just in Toronto. Or urban Lunenburg. Or Montreal and Vancouver, Barrie and Kelowna – but everywhere in North America.

It’s a continent-wide phenom. The identical trends are happening in NYC, Denver and Dallas. And for the same reasons.

  • Mortgages are dirt cheap, especially in Canada (although Americans can lock in for 30 years). Suddenly people can borrow more and spend more, so they are.
  • Space is a thing. WFH means people want to nest in a large, safe, bug-free environment with a door to the street and a yard for the dog. Or even a child, if necessary. So detached is big.
  • The burbs are hot. Ridiculously, impetuously and foolishly torrid. Look at the average box in the Mississauga tundra – now well over $1 million, and climbing. Those demented Millennial buyers think they’ll never have to commute again and are moving to London, Peterborough and Niagara (as well as Kamloops, Nanaimo and Hope). So cute.
  • Urban cores are unloved. Rents falling. Amateur landlords freaking. Condo inventory stacking up. Prices in decline. Soon the dudes living under bridges will afford to have a one-bedder on the 48th floor.

As mentioned here the other day, most WFHers are in sectors that continue to pump out full salaries (teachers, civil servants, financial). Their overhead is down, savings are up and they’re nesting as never before. Covid has deeply affected the psychology of hundreds of millions in Canada and the US. Cocooning is the new holy grail and recency bias makes them believe that life today is setting the pattern for tomorrow – a world where everyone works from the spare bedroom, cash flow is great, home loans are 1%, employers are benevolent and remote and you can stay inside, never again pulling on pantyhose or office slacks.

So what’s happened in the midst of the first global pandemic since 1918 with millions unemployed and the nation locked down?

About 545,000 houses will sell in Canada this year. That’s a record. Up 11% from last year, when nobody wore a mask, jumped off the sidewalk or refused to shake your hand. Across Canada average prices will finish the year ahead more than 7%, or twice the long-term level. In Ontario the property gain is 17%. In The GTA the average sale price climbed $112,000, or 13.3%, during the virus. These gains radiated out across the region, as they did in the Lower Mainland.

So where did prices rise the most in this hoary hinterland?

Belleville, Woodstock, Muskoka – all up 30% or so. Next in line were places where bears and beavers hibernate – Barrie, Bancroft, Brantford. Plus the hick cities of London, Guelph, Owen Sound and Peterborough. If you think the Canadian Tire parking lot is a destination and camo pants are a fashion statement, this is your moment, baby.

So, will these trends hold? It’s a huge question for those who have gambled in moving away from the workplace, paid an historically-high price for non-urban real estate and snorfled a steamy pile of debt at the lowest rate on record. If the virus continues, WFH becomes permanent, some dude in Mumbai doesn’t get your job, you don’t have to commute two hours, the vaccines fail and the economy is so weak mortgage rates are still at 1% in five years, then you win. Maybe.

But the odds are more like this: the herd gets vaxed. Virus cases fall precipitously by Q3 of 2021. The economy reopens gradually, but steadily. The boss calls. You’re wanted back in the office, three days a week to start. Consumer spending leaps higher after a year of quarantines and lockdowns. Inflation rips a bit. The bond market gets aroused. Yields pump and by the time your mortgage comes up for renewal, the rate’s doubled. Meanwhile over the next two or three years the universities reopen. Immigration is stepped up to four hundred thousand a year. The downtown repopulates. GDP growth hits 5%. What was old is new again – the burbs are for raising golden retrievers. The city is for careers.

Everything starts changing in six weeks.

Meanwhile, don’t pet the moose. They bite.

About the picture: “A bad dog owner dumped this wolfdog at a kill shelter when he got too big and too much to handle. Luckily a sanctuary took him, instead and saved his life! His DNA testing came back as 87.5 % Gray Wolf, 8.6 % Siberian Husky, and 3.9 % German Shepherd.” – Bored Panda


The lockdown

No vax talk today. Promise. (But I will be checking your shoulders for wee pricks in the future. And watching for the little pricks, too.)

But, sheesh, the virus stuff just gets worse. The UK is ostracized. Now Ontario’s going dark. All of it. The hospital dudes have been screaming for a circuit breaker, saying the 2,000-a-day new case count will become ten grand without it. Elective surgeries are kaput. Women are no longer getting screened for breast cancer. Cardiac patients are being sent home. And now virtually everyone in the most populous province, home of the biggest cities, highways, real estate prices, highways and egos is being iced until the end of January.

Do not underestimate the impact of this. Fifteen million people are impacted. And this comes along with lockdowns, quarantines, closures and restrictions from Montreal to Winnipeg to Vancouver (where YVR traffic is off 95%).

So, let’s ponder this. Pandemics may be temporary (this will end, trust me), but some people think the implications this time will be forever. The longer it goes on, the more imbedded changes become. And did you think back in April – when the first lockdown happened – that Christmas would be cancelled?

Nah, me neither. Too many cases. Too many dead. Too long. The whole world is being tested, and we are failing. The comment section of yesterday’s blog post proved that. If you missed it, go and read. Wear your PPE. The failure of modern leadership, and its poisonous effect, is on full display.

Now, what next?

Yeah, this will end. The vax (oops) will do that. Just wait. However there are a few trends gaining strength with every day that this hellish situation continues. Will they last?

First, less human contact. It’s what governments are trying to accomplish. No contacts = no virus. So we have shutdowns of offices, stores, eateries, churches, schools and events. In a social way, it’s incredibly destructive, leading to alcohol and drug dependence, Netflixitis, increased suicide and the kind of toxic breakdown in personal responsibility so evident here yesterday. I lament that. On a positive note, there are almost no shelter dogs left for adoption in Canada.

Second, less human contact means way more WFH. Back in the spring almost 40% of workers were sent home. This time even more. Surveys show a majority never want to go back, especially whose under 34. This is a recipe for conflict.

Third, the pandemic has exacerbated the wealth divide. Look at financial stuff, for example. Investors with balanced portfolios or exposure to stock markets have had a great year. But people depending on risk-free GICs and collecting interest have had their incomes crushed.

The divide is even worse between the WFH crowd and those whose livelihoods do not allow it. More than 80% of the people smugly Zooming in their undies and collecting full wages are in the education, government, insurance or financial sectors. (Let it be known I am wearing a tie while I type this. And pants.) But whacked have been folks depending on jobs in tourism, hospitality, travel, food service, transportation or most personal service industries. You may still be creating online lesson plans and being paid for it, but the guy who cuts hair or the saleswoman at The Bay are hurting bad.

Fourth, pandemics, less contact, lockdowns and a changing society may well lead to more automation. Machines don’t get viruses. Self-driving trucks, either. Some people think we’ll be coming out of this morass with way fewer jobs than we did before, as corporations in Canada deploy a mountain of $80 million in cash to replace people with technology.

Fifth, this virus is slaughtering small business. Bad public decisions abound. Why let Costco and Wal-Mart stay open in red zones when hairdressers, corner stores, vets and indy clothing stores are hobbled or shuttered? It’s estimated ten thousand restaurants will not survive this. The CFIB says 160,000 small mom-and-pop businesses won’t be here in the spring. And recall that this sector creates over 90% of total employment. Do we know what we’re doing?

Sixth, odds grow the virus and public policy may kill some industries for a long time. Will Porter Airlines ever fly again? Will Toronto’s pro sport franchises return? Will there be cruise ships in Halifax or Victoria in a couple of years? How fatal will the closed US border be to tourism – one of our major industries? Will Amazon, Wayfair, Etsy and the other onliners mean local retail is finished forever?

And, seventh, what profound, lasting impact will the pandemic have on real estate? So far the worse things get the more house prices have risen, as central banks try to rescue the economy with cheap money. Family debt is exploding. Property is less affordable. Escalating real estate is also making wealth inequality more acute. The suburbs have exploded with WFH, nesting and fear of others. Urban condos and rents have been clobbered. Locals in Zoom towns where life was once rational and measured are being priced out by Covid refugees.

This is our world now. Locked down and dirty. And some still say it’s just flu.

Okay, time for a scotch.


What to do with fixed income

RYAN   By Guest Blogger Ryan Lewenza

With the pandemic-induced global recession, interest rates around the world have plumbed to new all-time lows, putting even more stress on investors who need the income to fund their spending and retirement. Sure it’s great for millennials who can borrow money hand over fist at stupid low interest rates, but on the flip side, it hurts investors who depend on the interest income from these investments. As I sometimes (crassly) say to clients, “central banks are screwing retirees with these record low rates!” So today I review the fixed income landscape and discuss how we’re structuring client portfolios in this low rate environment.

With the Federal Reserve (Fed) and the Bank of Canada (BoC) cutting interest rates in response to the global recession, the Fed funds rate and the BoC Overnight Rate currently sit at just 0.25%. This matches the all-time lows hit back in 2008/09.

As central banks slashed their benchmark rates, this has brought down interest rates across all bond types and GICs. Currently, 10-year government bond yields – the most important bond yield to focus on – are below 1% in Canada and the US. Looking at the broader FTSE Canadian All Government Bond Index, which includes all the different maturities, yields just 2.07%. The similar FTSE Canadian All Corporate Bond Index yields 2.76%.

I reviewed our firm’s GIC list and GICs with a 3-year maturity range from 0.6% from most banks to 1.3% from the higher risk trust companies. And you’re locked in with GICs so I see little reason to invest in them right now.

If we look at higher risk bonds, Canadian and US high-yield bond indices yield 4.53% and 4.98%, respectively. While this looks attractive on the surface, it’s important to stress that these high-yield bonds can fall hard during recessions, which is exactly what happened in March. Thankfully we got out of these early last year.

So from high-quality fixed income investments, you’re looking at roughly 0.5% to 2.7% depending on the maturity and quality of the issuer. For further context, I used to trade bonds and fixed income some years back and I could easily find high-quality bonds yielding 4-5%. Boy how things have changed!

Current Yields on Various Investments

Source: Bloomberg, Turner Investments

So how do we position portfolios in this low rate environment?

First, we have a low government bond weight given their puny yields and in fact, we’ve lowered our exposure to these bonds in recent months.

Second, we prefer high-quality corporate bonds or ‘investment-grade’ corps. We prefer investment-grade corporate bonds as we get a decent yield ‘pick up’ and I see them outperforming government bonds next year.

I capture this in the chart below, which measures ‘credit spreads’ for US corporate bonds. A ‘credit spread’ is simply the additional yield of corporate bonds over government bonds of a similar maturity. Currently, credit spreads for US corporate bonds (BAAs) is 225 basis points (bps), which means the average corporate bond yields 2.25% higher than the US 10-year government bond yield. With a historical spread average of 200 bps, this suggests there is some value in US corporate bonds, which is a key reason why we prefer this area. Keep it simple. We prefer corporate bonds yielding around 2.5-2.75% to government bonds, many of which yield below 2%.

US Credit Spreads

Source: Bloomberg, Turner Investments

Third, in the downturn we changed our tune and added back some high-yield bonds, after selling them last year. Specifically, we’ve been adding bank loans to client portfolios, which are loans made from banks to small and medium-sized companies. We decided to add these to client portfolios since: 1) bank loans yield an attractive 5-6%; 2) bank loans are, on average, trading at 90 cents on the dollar, so as the economy recovers these bank loans should increase in value back to par; and 3) bank loans are floating rate loans so when central banks reverse course and start hiking rates, we’ll get paid more interest on these investments. We’re already up nicely on this investment and I see more gains coming in 2021.

Lastly, we continue to recommend preferred shares to our clients and see them continuing to recover in the coming year. As seen in the table above, the Canadian preferred share index currently yields 4.9%, which is well above government bonds yielding below 2%. And these pay dividends so on an interest-equivalent basis, this is closer to 7%. But it’s not just the yield that we like.

I see two key positives for the Canadian preferred share market over the next few years. First, I see government bond yields slowly moving higher as the economy recovers and inflation picks up. The key government bond yield for the Canadian pref market is the Government of Canada (GoC) 5-year bond yield and that currently sits at just 0.5%. As illustrated below, the Canadian pref market is highly correlated with the GoC 5-year yield, so when this starts to rise over the next 1-2 years (and it will), the pref market should rise along with it.

Second, some of the Canadian banks have started to issue a new type of debt instrument called a ‘limited recourse capital note’ or LCRN, to shore up their balance sheets. For example, Royal Bank issued $1.75 billion of these notes during the summer. With these new proceeds the banks are then turning around and redeeming some of their outstanding preferred shares, as preferred share dividends are more expensive than bond interest for the banks. So as the banks redeem more and more of their outstanding preferred shares it reduces supply and in Econ 101 we learned that less supply generally means higher prices. The combination of more pref redemptions and higher government bond yields in the coming years, should boost preferred share prices.

Canadian Prefs and the GoC 5-Year Yield

Source: Bloomberg, Turner Investments

So there you have it. In this low interest rate environment there are still opportunities out there, you just need to know where to look. We’ve positioned our client’s fixed income portfolios with more investment-grade corporate bonds, bank loans, and preferred shares. The corporate bonds provide stable income and help protect against deflation, while the bank loans and the preferred shares provide higher yields and a hedge to rising inflation and interest rates. There’s that balance again!

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.