Captain Covid

Just when you thought stuff couldn’t get weirder. It did. The Trumps have the virus. Mild or serious? Dunno.

Overnight, as the news was broadcast, the odds of a Biden win next month shot through the 60% mark. Stock futures tanked, until the market got more interested in the latest jobs numbers (not too hot – the recovery is slowing, Covid is winning).

Some think the at-risk, obese, mask-flaunting, 74-year-old president got what he deserved for trying to man his way through a public health crisis and downplay the bug. Others think he will receive sympathy and support as he works towards recovery. Meanwhile the Vix went up, oil fell and more confusion was injected into our world.

But remember what we said a few days ago? The presidential race is a sideshow. Markets care way more about the economy and stimulus. That’s why the Trump diagnosis turned on Friday into a financial nothingburger. So here’s the latest:

Over 661,000 jobs were created in the US last month when 850,000 were expected and compared with 1.5 million the month before. The overall unemployment rate fell half a point, but also down were the number of people in the workforce. When folks who have given up looking for work are factored in, the jobless rate is 12.4%. Ugly. So, as stated above, the good news is dribbling away – bad news for Trump.

Meanwhile there’s renewed hope Congress will get its act together and pass a fat new stimulus bill. With Trump sick, odds grow Republicans will want that cash flowing as soon as possible. Millions of unemployed need support. Angry, struggling people don’t usually vote for an incumbent. The bottom line is simple: if the president is truly stricken and markets wobble, the taps will turn on. More stimulus.

Meanwhile investors have been looking past the gloom, infections, job woes and GDP plop. Earnings forecasts for S&P companies are up – month after month all the way to the end of 2021. We know a vaccine is coming. We know it’ll allow more, safe reopening of the economy. We know GDP will restore. We know global growth will spurt as the pandemic fades. We surmise by the end of next year American employment levels will be back to those of late-2019. And we know in 2021 central banks will not change a thing – rates in the ditch and massive stimulus spending continued.

Who’s in the White House will be moot. So all of this pre-election angst and extremist positioning is useless, futile, destructive and degrading. When it comes to your portfolio, don’t be distracted, tricked or diverted by the headlines. Just look at the hours following the Trump early-morning testing. Anyone selling on that news was being hasty and emotional. Those who slept in were fine. There’s a lesson in that.

$     $     $

Retirement? Ha. It’s a myth for many without defined-benefit pension plans or seven-figure investment accounts. Canadians are making two big mistakes: (a) thinking they can live on government pogey – CPP, OAS or GIS – and (b) saving.

But you’re not alone. A report this week (Natixis Global Retirement Index) points out that people around the world trying to, or about to, retire are facing the four same nasty realities. They are absurdly low interest rates, record levels of public debt, virus-induced recession and income inequality. Also named is climate change – increasingly the cause of health issues while climate-related disasters chew up property and wealth.

The report states a second wave of Covid will just make things worse, and that interest rates have now gone negative in 16 of the 44 countries studied (including us). Four years ago, only one country gave savers a lower rate of return than inflation. Meanwhile, as you know, society is getting older – especially in the western world. The strains on retirement support plans and health care will augment, just at a time when governments have gone trillions into debt to deal with a virus they all pretty much botched.

The recession has caused many seniors to raid their retirement savings in Canada, the States and elsewhere. Not good. A multitude of households have also deferred debt repayments, making the amount they owe that much greater. Low rates not only clobber those who opt for brain-dead GICs or sucky HISAs, they also hurt pension plans – big time. Bond yields drop to nothing while pension liabilities grow (this is a good argument for commuting a pension, if you can). Future payouts become larger. Pension administrators freak out more.

Lousy returns also mean retirees have to deplete their savings faster in order to get by, raising the risk of outliving their money. As for governments, they’re blowing their brains out on the virus, which means tough choices ahead as a sea of old fogies expect support after gambling everything on real estate.

But blah, blah, blah. You know all this. The report just confirms again what we’ve talked about for a few years on this pathetic site. Savings vehicles are a one-way street to financial stress, unless you already have millions. Public pension payments will leave you gasping for cash flow. And thinking a house is a substitute for income is a really bad idea. Houses cost money. They do not produce it.

The big risk – more than ever since rates have collapsed and governments gone off the rails – is running out of money. It is not losing it. Financial markets got through Y2K, Nine Eleven, the Dot-com episode, the credit crisis and (soon) the pandemic. Those who invested well, stayed that way and ignored the noise (like an infected president) have reaped. Those who let fear dominate have lost.

Never in our lifetimes has this been more poignant than… now.

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Careful what you wish for

An hour into the disgraceful Trump-Biden brawl Google searches for ‘moving to Canada’ peaked. Of course once scared Americans started looking at real estate prices in this great, frozen, pooched nation, it fizzled a bit.

“My grandparents’ small house in southern Ontario was just resold for $775,000,” a Twitterite posted. “About 3 times what we sold it for 10 years ago. The average income in the town is $50k. How do Canadians afford to live there?”

We can’t. We just borrow heaps of money and pretend we own stuff.

But look at this. If just 1% of Americans moved here, that would soak up about two million houses. In all of 2019, right across all of Canada, only 458,500 property transactions took place – and prices still went up. Just imagine if the Yankee invasion were to materialize after a second Trump victory – with al those liberal, SJW, progressive, NYT-reading Karens flooding across the 49th.

‘Move to Canada’ trending. Are you sure?

Source: Google Trends

But is it already happening, sort of?

Covid has had material impacts on the housing market in 2020, as this pathetic blog has chronicled. And there are more to come. The virus crashed the market in March and April, then turned it blistering hot in July and August. Condos have fallen seriously out of favour as people worry about germy elevators and diseased neighbours. Meanwhile Airbnb crashed, rents were frozen, evictions halted and amateur landlords skewered.

As WFH turned into a thing, suburbia caught fire. Now silly people are paying seven figures for ugly houses with garages stuck on their noses perched on streets where nobody walks with sticks called trees, miles from the core. And recall that rental weirdness a couple of days ago in Huntsville? Oy.

As mentioned here recently, this blog has been stuck inside the Atlantic Bubble for a while which, apparently, has the best virus record in North America. A single new case in NS, for example, is a rare thing. They’re normally dumped at sea. But one guy who escaped and is in hospital at the moment.

Anyway, here’s the skivvy from a Halifax realtor:

Any way you slice it, summer had to have smashed some records in real estate this year, it truly has been an incredible market. Still, many await their turn to enter the Atlantic provinces, hoping someday soon the bubble will burst and they can plan their relocation. Until then, many people stand by to send another surge towards our housing market when it does happen, so tracing the impact of that event will prove interesting indeed.

Halifax has 600,000 people and – until last year – was incredibly cheap. Now the average selling price for a SFH has increased 28% – or almost double that of the GTA (to $415,000, which is still a bargain). Total listings have shrunk by about half as buyers overrun the place and days-on-market have dropped 53%.

And the little 2,000-soul touristy puddle where my baby bank-by-the-sea building is located? Listings are snapped in a couple of days. Prices in the ‘old town’ have risen 40% in a year. Unprecedented. Most buyers are online FaceTimers. The locals are being shut out. Again. First Americans and Airbnb were the scourge. Now it’s those damn Upper Canadian refugees.

Thus the virus has plumped values from here to Nanaimo. Niagara is a bidding war disaster. Valuations in London and Windsor are nuts. Urban Montreal has seen a 40% spike in sales and detached prices have risen 24%. Transactions in Quebec City were up 62% in August.

So here’s why this is all so strange, and Americans yearning for a simple safe and Trump-free life may need to consider Lithuania instead.

The chart below comes from mortgage rockstar blogger Rob McLister and debunks this myth: cheap mortgage rates make home ownership more affordable in Canada. No, actually, they don’t. You are still screwed if you try to buy without a pile of money.

Source: Ratespy.com

This portrays the minimum monthly cost a typical borrower would have to shoulder to buy the average new home in this land. Calculated in constant dollars (no inflation) it tracks routine financing, heat and taxes and is based on 5-year posted mortgage rates. So it gives a true answer to this question: are houses more affordable now? Answer: not a chance. As rates have dropped, prices have jacked. Buyers rushing in today are embracing more risk than ever. They just think they’re smart. Mortgage payments down. Mortgage debt up. Ownership costs historic.

Now, for the important stuff…

Source: Dogs for Biden

 

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The choice

“So,” she said, “what did your little rabble think of the debate?”

Dorothy rarely cares what happens on this pathetic site, for which I am uncommonly thankful. But sometimes she asks. I cannot lie to the woman, since she (like most long-term partners), has brain-piercing powers. Deception is futile.

“They hated it,” I said. And a barometer of that was the flow of comments Tuesday night after the slugfest in Cleveland turned from presidential to puerile. They ceased. The Trumpers lost their voice. The lefties stayed silent. There was not enough pride for anyone to lift a finger and type.

It was interesting that as the event rolled, stock futures took a dive – down hundreds of points. Mr. Market looked at what was unfolding and concluded, (a) Trump was blowing it, (b) Biden was unremarkable, (c) the election will be probably close and (d) if Biden wins, Trump will not leave easily, quietly, peacefully or at all and (e) the ensuing chaos could take months to sort out.

Of course, that gloom was erased hours later when it appeared Republicans and Democrats were finally close to agreeing on a $1.5 trillion Covid relief package and the latest jobs numbers showed more economic revival. Up she went – a trough-to-peak trip, for a while, of 800 points. What a ride.

The best strategy (again) is to have a balanced portfolio and seriously resist the urge to diddle with it, especially because of politics. The next few weeks will be completely stupid, followed by a period of utter insanity. In the end, the market only cares about two things – the economy and what the central bank’s doing. The president is a sideshow.

Of course the debate was a debasing embarrassment. You know that. Trump’s strategy was to bully, badger, interrupt and taunt Biden so much that he’d become disoriented and overwhelmed. That would prove the 77-year-old career pol had lost it. Unfit to government. Best-before date expired.

But that didn’t happen, so the president just looked like a nasty, egocentric, insulting and unpresidential person. After setting expectations for Biden so low, it was Trump who had the most to lose. And he did. It’s hard to understand now why there would be two more of these awful debates scheduled. What more is there to add?

It’s interesting to note that some Wall Street analysts say if the Democrats win that the tech guys – the FAANG stocks – will do well. If the Republicans triumph, then it’s value stocks which will benefit. So (naturally) why not own both with an ETF than embraces the entire market?

Also interesting Tuesday night was the moment when futures turned negative. That came as Trump raised doubts, again, that he’d accept the results of the election. There’s nothing new about his allegations (unfounded, according to the head of the FBI) that mail-in ballots will ‘rig’ the vote in favour of Biden, but every time he makes them the market responds.

This adds another element of risk and uncertainty to the recession, unemployment, the virus and corporate earnings. . “What we’ve seen from the debate is the reinforcement that if Biden wins, Trump is not going to accept that,” Bloomberg reported. “People positioned for an ugly contest afterwards have been validated.” And this fund manager comment: “The debate just added to the confusion about how the election will run.”

Says my corporate analyst buddy Jason Castelli:

“The option market is pricing in greater volatility not only in November, but December as well. This is atypical during the election cycle as implied volatility typically declines once the election is done. In order words, the market is expecting the election results to drag on for weeks after November 3…. Regardless of who wins there will be protests and potentially some social unrest, so expect this as your base case.”

Meanwhile listen to the tone that veteran New York Times columnist Thomas Friedman has adopted. After Tuesday night’s debate and Trump’s words, it could be 1863 all over again (he says):

Trump’s motives could not be more transparent. If he does not win the Electoral College, he’ll muddy the results so that the outcome can be decided only by the Supreme Court or the House of Representatives (where each state delegation gets one vote). Trump has advantages in both right now, which he has boasted about for the past week.

I can’t say this any more clearly: Our democracy is in terrible danger — more danger than it has been since the Civil War, more danger than after Pearl Harbor, more danger than during the Cuban missile crisis and more danger than during Watergate.

Okay, so why did the Dow end up gaining ground (300 points) the day after? Well, because Trump doesn’t really matter as much as he think he does. Nor does Joe Biden. More consequential are the employment figures, the progress of vaccines, central bank bond-buying and oodles of extra government cash unleashed into the economy.

Oh yeah, and this. If there must be an ugly election, Mr. Market says, please let it be decisive.

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The protest

Note to readers: If you come here to leave a comment trying to influence the US election, ah, go away. I warned weeks ago that mindlessly partisan posts would be deleted. You know who you are. The social media world is polluted, corrupted, invaded, twisted and polarized enough without that swill slopping over our gunwales.

None of us know the outcome of November 3rd nor the extent of the ensuing chaos. There’s likely no good outcome. The focus of this blog is not the next American president, but the impact on the economy, taxes, central banks, rates, housing, jobs, assets and financial markets. If you think in black-and-white, you’re part of the problem. Take a hike. Come back in January.

Got it? Good.

Now, about tonight. The debate in Cleveland. Many think it will be the political spectacle of a generation. Despite that, Mr. Market has been chugging along after a recent correction from record levels. In the face of all the crap 2020 has bestowed upon us – millions out of work, a recession and lots of crippled industries – investors who are (a) balanced and (b) have ignored everything, retained that 15% gain they enjoyed last year. And now with 2021 looming, with a  vaccine inching closer and that damn election soon to be in the rear view, no need to change course – regardless of what happens between now and Christmas (if they let us have it).

“This is the most crucial debate ever,” analyst Ed Pennock wrote yesterday. “Unlikely there’s a clear winner. Certainly could be a clear loser. Markets like certainty.”

Exactly. It will come. What you think of the orange monster or the drooling guy is irrelevant. That big, hairy (and manly) delete finger is ready. Make my day.

Arnie’s pain: ‘You really stung me’

Days ago we eviscerated a dude we called Arnie who wrote asking if he and his mat-leave wife (three month-old in arms) should blow their $80,000 in savings on a $800,000 semi in the distant burbs. You may recall they earn a collective two hundred grand and now rent in the city for $2,500.

Why buy in the midst of a real estate boom, a recession and a global pandemic, we gently asked? Are you just all hopped up on baby hormones and house lust? Owning would suck away liquid wealth, increase housing costs by over 70%, create $745,000 in debt and you’d still only own half a house a long commute away from work. Why do it?

In fairness, here is his subsequent lament:

“I saw you featured my email on your blog today. I must say I laughed when you did this to others, but it really stung when you did it to me.

“We don’t have just 80k in assets. We have a bit  more, but this is what we’re prepared to spend on a down payment, because we want a reserve fund and would like to try and be balanced.

“We don’t have a balanced portfolio yet, but we’re immigrants and moved to this country just 3 years ago. And yes, FOMO and kid are the reasons we want to buy. When you put it that way, it sucks.

“Anyway, I’d like to ask you to be nicer to people who email you, but your incisive comments are the reason we’re drawn to reading your blog. By the way, you didn’t answer my question.  Do you think prices of 800k houses will be lower than 650k in a few years? Let me know.

“Like I mentioned, it looks like the government is prepared to sell the country in order to keep RE prices up. Every single financial analyst who predicted the crash is right about the fundamentals, but wrong about the lengths to which the system will go to decouple values from fundamentals. I haven’t decided whether I’m going to buy or not, but I was hoping for perspective on how low the crash may go, and how long it will stay down.”

Arnie’s big mistake: trying to justify risky personal actions based on macroeconomics. The question is not where house prices or government policy are going, but if an action is correct based on personal circumstances. How is that not a simple and clear criterion?

If you need a home (a baby doesn’t cut it) and can afford one (increasing living costs by 70% is plain unwise) without draining your net worth (sorry, Arnie, the RESP and a nestegg come first) then go ahead and buy. But not now.

Ever been to Huntsville? Take warm undies.

Blog dog Joe has come across a weird situation. Actually it’s Joe’s brother-in-law which has been left shaking his head, wondering what the blazes is goin’ on down there in the GTA.

Hi Garth. My brother-in-law in Huntsville and he had his 3 year renter leave when the renter bought his own house. He put an advertisement on Kijiji for a 2 bedroom apartment to rent in Huntsville and received 344 applications for this.

It took awhile to go through everyone as he wanted the best applicant. It was quite the shock to receive so many for this place which is about two hours North of Toronto.

So I responded, asking J where all these apps were coming from. People in the area, maybe, whose igloos had melted over the summer or wanted to move into some kind of habitable shelter before the six months of darkness and roaming bears began? That would make sense.

“No, he said. “None of the applications were local. The Huntsville population is tiny and the Kijiji advertisement went provincial. It was just a surprise to have that many applications for this one apartment.”

And this is the topic for today’s comment section: what the heck?

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Feeling ill

Wow, whadda week.

The Confidence Man

In Ottawa the big confidence vote may be called. It’s now a nothingburger, since the Dippers won everything they demanded of the Libs. The CERB is back and being extended for as far as the eye can see – although it’s called different names (enhanced EI and CRB). Does this sound like a guaranteed income to you? It should. Plus Jag got the feds to agree to two full weeks of sick pay. That’s extra sick pay over your deal with your employer. It was an NDP prerequisite for backing Trudeau when he disbanded Parliament earlier this year, and it’s now a done deal.

So, no election. Yet. The spending will continue. We are on our way to a $500 billion one-year deficit. Harper’s credit crisis x 10.

By the way, speaking of ten additional paid sick days, it’s useful to remember how many public-sector workers are already paid for time away from their jobs due to sniffles. For example, this is the deal for elementary teachers in Ontario (who work 194 days per year, or 53% of the calendar):

If you are employed in a permanent full-time position, your sick leave entitlement each school year is as follows:
* 11 sick days at 100% of salary;
* 120 short-term leave and disability plan (STLDP) days at 90% of salary; and
* “top-up” of the STLDP days from 90% to 100% of salary from any of the unused 11 sick days of the previous school year. (Source: Ontario Elementary Teachers Federation)

Yes, this is where we’re headed. No wonder there’s a tax storm on the horizon. Plus this storm…

Blood & Guts in Cleveland

It probably won’t be pretty, but it will be seminal. The first presidential debate between Trump and Biden happens tomorrow night (Tuesday) in that city on Lake Erie’s shores. The first of three. So who has the most to lose?

Trump, of course. And not just his embarrassing tax records. He’s spent months painting Joe Biden as old, incoherent, doddering, senile and suffering from dementia. This happened after trying to portray him as a player in Ukrainian corruption and, when they failed, as a pedophile. In any case, expectations of Biden are now so low that if he shows up and stops drooling, it’ll be a win for the Dems.

I have no idea who will win this election, unlike everyone else who reads this pathetic blog. But we can expect mayhem. Trump has worked hard at discrediting the electoral process. He claims (without evidence, according to the FBI) that mail-in ballots are a sham. (There will be million so them, thanks to Covid.) He’s suggested that Congress, or maybe the Supreme Court (hence the haste to appoint the new gal) – and not voters – will decide the outcome. And he’s refused to say he will gracefully exit in case he loses.

Sound like a mess in the making? You betcha. This will not be decided on November 3rd, and Mr. Market could be in a crappy mood until Christmas. Meanwhile the social media onslaught is overwhelming. We have Proud Boys battling BLM. Guns are coming out. America is battling not only a virus but an infection of intolerance, polarization and hate.

Suddenly Canada doesn’t look so bad. And we get free money….

We’ve hit 1%. Seriously.

So a one-year, fixed-rate, high-ratio, insured mortgage is now available for 1.29% in most of the country. When did this happen last? Never, silly. It’s an all-time low number reflecting the fact our central bank has artificially depressed yields by buying up $5 billion a week in government and mortgage securities.

The times are unprecedented. While a 1% mortgage for sounds progressive, borrowers should realize it comes because of the risks facing the economy. There are four million people this week lurching from CERB to new government pogey. Unemployment in Canada is the highest in the western world. Our per-capita government sending is off that chart. The central bank is printing cash as never before and feeding it to a government that spends without precedent. Notably, almost 70% of all the people who stopped making mortgage payments because of Covid had yet to resume as of the beginning of September.

Should you take a one-year term? For most people, no. Go five. Not worth the risk. Of course, if you really want to be shellacked, go get a five-year bank GIC. The Royal’s paying 0.95%. Remember these days. Your grandchildren will want to hear about them.

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Tell me why

Shortly, we’ll dissect Arnie. First, a few hungry little harbingers.

One. More evidence WFH is not a thing. Not an enduring one, anyway. Next Monday a third of Citi’s 17,500 New York employees will be at their desks on Wall Street. Bank of America managers are back on October 21st. JP Morgan began a staggered return last week. Odds are within six months most of NYC’s 350,000 finance workers will be ensconced in their ant farms, busy rebuilding the office culture, making boodles of bucks for their banker bosses.

In Canada? Well, we’re Canadians. Things take longer since we have to emote. But there’s no doubt the office towers will repopulate, that CIBC will want to move into its spanking new DT Toronto head office and the 30 km of underground commerce (where five thousand people work in stores, spas and eateries) will seed back to life.

Two. Unsold condos in Toronto are piling up faster than borrowed billions in Ottawa. Supply and demand have fallen out of whack. There are meaningful reasons for this. First, too many units are flooding MLS because of Covid fears (elevators), new completions, student and restaurant renters moving home into Mom’s basement, the silly ban on evictions and the collapse of tourism, travel and Airbnb. A mass of investors are dumping their condos, sick of negative cash flow. (As this pathetic blog told you already, this will be a temporary – and significant – buying opportunity if downtown ownership is your thing.)

But wait, demand’s also petering. It’s evident everywhere except in the media and lagging realtors stats. Look at this…

Three. September was a shocker in Vancouver, for example. Compared with August (the market peak) condo sales have fallen 51% while detached deals are off 46% from last month. Ditto for townhouse transactions – down by half.

A recent RBC report seems to have nailed it – all that pent-up virus demand from the spring, unleased in late summer, is done. It’s over. The greater fools blew their wads, borrowed massively, paid inflated prices, and are now done. The market’s momentum, the bank told us a few weeks ago, will dissipate in the autumn. No now it’s fall, and the bubble is leaking.

Badboy housing guru Dane Eitel says the same. “CERB is coming to its conclusion, the deferred mortgage program is ending, and evictions have returned, now let’s see where the market will head on its own volition. Hint, down she goes,” he says. Inventory is growing, and average detached prices will drop about two hundred thousand.

Well, it’s time for Arnie. How does all this fit into the desires of a Toronto renter dreaming of suburban dirt?

“Me and my wife are 31, and we just had our first child three months ago. We have a family income that’s upwards of 200K, and enough for a 10% down payment on a semi-detached in the suburbs.

“I’ve put off buying for about 18 months and I agree with all of your analysis, and I do believe Canadian economics and real estate are a ticking time bomb. However, the government seems intent to keep real estate prices high, even if it means they have to sink the entire country to do so. To hell with jobs, fiscal prudence, taxpayers, stocks, and everything else that’s productive, as long as homeowners can make a quick buck when they sell their houses.

“If I rent for another 3 years at $2500 a month, I’ll be $100,000 down the drain. I’m unable to believe that a house that costs $800,000 now will cost less than $650,000 in 3 years, as that’s the reduction that will be necessary for me to not make a purchase right now (I’m not building any equity on rent, but some equity will be built on ownership). Why exactly do you say that we still shouldn’t buy? Please let me know.”

First, Arnie, do what you want. Never use this blog as a reason or excuse for personal action. That’s just too convenient.

But we have to ask some questions. Like, why are you suddenly house horny, in the middle of pandemic, recession, economic uncertainty and real estate inflation? Is it because of FOMO, or the fact you have a baby? Not good enough. And with an income of $200,000, why do you and your wife have but $80,000 in liquid assets? Now with a baby and mat leave, won’t it be even harder to save and invest? Isn’t your greatest obligation the kid? If you can’t save much when renting at $2,500 a month, how can you build up an RESP, for example, when she’s not working and you take on the burden of a house? Have you thought this through, Arn, or was this note written at night by your hormones?

For example, do you know the cost of ownership? A semi selling for $800,000 in the burbs comes with $25,000 in land transfer tax (kiss that goodbye – ten months’ worth of rent) and closing costs. Mortgage payments, property tax, insurance and the lost gains on your down payment come to $4,290 a month – a 71% premium over rent. That’s almost $65,000 over three years, or closer to $75,000 if the monthly difference were invested in TFSAs and an RESP. This would double your liquid assets, while buying would reduce them to zero. All of your eggs would be in one place – half a house on some soulless cul-de-sac where it takes a lire of gas in the minivan to fetch a litre of milk from the distant superstore.

Have you thought of the risks, A? What if the virus gets worse, the economy stutters longer and you’re laid off? Or lose your job entirely? Perhaps your spouse will want another child, another 12 or 18 months of maternity leave on EI without salary. Maybe she will wish to stay home for a few years with the kids. What happens if interest rates rise modestly and your mortgage payments increase by half (or more) upon renewal? What about being called back to work in the city, facing a two-hour daily commute? And what do you do if the guy living in the other half of your house turns out to be Covid-positive? Or joins a gang of geriatric Harley riders that he invites over every weekend? Or smokes dope all day on the shared back deck? Or is merely a jerk?

The main question: should a couple with just eighty grand saved and a new family buy a $800,000 asset with $745,000 in revolving debt, putting all of their wealth in one asset with no reserves, contingency or backup? In a pandemic? How is that not gambling?

Sheesh, Arnie. You came, you read, you were prudent. Now stop thinking with your pants.

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Inflation’s coming – in time!

RYAN   By Guest Blogger Ryan Lewenza
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The economic toll, among other things, of the global pandemic has been devastating. From what I read, the conversations I have, and what I see around me, it’s heart breaking to see so many people hurting during this scary and uncertain time.

Due to the economic damage caused by this pandemic, governments around the world have responded by providing unprecedented benefits and support to those impacted by this virus. And with all this increased government spending and deficits, central banks are ramping up the printing presses again, leading some to fear that much higher inflation (some are even calling for hyperinflation) will come and blow everything up.

For example, we’ve seen the Federal Reserve’s balance sheet increase from US$4 trillion to start the year to US$7 trillion currently. As a result of this monetary and fiscal stimulus, we’ve seen US money supply skyrocket. M2 money, which includes all notes in circulation and bank deposits and money market funds, has surged 23% year/year! My data goes back to the 1960s and the next highest annual change was back in the 1970s when it hit 13.5%. So just looking at this, many assume inflation is set to skyrocket.

US Money Supply is Rising at a Record Clip

Source: Bloomberg, Turner Investments

But money supply only captures one aspect of inflation. When looking at inflation we have to examine all the key areas including wages, commodities, and the things we buy like food, energy, electricity, etc. Focusing on the US, I reviewed all the key components of inflation and while food inflation is on the rise – the main thing people tend to focus on – many other key areas like energy and apparel are experiencing major price declines.

While I see oil prices recovering next year as demand rebounds, oil prices are likely to remain contained (i.e., $60/bl), keeping gasoline prices low. With unemployment still quite high, I see minimal wage growth pressure over the next few years. And I see pressure on residential and commercial rents until Covid passes. Basically, I see a number of shorter term deflationary trends over the next few years, which should help to offset the dramatic rise in money supply.

US CPI 12-Month Percent Change, Select Categories

Source: US BLS, Turner Investments

Looking longer term there are also a number of major deflationary trends to consider. Some include:

  • Globalization: The most significant deflationary force in recent decades has been the offshoring of jobs and manufacturing to China and other low-wage countries. Look at the tags on your clothing or the stickers on your new TV and odds are it was manufactured in China, Vietnam or Mexico, where through their low wages they can manufacture consumer products on the cheap and ship it back to us. There’s a reason why Walmart, Costco and Amazon are some of the largest companies in the world.
  • Technology: After globalization, technology has and will continue to be a major deflationary force. Technology helps to improve productivity (a good thing) but comes at a cost as technology has helped replace millions of jobs in the US and globally. Technology has led to “disintermediation”, which removes the middlemen or intermediary in areas like finance and technology. Think free trading from Robinhood and online purchases using Shopify’s online platform. And it will only get worse with automation and AI, which will have huge ramifications on the labour market and wages.
  • Demographics: The world’s population is aging and this has implications for inflation as older people tend to spend less and be less productive, generally speaking. According to the UN, by 2050, one in six people in the world will be over age 65 (16%), up from one in 11 in 2019 (9%).
  • Debt: Lastly, high debt loads can be deflationary as more and more capital goes to servicing the debt rather than being directed to more productive areas like investment.

So, while the large increase in deficits and money supply are inflationary, there are a number of deflationary trends, helping to offset the impact of the rising money supply. Basically, the simple thesis of higher money supply, leading to much higher inflation is not so cut and dry.

Given the deflationary forces that I’ve highlighted above, in the medium term (i.e., 3-5 years) I see inflation remaining fairly low and contained, but longer term I do see the potential for inflation to rise and potentially sharply, which could cause dislocations to the economy and client portfolios. One day we’re going to have to pay for this debt binge, but as a society we’re pretty good at kicking the can down the road and delay taking the hard medicine, hence why I see inflation as a longer term concern.

US Inflation Has Been Low for Years

Source: Bloomberg, Turner Investments

At Turner Investments we always try to take a longer term view and to help combat against the prospect of higher inflation longer term, we have included positions in the portfolio, which could benefit from rising inflation. These include our long held position of preferred shares (if inflation picks up central banks will have to begin hiking interest rates, which given that the Canadian preferred share market is dominated by fixed resets, they would benefit from this) and more recently we’ve started to introduce floating rate bonds and bank loans, which would also benefit from rising inflation and in turn, higher interest rates.

It never hurts to have some hedges in the portfolio!

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

 

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Suck & blow

One problem with running a free blog is that anyone can come in, use the washroom, make a mess, rifle through the fridge, write on the wall and leave, smirking. So far there have been 686,200 comments published here. A whack more were deleted – too combative, disgusting, shanky, horny or dodgy to post.

Free speech is important. Abuse is too frequent. But these days, more than ever, we need debate. The world’s highly abnormal. More disruption and change on the way. There’s no black-and-white solution to anything.

Here’s a recent controversial topic: if massive government and CB stimulus are causing danger by inflating real estate, why isn’t a puffed-up stock market just as bad?

Answer: people buy houses with 10x and 20x leverage, usually for emotional reasons, often when they can’t really afford it, and despite the fact renting is almost universally cheaper. Today we owe over a trillion in mortgage debt which is guaranteed to cost more to carry in the years ahead. People willfully ignore the inverse relationship between rates and real estate prices. So when the cost of money starts to restore, mortgage debt grows more expensive, houses lose some value and personal finances wither.

That’s the risk. The naysayers counter by stating rates will never rise again in their lifetimes. But they will. No question of that, unless the economy remains in recession for decades – in which case, real estate will be a death trap. This is the mistake Mr. Socks made on TV Wednesday night, saying Canada can add excessively to its deficit/debt because of low rates. But when they double – from 2% to 4% (it’s coming with economic recovery) – it will add $20 billion a year to the cost of carrying $1,000,000,000,000 in existing debt. That’s twenty billion less for health care transfers, child care, seniors or renovating 24 Sussex.

Finally, lots of residential real estate transactions are non-productive. Aside from realtors, lender dudes, lawyers and movers, nobody gains. No new jobs are created. No products produced for export or domestic sale. No factories built, stores opened or offices launched. It’s hard to understand how a nation of people continuously selling each other houses and condos at ever-rising prices with larger whacks of debt expect a higher standard of living.

All that debt, by the way, is expensive to maintain – even at these rates. It sucks off disposable income that might otherwise buy cars, iPhones, clothes, vacations and stuff which actually creates products and jobs. Plus, look what Covid did. Almost a million families stopped making mortgage payments – a quarter of all the indebted households in the nation – because they couldn’t carry that $180 billion in borrowings. Now they are madly adding to them.

Is this not a warning we have taken the real estate, the one-asset strategy, too far?

What about financial assets?

Yup, also benefitting from government fiscal stimulus and central bank monetary diddling. Low rates have shoved down bond yields (along with bank savings and GICs) so more money flows into growth assets like equities. Cheap rates help corporations by lowering their borrowing costs. Govy handouts such as CERB keep people buying food, kibble and Internet connectivity, which helps Loblaws, Shaw, Purina, Sobeys, Rogers and Bell. There have been small business loans (partially forgivable) and payroll subsidies, as well as sectoral bailouts (more coming for the airlines).

As a result, people with financial portfolios have flown through the dogawful 2020 largely intact. Those 15% gains in 2019 have been retained. Now investors look forward to a recovery and post-election euphoria in 2021.

Meanwhile real estate buyers in 2020 have paid more for a house than ever before in history, taking on greater debt when the jobless rate is above 10% – the highest in the OECD – and the country is in recession with four million people worried about CERB cheques ending next Thursday (they won’t, of course).

In short, pretty much all of the assets in a financial portfolio end up in the economy, productively feeding corporations, employers and jobs or financing government debt. Most critically, people with RRSPs, TFSAs, RESPs, non-registered accounts and RRIFs do not have government insurance backing their portfolios and did not use leverage to buy them. They have assets which are not layered on debt. So when Covid hit, there were no deferrals. Besides, people always require income, especially in retirement. They don’t need houses. You can rent nice accommodation when you’re seventy. You cannot rent cash flow.

Apples, oranges. Bananas and Buicks. Simple comparisons are meaningless. Stop trying to make them. There’s no competition between real estate and financials. You should probably have both.

Despite the above, nothing will change.

A survey out today from BMO found 40% of first-time homebuyers think this is a swell time to make a house purchase – with record-high prices, greedy sellers, low inventory, steep unemployment, a deep recession and a global pandemic. Thanks to the sick economy, the bank says, many of the kids have had to dig into their savings and will require larger mortgages. “Even with a global pandemic as our backdrop, we’re encouraged to see Canadians maintaining their optimism on our housing market,” says the head of personal lending. Smiling.

But it’s not just optimism. It’s delusion.

Now get out of my bathroom.

 

 

 

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They did what?

Was the bond market surprised when Mr. Socks let it be known federal spending was just getting going? That the estimated $380-billion annual deficit was, well, merely a starting point?

Nah. Rock-bottom yields hardly budged on Canada bonds after the Throne Speech. Mr. Market says the central bank will continue to gobble up debt, creating demand and depressing yields for a while yet. Given the one-two punch of fiscal and monetary stimulus (Chrystia’s spending and the CB’s buying) we’re on our way to a $500 billion annual shortfall, and all the long-term consequences that will bring.

Don’t ask. They’re ugly. Your kids will hate you. Especially if they grow up to be anaesthesiologists.

Meanwhile, lenders are in a deathly battle for mortgage market share. Today we have a new all-time winner for the lowest fixed-rate, five-year home loan. It’s from those pirates at HSBC and clocks in at a mere 1.64% (for insured mortgages). It’s the cheapest advertised rate in Canadian history.

Yikes. That means it costs but $2,031 to carry a mortgage of $500,000 which, after five years becomes $415,600. Thus, $84,400 in principal is retired through making $122,000 in payments over sixty months. A record.

Combine that with 20x leverage, thanks to CMHC’s ridiculous insuring of 95% mortgages, and you arrive at these conclusions:

  1. When housing agency boss Evan Siddall warns young people not to buy real estate because of the inherent risk, and chastises society for its mindless ‘glorification’ of housing, is he hoping we won’t notice what his own outfit is doing? By insuring loans with extreme leverage, protecting lenders who can then do crazy things – like offer a 1.64% loan – this governmental body is literally begging moisters to jump in, increasing demand and jacking prices further.
  2. Ottawa is out of control. Stimulus spending is off the charts. Now the PM says, in a trumped-up, pre-election address to the nation, we’re in a second virus wave. Not maybe. It’s here. (By the way, the province I’m in today has one lonely dude with symptoms. No new cases. Nobody in hospital.) As a result of scary Covid, we’ll get national child care, universal pharmacare, payroll subsidies until next summer, a brand new CERB,  and, oh yeah, an enhanced shared-equity mortgage program for first-time buyers. Plus, of course, whatever the NDP wants in order to prop up the government. Did I mention there’s an election in the cards here? Will Canadians vote against cheap child care, 1% mortgages and free scripts?
  3. We are so drugged on debt. Households owe over $2 trillion, and mortgage demand is (of course) popping higher. The feds will spend $500 billion more than they have, pushing the federal debt way past a trillion. Provinces are pooched. Cities are crying for cash (look at poor Toronto and Vancouver). Conclusions: taxes and user fees will rise. When rates start sneaking back up, well, I hope you did the right thing in the final months of 2020.

First, if you’ve been even thinking a teensy bit about downsizing your real estate, and live in a bubble city or region (everywhere except Alberta, and the other flat bits), why not do it now? Buyers are currently hopped-up, wild-eyed, debt-infused zealots, seriously believing if they don’t purchase immediately they’ll be shut out forever. So cute. Anyway, this is the time to bail for top bucks.

Then rent for a while. Wait to get back in if you need property. The world will sure look different in two or three years when all of this stimulus starts turning to regret.

Looking to buy? Don’t. Utter foolishness. You’ll pay too much and are better off leasing a place since landlords are hurting and rental rates are dropping. Down 15% in the last few months in Toronto, for example.

If you must buy (spousal abuse) pre-qualify for financing. Get a five-year fixed commitment since the variable discount has largely vanished. If you end up in a bidding war, and win, (a) plan on staying put for at least a decade to justify being Hoovered, and (b) get a weekly-pay mortgage which – combined with today’s ridiculous rates – will help you trash the extra debt in record time.

Have a financial portfolio? Stay invested. The amount of government and central bank stimulus in Canada, the US and globally is unprecedented. Twelve trillion so far – which is about the size of the entre Chinese economy. It will continue to inflate many asset values, keep rates depressed, flow cash into capital markets, paper over anything Covid does and shift the burden of pain from corporations to governments, taxpayers and savers.

There’s a reason equity markets caught fire after their March lows. That’s when Trudeau and others turned the taps on. Despite all that the virus has done to our world, investors with balanced and diversified portfolios have skated through the mess. Now the taps are being opened even wider. No reason to think we’ll get a different result. And when a vaccine arrives, stand back.

By the way, did you see Ontario is now allowing employers  (effective next week) to skip making contributions to their defined-benefit pension plans? More virus fallout. More reason you need a Plan B.

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Bottomless

No Time for Austerity.

You betcha. And that was the theme of today’s Throne Speech. What a surprise.

The Trudeau government is gearing up for a national child care program, universal pharmacare, enough spending on green initiatives to create a million jobs (good luck with that), plus oodles more money for testing, vaccine development and pandemic-fighting. Enhanced EI benefits will be extended and the wage subsidy program rolled right into next summer. No big UBI announcement but – as detailed here a few days ago – that $199-billion-per-year Godzilla would require massive tax changes to fund.

Speaking of tax, Throne speeches never detail such stuff – and we’ll get a lot more from Commander Chrystia in a few weeks. But the Liberals did promise they will be “identifying additional ways to tax extreme wealth inequality,” attack stock options, and also take a run at the online giants like Facebook.

The key phrase, “this is no time for austerity.” So much for the warnings of bankers, business leaders and those pesky Conservatives. More money will be coming for the travel business, arts, hospitality and targeted subsidies for businesses nailed in soon-to-come regional lockdowns. More for women, racialized citizens, kids and old snorts.

Missing words were ‘deficit reduction’ and ‘debt.’ Oh, and ‘election.’ But not for long.

Short, Sharp & Dramatic

No, that’s not merely a description of me. It also applies to corrections during a bull market – which we have been in now since the shock of Covid wore off. Stocks have been wonky, and generally descending since making all those exciting new highs in August (happened again today).

The FAANG tech giants are vulnerable. The airlines are dying. But cyclicals are gaining ground. The railways are back. Cash is moving into small caps (which always lead a recovery). So a pile of experienced money is positioning for the post-virus world when crazy fiscal (government) and monetary (CB) stimulus wears off and companies start making decent money again in a growing GDP.

But before that happens, the tree will likely be shaken again. More volatility. More RobinHooders squished. And, of course, there is this…

The Vote from Hell

America has to choose between a crazy 74-year-old serial fibber and narcissistic bully and a 77-year-old crusty career politician with a platform of mush. Not pretty. On one side is the evangelical, F150-driving, rebel forces of the right and on the other the BML, new-green-deal, social justice lefty warriors. A recipe for sustained conflict.

The worry is no clear winner on November 3rd, followed by protracted indecision amid vote counts, legal challenges and conflicting claims of victory. Markets hate uncertainty. Polls are imprecise and anxiety is building.

Veteran trader Ed Pennock had this to say earlier today:

Election polling is inexact. Biden’s lead is shrinking. His Lead has narrowed in Florida, Iowa, North Carolina, Ohio, and Arizona. His lead in Pennsylvania has dropped to 5%. He should be worried. This is how 2016 went. 45 did not win the popular vote. He won the Electoral College. The difference this time will be the contested Mail-In Ballots. Count on it getting Ugly.

Recall that during the Gore-Bush recount in Florida (which took more than a month) the markets shed about 12% of their value. This election could take until the end of 2020 to figure out, and that bull market correction might well reflect it. Who knows? But it seems reasonable to (a) stay invested and ignore the noise and (b) use your shiny new 2021 TFSA money to go shopping. Stuff may be on sale.

Pity the Poor 905

So last week this pathetic blog detailed the decline in urban-core condos in terms of sales and prices, and told you why. You know. The virus. Germy elevators. WFH. The quest for space. And cheapo mortgages.

We also told you about poor Hamilton, flooded with house-horny Millennial condo refugees and their damn cats, driving local prices skyward with multiple offers and extreme bids. The assumptions being made: remote working is forever. Downtown office jobs are relics. You can earn the same money in your underwear at home as you can in the cube. And why not move to some hick city to get an affordable house when you don’t have to commute into the Big Smoke?

Well, that’s cute. Reality will arrive for these folks soon enough.

Meanwhile the disease is spreading. Now it’s Fort Erie that’s sizzling, say local realtors. (For the uninitiated, this grimy blue-collar former canal city of 30,000 people sitting 152 km to the west and south of Toronto. The death highway connecting the two is the QEW.)

Sales in the region are up about 40% from last year and prices have risen 15%. Plus, if you move to Fort Erie, you get to see Buffalo across the river, with its picturesque red and blue flashing first responder lights and ever-present glow from smoldering buildings.

Yes. Livin’ the dream.

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