Banker angst

The finance minister says it’s all okay. Canada will be a northern paradise. The best employment picture in the G7. Only Andrew Scheer will lose his job.

But Susan isn’t so sure. She’s not buying the everybody-gets-a-pony message in this week’s economic update. In fact as a banker, she’s scared. The finance sector layoffs have already started after a disappointing set of earnings for the Big Six. And, as you know, the banks want to dismantle their costly and elaborate web of physical locations, shedding front-line workers and forcing customers to find an ATM or go online.

  (This is precisely how I obtained my sweet little stone BMO branch – so there is an upside…)

Bank of Montreal just announced that 5% of its workforce, or more than 2,000 people, will be laid off. RBC’s chief exec is warning of a few rough years. The fintech industry is snapping at the bankers’ heels. And loan loss provisions are up sharply – more than 50% at the CIBC and a third at TD and Scotia, for example.

Susan has some serious questions, therefore. But wisely prefaces them with a MSU.

If it wasn’t for your wise advice, I would neither have saved the amount of money that I have, nor learnt anything about investing.  My savings rate is approximately 60% of my salary, but every year I earn the same amount as I save.  This would not have been possible by investing in GICs, and I’ve tripled my investment money in the last 8 years.

Here’s my question.  My industry, Finance, is laying off thousands in the coming year, both in the US and in Canada.  I fear a job loss in the next few months or weeks.  What do you recommend I do to prepare for it?

I’m particularly stumped at what to do about my DB pension.  While I want to break it out into a LIRA, I’m afraid I will lose a substantial portion of it to taxes as I have no RRSP room.

You save two-thirds of your salary? That’s deserving of an Order of Canada, or at least a life membership (and your own parking spot) at Costco. Hopefully you’ve been stuffing your TFSA (since the DB pension restricts RRSP room accumulation) and building up a nice non-registered account chock full of growthy ETFs and enough fixed income to let you sleep at night, should the axe fall. (Sounds like you might have been too aggressive of late, however – so dial it back.) We have no details on your personal life, but you gotta be a frugal gal. Perfect, when your employment’s dodgy.

The pension? Big decision.

If you leave the funds where they are, inside the plan, there’s little to fear in terms of stability. The banks aren’t going bust. Ever. They are systemically important, and federally essential. Outside of government pension money and your dog’s love this is about as secure as it gets.

But there are still valid arguments for commuting the pension, leaving the plan and managing this money on your own. For example, if you stay in, every payment received in retirement will be fully taxable at source. No way to mitigate that. If you don’t need the income, you must still take it. That could push you into a higher tax bracket, which sucks. On the other hand, if you take possession of the cash and it sits inside a registered fund, you can dip in whenever you want and thereby better control your own marginal tax rate in retirement.

Second, by commuting you seize control. Instead of relegating investment decisions to an unknown and unseen pension administrator, you make your own decisions. That can be immensely satisfying. Third, you can tailor the investment strategy to your own needs, goals and personality. Pension managers’ primary mandate is to ensure funds are available to meet future obligations, while you might be more concerned about growth and getting a Porsche (to drive to Costco). Fourth, when you croak the money belongs to your estate, not the pension plan. You can pass it on to spouse, family, friends, charities and pets.

Now, what about the tax hit when commuting?

Typically a portion of a commuted pension can be rolled into a LIRA (locked-in retirement account – just like an RRSP, but not cashable until you reach retirement age). The remainder is given as cash,  taxed in that year as income. The Hoovering can be cut if you have RRSP room available but, sadly, poor Susan has none.

What to do?  Nothing. Take the money. Pay the tax. Move on. Remember if you stayed in the plan 100% of every cheque for the rest of your life would be taxable, so all you’re really doing in commuting is paying it now. It’s also wise to optimize when the cash is received. Most employers will offer an option of taking it immediately when leaving the pension plan, or a few months later within a new calendar year. Obviously taxes will be lower in a year of unemployment.

The biggest reason people don’t commute is, of course, fear. They think staying inside the corporate womb is somehow safer than taking charge of their own destiny. In some cases, (like this) that may make sense. For the 2,000 GM workers losing their jobs in Ontario this week, for example, it makes none.



The mucked-up middle

This week Chateau Bill brings in his autumnal economic statement. Interestingly he will do it not in the House, facing catcalls and raspberries from the oppo benches, but in a presser opposite the comatose Parliament Press Gallery. So much for accountability.

Anyway, expect him to be rosy, upbeat and yammer on about “the middle class and those working hard to join it.” As you know, we now even have a Minister of Middle Class Prosperity, a member of T2’s 38-member Cabinet. (Each minister also has a Parliamentary Secretary with bonus pay and a preferred status. This means half of the entire Liberal caucus has been granted favours.)

Morneau will talk about growth, jobs, hope and ponies. Do not count on him to dwell on revenues or deficits. The Trudeau agenda calls for a slew of new spending and no balanced budgets for the entire mandate. But there will be new and more taxes coming in the winter budget. The good news for Ottawa will be a strong US economy and robust markets pulling us forward. The bad news is this collection of financial losers called ‘citizens.’

Despite ten years of expansion, rising asset values, the best job growth in decades and the cheapest interest rates in history, Canadians have been backsliding. Savings rates have slipped while debt swells. More people are retiring with mortgages than ever before. Four in ten families are $200 or less a month from default. Never before have more young adults lived with their parents, seemingly afraid to venture forth. The middle class is turning out not to be such a hot destination.

On Friday Stats Canada announced the household leverage rate hit a new all-time high. It’s just a hair under 15% of disposable income, the majority of it for mortgages. This may not sound like a lot, but when you remove renters (35% of taxpayers) and the people without mortgages (half of homeowners), and factor in lowly interest rates, this is a big number. It suggests enough people are in serious trouble to trigger issues for everyone. Indeed, it took only 8% of debt-pickled Americans to crash that country’s housing market and send the world into a financial panic.

Eight charts Bill will not be sharing with you.

Here’s an illustration from RBC showing how household leverage has crested, despite 2% mortgages,

And, by the way, the increase debt servicing costs is outpacing income gains, as you can see in this chart from TD Economics. Just imagine if the economy stalls (wages drop) or inflation jumps (rates increase). Pooched.

And here’s a more graphic portrayal from the alarmists at It does a fine job of depicting what households have done to their finances over the past 20 years.

By the way, I forgot to mention the personal savings rate. So if you were wondering if more debt was okay because we’re just socking more into our TFSAs, RRSPs and non-registered investment accounts, well, forget it. In the 1980s we saved 20% of what we made. Now it’s 1%, and nearing historic lows.

And what about the economy? Will it save us from ourselves?

Chateau Bill will suggest exactly that. No reason to worry. Just move into the middle class and relax. But, alas, the economy is not what it used to be. Increasingly it is based on consumer debt, continued household borrowing and overspending on real estate. As this BMO chart illustrates, we are building a condo economy, in stark contrast to the US.

Nowhere in the world, according to the International Monetary Fund, have house prices jumped more relative to incomes than in Canada. In short, we are buying what we cannot afford.

And this is born out in the loans we’re swallowing to do it. This chart from Bloomberg shows household debt has returned to a near-decade level, even with the stress test and a plethora of other government measures in place to quell borrowing. Conclusion: they didn’t work.

Finally, debt in Canada is vastly out of step with the US experience. Americans went through a housing bust, deleveraged and have not resumed their bad habits – and meanwhile their economy blossomed. In Canada we escaped the real estate crash, kept borrowing and buying, never corrected our path, and have arrived at this point.

What does all this mean for you, the responsible GreaterFool reader who is not working hard to join the others? Stay tuned.



Smells like teen spirit

DOUG  By Guest Blogger Doug Rowat


Thank god my kids aren’t yet teenagers; however, my seven-year-old daughter is already asking for a cellphone, so I’m getting a sense of what’s in store for me. I’m probably doomed.

So, for those of you who do have teenagers I won’t presume to offer advice regarding how to talk to them; however, eventually all parents will have to have ‘the money talk’. And here I might be of service. Below I offer my best advice.

Explain to your teenager where money is really concentrated. Teens frame the world around their own interests and through their own social-media experiences. Therefore, they often focus on celebrities and music. Teenagers think that wealthy means Taylor Swift, or Jay-Z and Beyoncé. Point out that the real wealth is held in the financial industry. The below chart shows how much top-celebrity-earner Taylor Swift made in 2016 versus what some of the most successful hedge fund managers made. Needless to say, there’s no comparison. This doesn’t mean that you should point them towards a future in finance. Far from it. There are already too many of us in this business. The world needs more artists, musicians and poets. However, it’s still important that they understand where the real wealth lies.

Shake it off: Taylor Swift earnings vs hedge fund manager compensation

Source: MarketWatch, 2016 data

Teach them that markets sometimes go down. We have many clients who are inexperienced investors, which, of course, is fine—it’s our responsibility to educate them about market volatility. However, ideally, clients have already learned, long ago, that volatility’s a normal, in fact, expected, part of capital-market investing. Bad stretches occur every year, but the vast majority of the time markets end up in the black. Educate your teens that negative intra-year periods occur regularly, but that they shouldn’t become unsettled by this temporary weakness. The chart below from JP Morgan is a great visual to show young investors. Intra-year market drops for the S&P 500, the world’s largest equity benchmark, are a constant reality and sometimes they can be severe, but seldom do they result in the full calendar-year returns also being negative. Stay invested. Markets need to take breathers but virtually always move higher in the long run.

S&P 500 intra-year declines vs calendar year returns: despite average intra-year drops of 13.9%, annual returns have been positive in 29 of 39 years.

Source: JP Morgan

Questions on first investments? Suggest health care. When you’re a teenager you assume that you’ll live forever and you surround yourself with other young people, so it’s easy to lose sight of the fact that the world is, relative to a teen, a much older place and rapidly getting more so. If teenagers think about investing at all, it’s usually in the context of what they’re familiar with. For example, “I use Uber, so that must be a good investment.” (You might explain to them that Uber has, in fact, been a terrible investment.) Encourage them instead to think long term and to broaden their lens. As the chart below shows, the global aging trend has dramatically accelerated in recent years and will continue to do so. Health care is critically important to an ageing population. It’s no coincidence that over the past 10 years the S&P 500 Health Care Sector Index has returned 285% on a cumulative total-return basis, easily outstripping the still-impressive 248% gain of the S&P 500. More so than us parents, your teenager will fully benefit from the upcoming, multi-decade shift in global demographics. Over time, your teenager can (and should) continue to add more diversification, but health care is a reasonable first investment and it creates more interesting talking points than a plain-vanilla balanced fund.

Global age trend: health care makes for a reasonable first investment

Source: United Nations

Have them open a TFSA. You’re allowed to open and contribute to a TFSA once you turn 18. You don’t even need a job (earned income) to start contributing to one. Though the contributions made to a TFSA are not tax-deductible, the investment gains within a TFSA are not subject to capital-gains taxes. Tax deductibility isn’t a big priority for most teenagers anyways as they likely aren’t earning much and are probably in the lowest tax bracket. However, the tax-free growth is an important long-term advantage especially when you consider my next point below. The cumulative TFSA contribution limit currently sits at a meaningful $69,500.

Encourage them to start investing early. As my partner Ryan perfectly illustrated last week, through the power of compounding growth, if your teenager starts investing early and saves consistently they’ll have exponentially more money in retirement than their less-disciplined peers (see chart below). Now, I recognize that these initial savings assumptions are aggressive for a teenager, but the overall point is still clear: start early.

Investing early can have a dramatic impact on eventual retirement savings

Source: Turner Investments; Assumptions: saving $12,000/year at a 6% CAGR to age 65. X-axis represents years of investing.

You can, however, tell them that they don’t necessarily have to start this early:

And, incidentally, why this album matters more than any other will be my daughter’s next, non-financial, lesson.

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



Cher Bill

The ink was barely dry on young Scheer’s take-this-job-&-shove-it letter when news on what the T2 Libs have in store for this confused and snowy land emerged. Finance guy Bill Morneau’s ‘mandate letter’ was released Friday – essentially the instructions given to the main economic minister from the PMO. This is an outline of what we can expect in the coming budget.

So sit, clutch some furniture or hold your dog’s paw as you proceed. Under no circumstances should the following be read alone. The mandate:

Defang the Stress Test.
Remember the dumbest plank in the Tory election platform? Yes, to gut the mortgage stress test as the housing lobby had been begging for a year. The Cons promised to ‘modify’ it if elected, and were immediately hugged by the Canadian Real Estate Association. Realtors argued that by reducing the amount of money first-time buyers (who have no money) can borrow the test was depressing sales and prices. Properties were becoming slightly (…oh, the horror…) more affordable as a result. Commissions were down. Mortgage lenders were sleeping in their vans.

Well, it’s coming. Morneau’s been instructed to “review and consider recommendations from financial agencies related to making the borrower stress test more dynamic.” That does not mean making the test harder. Just the opposite. And so the political manipulation of the market continues. Combined with cheapo borrowing rates plus the shared-equity mortgage, it’s clear Ottawa is trying to recreate the Spring of 2017. Dog help us.

Slap on a National V&S Tax.
Soon the country will have its first pan-Canadian federal real estate tax – another order just given to Bill. The annual ‘vacancy and speculation’ tax will initially be set at 1% of a property’s value each year, to be paid by any investor not resident in Canada. It’s another example of what this pathetic blog has been yammering about recently as real estate turns into the new new thing for governments to Hoover. Of course this will do nothing to make houses and condos cost less, especially when the government is about to geld the stress test and increase demand.

But the basis of successful politics is “us vs. them” and that requires an enemy. One that doesn’t vote is even better. Meantime any national law of this nature involves tracking everybody’s activities. Like BC. With fangs.

Whack the Rich.
Trudeau’s first big moves in the last mandate were to gut the TFSA contribution limit and bring in a new tax bracket to vacuum $2 billion more a year from high-income earners. Not the super-rich in terms of assets, like Bill Morneau and his billionaire wife, but those nasty doctors, lawyers, vets, surgeons, dentists and small business guys making two hundred grand a year and employing people. Well, there’s more coming.

The new luxury tax, for example. If you buy a boat or a car or an RV worth more than a hundred grand a fat 10% tax will be applied to the price. That’s on top of HST, and you pay the bill in after-tax dollars. Just imagine what this is going to do for the recreation business.

Morneau has also been instructed to review “tax expenditures” for the purpose of “ensuring that wealthy Canadians do not benefit from unfair tax breaks.” So what are tax expenditures? Vehicles which reduce federal revenues, like TFSAs, RRSPs, RRIFs, LIRAs and RESPs. Also included are all the tax credits and breaks, from tuition to child care expenses, to principal residence capital gains exemption, age credit, basic personal exemption, interest deductibility etc. Oh yeah, plus the capital gains inclusion rate and dividend tax credit. Gulp. Oops, almost forgot – Morneau’s also been told to whack high-income people getting stock options form their established, ‘mature’ employers.

So there you go. Trudeaunomics in a nutshell. Pander to homebuyers by allowing over-borrowing and increased debt. Blame foreign dudes. Increase government spending and the river of red. Penalize successful people because it’s unfair they should have more than you. And rejoice that the guy who got the most votes was just nailed to a tree.



The hanger-on

First today a question from blog dog Bob. “My brother has a First World problem,” he says. Indeed he does.

“During the nasty recession in 81 he left Canuckistan for a job in the USA.  He had a job with an engineering firm in Vancouver and when they downsized they sent him to their SanFran Office.  He was pretty young at the time but had managed to sock about $25K into an RRSP.  Well, here we are almost 40 years later and that little chunk of money has grown to over $300K. (That’s about a 12 fold increase whereas the $200K house he sold at the time would probably only have increase by about 6 to 8 times as much).

“The tax implications are serious though.  In a few years he’s got to start winding his RRSP down and paying tax on it at a high marginal rate.  He’s a Washington resident now and so doesn’t pay state income tax, but he will have to pay federal tax and Canadian taxes. Is there an optimal way to minimize income tax?  How quickly does he have to convert the RRSP to something else after age 70? Or should he just bite the bullet, pay the price, and be happy that compounding has weathered inflation.  I’d be interested to hear your perspective on the best way to dismantle an RRSP.”

Okay, so bro has enjoyed $275,000 in growth sitting in a Canadian tax shelter without contributing anything to the country’s finances, and wants the money paid out sans tax? Does he not realize this is a glorious socialist state now and we expect all comrades to pony up their share? Outrageous.

Well, here’s the scoop. RRSPs can stay in place until the last day of the year in which you turn 71. Then a choice – cash the plan in and pay tax (ouch) or convert to a RRIF and take an income trickle. That’s a ‘registered retirement income fund’ and the government mandates that you withdraw a little over 5% of the plan in the first year, with an upwards sliding scale thereafter. By age 98 the RRIF is usually kaput, and along the way the withdrawals are added to taxable income – but all funds in the plan continue to grow tax-free.

A RRIF can be set up at a younger age, if you want, with a lower withdrawal minimum (about 2.5% at age 55, for example). But remember that once a RRSP morphs into a RRIF no more contributions are allowed. This won’t stop you from contributing to your spouse’s plan, however, so always marry a young thing.

Taxes? Suck it up and pay. For Canadians RRIF withdrawals are added to all other income, which determines the tax rate. For Americans and other infidels there’s a 25% withholding tax on lump-sum withdrawals (of RRSPs or RRIFs) and 15% for periodic payments. The distributions must then be reported on bro’s US tax return.

By the way, we hate him.


Stock cowboys got all aroused again on Thursday with news the China-American trade deal is on again. So says Trump. And he never lies.

Anyway, for those who think a 3% GIC with taxable interest is orgiastic, understand what kind of year 2019 has been for investors in equities and those with low-volatility balanced & diversified portfolios. After the late-2018 plop, markets have ascended to new levels with ample reason to believe the party will continue well into 2020.

As this is being scribbled the Dow is ahead 20% for the year, to a record high. So’s the S&P 500, which has added 26%. The tech-heavy Nasdaq has gained 32% (also at an all-time high) and on Bay Street the TSX has sprouted 19%. Investors who hold an ETF-based, 60/40 balanced and diversified portfolio are positive 13%, with all assets gaining ground – even those beaten-down preferreds are back in the black as interest rates sneak higher. So this is a 32% portfolio advance over the past four years – +10.8 in 2016, +8.5% in 2017, -3% last year and +13% now.

But, the skeptics cry, what about next year? Surely after 20% gains markets have to swing back. I’m scared!

Sure, anything can happen. However remember that 2020 is a US presidential year and throughout history markets have plumped during this period. And while Trump is a quixotic, weird, unpredictable leader, he’s a political animal seeking re-election. His proxy is the stock market, which depends on a hot economy and no trade war. There’s not much doubt what he’s going to do to ensure the Dems are smoked in November.

And, hey, listen to what the Fed said when rates were put on hold this week:

“The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective”.

Wow. No more rate cuts. Economic expansion. Lots of jobs. Contained inflation – not too hot, not too cold. A soft landing, in other words, after all that ill-informed and alarmist talk about a recession, inverted yield curve and market mayhem. Meanwhle Beijing did not invade Hong Kong. Europe is coming back. Chinese data’s getting stronger. US unemployment’s at a 50-year low. Corporate profits just beat expectations to a pulp. Adele’s still not touring. Life is good.

Says Bay Street analyst Ed Pennock: “The newest acronym replaces FOMO. Fear of Missing Out is now Fear of Joining In. Markets have done so well that it’s got to be over soon. Say the market ends up 25% this year then it can only be up 6% or 7% next year. It can’t possibly be up 20% next year. The problem with this opinion is that there’s no causality. ‘Cause it was so good It can’t be good again. Thus FOJI.”

Actually 2020 could repeat 2019. More growth, profits and rising markets. Be scared if you want, but don’t bitch about the results a year from now. Remember the credo: invest when you have the money. Spend it when needed. Do nothing in the middle. You’ll be fine.

The right stuff: Andrew Scheer made the correct decision. Progressive Conservatives rock.


The big proboscis

Hey, time for another ok-Boomer paranoia blog. While the kids today are perfectly compliant when it comes to gutting the notion of property rights and happy to stick it to existing homeowners and rentiers, the crusty ones are not. In an overtaxed land, using more taxes to drive down asset values is a flawed idea. But what else would you expect from Dippers and moisters?

Hence, this post.

In a couple of weeks BC will start taxing raw land to make houses more affordable and increase rental units. Yes, that’s NDP logic. Although nobody can live on vacant land, it’s bad. Taxable. And at a withering rate of 2% per year of its value.

In fact the ‘speculation tax’ which is really a grab from Albertans and other non-locals silly enough to own property in BC is rising four-fold as of the new year, from 0.5% of the market value to 2%. That’s atop municipal land taxes, acquisition and ownership costs. Last year the province Hoovered off $115 million from owners, many of them families which have used their places for decades as cottages or cabins. So, this is just a tax on wealth – the pointy tip of a giant, hairy government proboscis now thrusting into private wealth. Not income, but assets. Big difference. Pay attention.

There’s more. If you own real estate, forget about privacy.

BC is the first jurisdiction (there will be more) to erase the right to keep private all personal information, including your email address and SIN. Property owners on the spec tax list must now surrender name, address, date of birth, social insurance number and email details, “which are necessary for the program of administering the tax.”

You may not live in BC. Or have property there. Or be subject to this arbitrary levy. But this is the future.

Now to Hamilton where councillors there love what they see out West.

The city’s politicians have voted unanimously to craft a new tax on ‘empty’ homes, just like the one helping to degrade owner  rights in Vancouver. Of course, council admits there’s no data on speculation happening in the city. Nor on the number of residential units that are not rented or occupied full-time. Absent is information on what impact speculators may have had on real estate prices. But, of course, such details are moot when there is… anecdoctal information!

“I’ve received anecdotal information from residents that they cannot find housing accommodations in our city,” says the pol spearheading the move. “At the same time, there’s also anecdotal information I’ve received from other neighbours that they know there’s buildings that are sitting vacant. Not just buildings, but homes. Homes that could be rented out.”

By the way, rents in the Steel City average $1,600 – and that’s for all properties, including houses. One-bedroom apartments go for $1,100 to $1,500. Down the QEW in Toronto, by comparison, one-bedders DT range from $2,500 to $3,200 for a small box. The average price of a detached house in Hamilton is $575,000 – or about $900,000 less than in 416, an hour away. The year/year increase in 2019 was 4.3% and sales grew 5.5%. Toronto prices advanced 7% and sales spiked 14%.

So is Hamilton a hotbed of speculation? Nah. Hardly.

It’s just another grab, more snouting into the brave new world of wealth taxation. The argument that taxing real estate held as an investment asset will make housing more affordable for low-income folks is specious. The most ‘affordable’ housing in Vancouver, for example, has been the segment with the greatest price hikes since NDP taxes blossomed. Rents have gone up, not down, since the socialist hordes started vacuuming the investor class. The only real impact has been on the value of detached and luxury homes, partly because non-BC owners are now so discriminated against.

Does housing cost too much?

In urban Canada, for sure. This is largely the result of interest rates which promote excessive borrowing plus our policy of not taxing residential real estate profits, encouraging massive ownership. Face it: we’ve created a property cult. Houses are unaffordable not because of speculators, hoarding by the wealthy, or boatloads of rich Chinese dudes. Whacking empty houses, part-time residences, second homes or cottages will do squat for valuations or rents. But it will flow more taxes.

Which is the point. And this is the start. Now get off my lawn.


The jubilee

Kids exiting uni owe an average of $28,000. For law students it’s four times that amount. If you’re a baby doctor or dentist, owning two hundred grand is no stretch. Lots of people carry those debts into their thirties, when they’re into the process of heaping on more debt – for a car or maybe a house.

In fact student loan debt is one of the inhibiting factors when trying to score a mortgage. And speaking of that, families now carry $1.6 trillion in mortgage borrowing. Plus $400 billion in HELOCs. Then there are reverse mortgages, and another $600 billion in credit card and consumer loan debt.

It’s everywhere. You know the numbers. Four in ten people have less than $200 a month after servicing their debts and buying yogurt and street cannabis. The debt-to-income ratio has never been higher. Borrowing is running four times hotter than inflation. Even when house values go down, mortgage debt goes up. It’s hopeless. Addicted. We’re pickled in the stuff.

This week the bank cop (OSFI) ordered the Big Six to put away more capital because of ‘elevated risks’ flowing out of housing, especially in the GTA and the LM. It’s called the “Domestic Stability Buffer” (I could use one of those), and it’s been raised now three times in about a year. It’s there so when an economic, debt-fuelled shock hits the economy, the banks have cash on hand to, yes, keep making loans.

We’re not alone. The feds can’t balance their books and Ottawa’s deficit will run thick and red for the next four years. Corporations owe a ton. Interest rates are too low, but central bankers are scared to hike since people already struggle to pay. Meanwhile low rates hurt savers and encourage more loans. People borrow money to pay the interest on existing borrowings. Car loans are 96 months – often lasting longer than the damn vehicle. People borrow to buy mattresses. Payday, cash-money loan vultures abound. Debts growing faster than people have the ability to repay them constitutes an economic disease.  Hard to see where this is going to end.

So debt fatigue has bred some rad ideas.

During the GFC Obama’s administration tried bringing in mortgage forgiveness, but failed to get it through Congress. Five million families lost their homes and the financial crisis got worse. Many economists think the downturn would have been shorter and shallower if homeowners had been cut more slack.

Now it’s 2020 (almost) and the political winds have shifted. Have you heard about the Debt Jubilee? It’s the big new thing. The kids love it.

  Democratic contenders for the US presidential contest have been proponents. Elizabeth Warren wants to forgive almost $2 trillion in student loans. Bernie Sanders would do the same and erase another trillion in medical debt. The arguments are interesting.

First, a lot of student debt is owed to the government, or backed by it. So forgiveness wouldn’t really screw the commercial lending business (much). Second, erasing debt for people is the same as cutting their taxes. That’s called ‘fiscal stimulus’. It actually means interest rates can go up to stem the tide of new borrowing because the economy gets a shot from the jubilee. Third, 60% of Canada’s GDP and 76% of that in the USA comes from consumer spending. Indebted consumers spend money on loan payments, not on new Silverados, appliances or (in Alberta’s case) weapons. So a debt holiday would actually boost the economy as a whole, helping employment, corporate profits, wages, markets and investors.

But wait. Is it fair to consider forgiving the debt of some dork who overspent and deserves to waste his adult life paying for it? And what message does wiping away loans send? Don’t we all need more fiscal discipline, financial literacy and a few kicks to the nether regions instead of just giving stuff away? How is this really different from a universal income in which everybody basically gets enough to get by without worrying about employment? Have we all lost our minds?

  Maybe. But the idea of a debt jubilee is apparently five thousand years old, going back to Babylon where new kings would let everybody walk away from their creditors. That way people could afford to pay their taxes and buy stuff, creating a stable, prosperous society. And it was good politics. Kings got to keep their heads longer.

Sound commie ridiculous?

Actually the federal Libs have already started down this road with the shared-equity mortgage. It’s a way of relieving first-time buyers of a chunk of their indebtedness – money used to get a house, for which nothing’s paid.

The dogs are out.



A brief update on this pathetic blog. It’s been eleven years of dogs, balanced portfolios, taxes, chiseled abs, moister-bating, house porn and fighting with infidels, xenophobes and now the Wexit whackos. It contains 3,590 posts (2.7 million words, or the equivalent of 44 books) and 632,033 comments, not counting the 14 million that were deleted. As you may have noticed, unlike TikTok, there’s no dancing here. No lip-synching. Or pneumatic sixteen-year-olds.

Impossible to know how long it will continue. Like the corner milk store this blog is open seven days a week with fresh product. It accepts no ads, generates no income and sometimes immensely irritates Dorothy. “Are you reading comments again?” is usually the warning signal. I lie.

Well, webmaster William Stratas sent over some stats you might find interesting. They come from Cloudfare, the thingy that sits between us and the hosting server (wherever that is) and is tasked with repelling bots and other malcontent attackers. Last month there were 3,544 threats detected and squished. Of those 1,800 came from Slovenia (seriously), 826 from Canada, 465 from the States, 51 from Ukraine and 402 from elsewhere. The good news is that threats in November were 17% lower than October. Sounds significant, but I have no idea why

These were the top traffic locations: Canada accounted for 5,243,905. Just over a million came from the US. France (?) clocked in at 191,758 and Cyprus (??) counted 73,124. Another 656,475 emanated from other places.

What does this mean?

No idea. In the context of our online world a blog on money from Canada written by some old white dude is as exciting as colonoscopy research. And just as fun. But there’s apparently a need for this drivel at a time when most people are going backwards with their finances, making dodgy decisions and being whipsawed by greed and fear. So it continues for a while. All I can promise you is there will be no team dancing routines to a Drake soundtrack. Death would be a relief.

On Sunday we told you the feds would soon table legislation for a sort-of tax cut. Well, the official announcement came just one day later. Bill Morneau, our billionaire finance minister, gave a presser with Mona Fortier to unveil the increase in the personal exemption, to $15,000.

Who’s Mona, you ask?

  She is our Minister of Middle Class Prosperity. The 47-year-old was first elected two years ago in an Ottawa riding after my old House of Commons pal Mauril Belanger died of ALS. Mona’s qualifications to look after the middle class? She was the flack for a local community college, ran her own one-woman communications outfit and was Liberal campaign manager for Belanger.

When asked what the middle class is, exactly, and who’s in it, this was her response after being sworn in last month: “I define the middle class where people feel that they can afford their way of life. They have quality of life. And they can … send their kids to play hockey or even have different activities. It’s having the cost of living where you can do what you want with your family. So I think that it’s really important that we look at, how do we make our lives more affordable now?”

Um. Okay. Thank you, Minister.

So, on cue, they announced it. But that higher personal exemption level will take almost four years to phase in. The tax savings for most families in 2020 will amount to two tanks of gas, minus the carbon levy. Having said that, the Liberal plan will eventually remove another 1.1 million families from the tax rolls, meaning more of the burden will fall upon the shoulders of a diminishing group of people. On Monday Morneau made a point of saying nothing the government is doing will reduce the taxes of 1%ers. Obviously those families don’t have hockey-playing children or financial pressures. They’re just supposed to pay up.

Morneau will have an economic statement before Christmas, he adds. That means in the next ten days. A budget two months later.

So the advice here stands. Maximize your RRSP contribution for 2019. Open a spousal plan and use that if there’s an income disparity. Fill up the TFSAs on January 2nd. Make a RESP contribution by the end of the month. Gift your adult kids money for their tax-free accounts. Sell off any pooched securities so you can use the loss to reduce capital gains. Loan your squeeze money to invest this month and s/he won’t have to make an interest payment for a year. Use Form 1213 to reduce taxes withheld at source when you do the RRSP contribution. Over 60? Apply for your CPP. Turned 71 this year? Convert the RRSP to a RRIF by the end of the month. If your spouse is younger, keep investing in a spousal. Need to raid your TFSA? Do it this month so it can be repaid any time after January 1st. Otherwise you may wait a year. Delay buying investment funds that have year-end capital gains distributions. Pay child care expenses by December 31 and get a receipt.

Remember, Mona wants you to stay in the middle class. This is how.



What’s coming

The average tat costs about $200. So soon you can have a new one, thanks to Justin Trudeau’s government (he has a few). In the coming days the feds will table legislation to cut some taxes by increasing the basic personal exemption to $15,000.

That means no tax on that first fifteen grand (a $2,000 hike) so people earning less than $147,000 will see a small reduction in federal tax – about $600 per year per household when implemented. This will further remove some people from the tax rolls and cut federal revenues by $15 billion over four years, Scotiabank figures. You can be assured the shortfall will come from taxes on people earning over $147,000 annually.

Who’s that?

Well 90% of Canadians make less than $80,500.The top 5% earn just under $180,000. The bottom 90% (all people over 16) have an average income of less than $29,000, which clearly signals something is wrong in our society.

The top 20% of families (average $179,000) earn 49% of all income and pay 56% of all taxes. The top 1% earn 10% of all income and finance 15% of all revenues. This is the same tax bill as the bottom 50% (by income) of all citizens pay. So, that’s is how politics works. Tax success. Pander to the rest.

Of course, there is more coming. The T2 gang are now propped by the NDP (they want a wealth tax on top of income taxes) and the Bloc dudes, who hail from the highest-tax jurisdiction in the land. Likely targets are a higher inclusion rate for capital gains, some diddling with dividends, more grief for small business owners and professional corps, plus yet another whack at the $250,000+ income crowd. According to the latest StatsCan numbers, there are just 245,000 people in this category. That’s 0.65% of the population. In the US 5% earn that much (and in American dollars).

The conclusion: we don’t have enough rich people. If the 1%ers pay 50% more tax per capita than everybody else, don’t we need more? Now that 40% of families pay no net tax (and this week’s changes will increase that) it probably doesn’t make sense to create incentives for people (like medical professionals) to leave. But logic and politics don’t mix.

Anyway, this is all a reminder to the affluent and successful to exploit the tools you have left. The TFSA. The RRSP and the RRIF. A RESP or RDSP. Preferential rates on investment assets. Income-splitting with spousal RRSPs or low-interest family loans. Trusts, estate freezes or tax-deductible mortgages. If you earn over $150,000, you’re the enemy. Arm yourself.


A tale of two cities: Urban Montreal has 4.1 million people. Greater Vancouver has 2.4 Million. The average house price comparison: $350,000 vs $993,700. In Montreal last month sales increased, listings fell and condos were flying off the shelf at an average price of $290,000. In Vancouver, apartment sales were also way up while the average price of $651,500 was down 4%.

The median household income in Vancouver is $86,100. In Montreal it’s $82,000. So why are people in one (smaller) city willing to pay three times more for a house?

Sure, the climate’s better in BC. And Montreal is bilingual. Quebec has a long history of flirtatious separatism (take note Alberta), which has certainly repelled investors. But mostly it comes down to local culture. More than 45% of Montrealers rent, which is 10% more than Vancouver. There is no shame in the country’s second-largest metropolitan area in being a tenant. In fact it’s practically a city-wide party every July 1st when people move from one apartment to another. Moisters in Van seem to crave a Forever House to croak in. On the shores of the Saint Lawrence they get off on variety. Maybe it’s a French thing. Or perhaps BCers have turned into brain-washed property slaves.

It could be telling that this story got a lot of press in Van recently:

Forget paying for your home — in some Vancouver neighbourhoods it could take you as long as a century just to save up for a down payment. The findings were calculated based on median household incomes before taxes and benchmark home prices for detached homes and apartments, according to real estate firm Zoocasa.

The report showed that saving for a down payment of a detached home in Vancouver could be as far as 91 years away in East Vancouver, where the median household income is $65,000. Moving westward, it could take as long as to 217 years to save up for a down payment based on the same median household income.

“In the three priciest luxury neighbourhoods including Richmond, Vancouver West and West Vancouver, where benchmark home prices range between $1.5 to $2.9 million, it would actually take more than 100 years to come up with the needed funds,” wrote Penelope Graham, managing editor of Zoocasa and author of the report.

BC is an angry place lately. The government’s vindictive and grouchy. The kids are feeling disenfranchised. The household savings rate is, on average, negative. Financial stress is high and expectations higher. Tensions over income inequality and race pepper society. The Zoocasa nonsense fuels resentment and is typical of local media. This is why YVR is the country’s most indebted city, and will remain so. House porn is everywhere.

The point is not to compare Montreal with Vancouver. You can’t. Don’t even try. But if you choose to stay in a crazy, obsessed place, stop complaining.

Source: Zoocasa (Click to enlarge and feel inadequate)



Power of compounding

RYAN By Guest Blogger Ryan Lewenza

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

The above quote is attributed to the Nobel Prize winning physicist Albert Einstein. So in addition to developing The Theory of Relativity (you may have heard of it…E=mc2), he also had the brilliance to recognize the incredible power of compounding returns, which is the focus of today’s blog post.

Simply stated, compound returns are just returns on returns, and they help to significantly grow your savings over time. For example, say you invest $10,000 and you earn a 6% annual rate of return over a five year period. At the end of year 1 you’ll have $10,600 with your return being the $600. Then in year 2 you’ll earn another $636 ($10,600 x 1.06), with the $36 representing the compounding returns on the original $600 earned in year 1. In the table below take note of the yearly return column, which increases from $600 in year 1 to $757.49 by year 5. That’s compounding returns at work.

Compound Returns at 6% on $10,000 Investment

Source: Turner Investments

Now the magic of compounding returns, and why Einstein called it the “eighth wonder of the world”, is the earlier you start investing, and the longer you’re able to compound the returns over time, the more exponential the returns become.

In the chart below I calculated an investor saving $1,000/month ($12k/year), earning a 6% return, and starting at age 30 (35 years invested), age 40 (25 years) and age 50 (15 years) to retirement age of 65. The investor who starts saving at 30 years old would have a retirement portfolio at age 65 of $1.43 million. The second investor who starts ten years later at age 40 would see their savings grow to only $696,000. So, in this example, if you start 10 years earlier, which equates to an additional $120,000 of savings, it will result in the portfolio being $700,000 higher at the end due to the power of compounding returns. Finally, an investor who drags their heels and waits till age 50 to begin saving would see their savings grow to just $292,000 by age 65.

As you can see in the analysis the key is starting early, continuously saving, and sticking to the long-term plan so that compounding returns can work for you.

The Power of Compounding

Source: Turner Investments. Assumptions: investor saving $1,000/month ($12k/year), earning a 6% return, and starting at age 30 (35 years invested), age 40 (25 years) and age 50 (15 years) to retirement age of 65

Another interesting way to look at compound returns is to calculate the required monthly savings amount at different ages that will achieve a $1 million portfolio by retirement age of 65.

In the chart below, where we look at different starting ages to invest, lets focus on age 25 and 45. If you want a $1 million portfolio at retirement and start saving at age 25, with the portfolio earning a 6% rate of return, you’ll need to save $499/month or $239,520 in total. Compare that to a person who starts saving at age 45, they will need to save $2,153/month or $516,720 in total till age 65 to realize their goal of $1 million. So here’s the easy question for our readers – would you prefer to save $499/month at age 25 or $2,153/month at age 45 to have a million bucks at retirement? I know which one I would prefer.

Monthly Savings to have $1 million in Retirement

Source: Turner Investments. Assumptions: 6% annual rate of return

In just the last week we saw the S&P 500 hit new highs, followed by a big drop on news that the US/China trade deal could be pushed till after the 2020 election. During these uncertain and volatile times when we’re inundated with so much noise we can lose perspective of what’s really important to investing and realizing our long-term financial goals.

At the end of the day, the two most important factors to successful investing are one’s long-term rate of return and the number of years invested. We get so caught up on which hot stocks to buy, when the next bear market may be coming, how much should we have in equities etc., when the simple truth is it’s about time in the market, rather than timing the markets that will determine whether you realize your financial goals.

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.