The flip, part Deux

Changes in the wind. Pay attention.

The Bank of Canada is pulling back on the throttle. Finally. Weekly bond-buying that stood at an incredible $5 billion every seven days last year and dropped to $4 billion in the autumn is heading down to three. This means the ongoing suppression of interest rates in the bond market (where the central bank now owns 40% of all debt) will lessen. It opens the door for the creeping normalization of rates, as the virus recedes.

There’s more. Did you see the latest inflation stat?

Yeah, I know. The government numbers are ridiculous since we all know life has become hideously more expensive. But this is significant – the cost of living officially doubled from February (1.1% annually) to March (2.2%). So what? Well, 2% inflation is the central bank’s big target. Once we get there, it’ll consider raising its benchmark rate.

Economists and Mr. Market saw that happening in a year. The odds of hikes commencing in 2022 were 60% before Wednesday’s announcement. Now they’re 100%, which poured gas on the dollar. All those folks who come here to tell you the cost of money will never increase and ‘the government won’t let housing decline’ need a new hobby.

There’s more. Vaccines. So far 10.5 million doses have been squirted into shoulders, which means 27% of the adult population has been jabbed. We may still be struggling with the Third Wave, but we know where this is headed, and when. Ten million more doses will arrive next month. About 1% of the population gets inoculated each week, and UK experience shows that at a level somewhere around 40% life gets a lot better.

The central bank is turning off the stimulus tap and telling markets to expect higher rates sooner for one reason: economic recovery. The bankers say growth this year will be 6.5%. Just weeks ago the forecast was 4%. In the world of CBs, that’s elephantine. We’re likely just weeks away (maybe a dozen of them) from everything changing. The next few months will be difficult, volatile, and filled with news of virus victims, new restrictions and a struggling health care system. But it’s finite. The light’s there. End-of-tunnel days lie ahead.

By the way, here’s today’s reaction to yesterday’s blog from the realtor who reported the housing market flipping the day before:

I don’t see an actual rate increase yet, but rates will drift north when the bank gets out of the bond market. I do see the prime rising in 1/4% increments after the election regardless of the outcome. The years run up in real estate prices is attributable almost entirely to  lower rates, so some price decline is inevitable as the rates climb. Judging by your blog there wasn’t a lot of agreement with my comments concerning a cooler market. Maybe a blip, or the very early stages of a correction. Some agents are worried, particularly the 20+ year vets who know that prices don’t rise forever.

It’s a lesson lots of newbie agents, house speckers and inexperienced homeowners have yet to learn. Yesterday we yakked about a potential market flip in real estate. The reasons – prices most people can’t afford and (mostly) a surge in listings. As Covid recedes, expect a dearth in inventory to become a flood. And why not? Astute owners will want to cash in on the highest valuations in history, and the vaccine will make selling a property much less scary. Once prices start to soften, FOMO recedes. Gone is the fear sellers have that they’ll never be able to buy again.

By the way, check out the latest StatsCan borrowing numbers. Maybe things aren’t exactly as they seem. Maybe the ‘bubble market’ is already leaking gas, and the breathless media missed it.

Mortgage borrowing in the latest monthly report fell 12% from January, and has toppled since last autumn – down over 60%. Yes, house sales have been booming (up 40%), but this is evidence a big whack of those resulted from move-up buyers with equity. No surprise there. The kids are being priced out. First-time buyers are the most important fuel of the housing market. When the fuel disappears, the fire fades.

Now, do the Bank of Canada’s moves – cutting back on stimulus and changing its rate-increase timetable – mean the end of the real estate insanity?

Nah, of course not. There’s an ample supply of greater fools left to keep realtors busy. March home prices shot ahead a big 1.5% month/month says Teranet, plumping the most in Halifax, Hamilton and Toronto. Meanwhile CREA reports the average price of a house nationally jumped 31% year/year. It ain’t over yet.

But as supply increases, vaccines flow, the GDP reflates and the end of emergency interest rates grows nearer we’re closer to the end of this bizarre episode than the beginning. Nothing has been normal since February of 2020. Those who think what Covid brought was permanent societal change will learn otherwise. It’s not different this time. It never is.

About the picture: “This is Juno, a 5yo border collie waiting for her next command in sunny East Van,” writes Dave. “Perfect obedience came as a standard feature with this one, unlike the unruly pack found sniffing around your blog. She would be thrilled to be your daily pin up girl/boy.”

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‘The market has flipped’

So Chrystia the Impaler turned out to be more of a Milquetoast Mama. The budget will be quickly forgotten, especially when it comes to pricing a house. Sorry, newbie would-be buyers, but the feds want real estate to run hot. That’s now clear. They did absolutely nothing to cool this sucker off, not even lip service to their Millennial and Gen Z voter base who will shoulder real estate debt for most of their adult lives.

But stop. Hey, what’s that sound?

Silence.

Apparently realtor phones (at least in the nation’s biggest market) have ceased ringing. Look at this report from one of GreaterFool’s clandestine double agents, posing by day as a prominent GTA broker:

“Live from my office meeting,” he says. “The market has flipped. Don’t know why but it has. Tons of new listings. Showings down big time.”

“Early days, and I haven’t checked the stats, (they tend to be a bit of a lagging indicator anyhow), but I have noticed that signs have been popping up like tulips for a week now. Today, at our virtual listing tour I had the first opportunity in a week to check in with the men and women who are active agents.  Two things stood out. First, everyone reported a new listing, some more than one. This follows a period of many months in which everyone had buyers but no listings.

“Secondly, showings, which are tracked in real time on every listing agent’s phone, were down significantly. Others reported expecting multiple offers, but finding themselves with none. Staff reported that the phones were quieter than they had been. It is anecdotal at this point, and perhaps some of your blog dog realtors may or may not corroborate my experience.”

He’s not alone. Similar reports have come in from the burbs of Vancouver and some of the larger regional markets, like London and Barrie. What was a conflagration two weeks ago is now barely smouldering. Deal numbers are off, yes, but it’s the level of buyer activity – inquiries, calls and showings – that tell the real story.

What’s happening?

Lots. First, we have the damn Third Wave. This one is scary in a whole new way as the health care system starts to buckle. Now you don’t need to worry only about getting Covid, but anything that could send you to the hospital. The world is suddenly too volatile and unpredictable to merrily mortgage your soul.

Second, it’s spring. The time when people traditionally list houses. If demand drops a little while supply swells the market will respond. And it is. Bigly. Have you done a realtor.ca search for new listings in the past 14 days?

Third, travel restrictions. In BC Comrade Premier Horgan has told people not to venture out of their own health authority regions. In Ontario Doug Ford has erected barriers at the borders with Quebec and Manitoba (to keep Ontarians from fleeing). Today Nova Scotia virtually sealed its borders, including to residents who are now told not to travel unless essential. Nobody gets in, either. Even for funerals.

Fourth, there’s no value left in residential real estate. Everybody looking to buy knows they’ll be hosed, fleeced, Hovered and ripped off by greedy vendors and rapacious realtors. All purchasers – except those still riddled with FOMO – must understand they’re buying into a bubble, at the top, paying a huge premium in precarious times for dubious reasons. In short, we may have hit that wall. And no wonder. A 30% year/year price increase is absurd, irrational and historic.

We used to have a five-month supply of houses on the market, which recently slid below two before starting to edge higher again. If demand slows, things could change quickly. ‘Offer nights’ will end up being lonely affairs as agents and sellers who craved a vicious blind auction are left staring at an empty kitchen table. As new listings crop up beside places that have yet to sell, competitive pressure will build for prices to drop.

And, inevitably, as the herd gets dosed (we’re at 27% of adult Canadians) you can count on more workplaces opening, the WFH craze phasing out, and the shine coming off markets that looked like rural utopias six months ago. How did people moving to Woodstock, Hope, Marmora or St. John ever think they were going to pull this off? Pandemics suck. But they’re temporary. And, no, this one is not going to change the world.

Let’s see what happens. But for every action there’s a reaction. This one could be epic.

About the picture: “Baylie is a 2 year old Schnoodle, who loves to jump up on my chair,” says blog dog Peter in Kitchener, “as I’m reading the daily Greater Fool blog … she needs portfolio advice to protect her kibble account from the ravage of inflation, and from incompetent government policy. Lol.”

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The shadow

Budget Day. An historic one. Our current prime minister will officially have accumulated more debt for the nation in one administration than all of the 22 prime ministers who went before. That takes some effort.

But was it worth it, to fight a one-in-a-century pandemic?

We’ll have a few comments to add later in the day, once Chrystia drops her document in Parliament. In the meantime, let me tell you about Saturday…

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“So,” I said, baring a toned, athletic and muscular upper shoulder, “how many have you jabbed today?

“Six hundred and forty-one,” she said. And in went number 642. I asked her if she was a volunteer or a health care professional. A family doctor, she replied. Then we talked about what life must be like for her colleagues in distant, diseased Ontario. Turns out her best bud is a gynecologist who has been pressed into emergency service in the ICU of a major Toronto hospital. “Whatever it takes,” she said. “So glad we are here.”

The squeeze and I got the Pfizer stuff on the weekend. Dorothy had spent the previous few days watching TV images of pop-up clinics in TO hoods where hundreds of people waited four or five hours for their chance to be vaxxed. It looked chaotic, disrespectful, disorganized and worrisome. Things weren’t helped much when some friends came by the house and relayed the experience of their high rise-living daughter in one of the “hot” Toronto postal codes.

A vax van arrived one day last week and announced over loudspeaker that 400 doses were on board, first come-first served. It was, she said, a desperate stampede.

Well, the inoculation centre in Halifax was in a hockey arena with a big sign outside telling people not to arrive until five minutes before their appointment. There was no line. But there was a greeter who thanked us for coming, then an iPad checkin, then the jabs, then 15 minutes in a recovery area patrolled by a nurse. Then out – twenty minutes in total.

Five minutes later the vax receipt arrived by email, along with confirmation of the hard appointment for the second dose, 105 days hence.

Side effects? A sore arm for a day, then nothing. “That means the antibodies are being created as your defence against Covid-19,” said the literature we left with. So now I’m full of these little suckers.

It’s been four months since I flew out of Toronto just as that city was shutting down for four weeks. It hasn’t opened since. Now things have devolved amid chaotic and conflicting policies and government announcements. Infections are at a pandemic high, the hospitals are seriously stressed and a five-year backlog for elective surgeries has evolved. Don’t get breast cancer or be in a car crash, in other words. There are over 50,000 active Covid cases in Ontario with 2,000 people in the hospital and over 700 in ICUs, the majority on vents.

NS is far smaller (one million compared to 14.5), but the numbers are tiny: 49 cases in total, two people in hospital, none in intensive care. There were 7 new cases on the weekend, which was kind of high. While my fancy corporate offices on the 53rd floor of a bank tower at King & Bay have been silent for more than a year with colleagues stuck at home, my wee bank by the sea has been full of employees and community groups. We shuttered for three weeks last April, but soon realized that was extreme.

So why has Covid – now decimating the Main Street economy of our biggest province – been a non-event in the East? How can people in NS be casual and decent about the vaxxing process when folks are treated like cattle in the Big Smoke?

Simple. Quarantines. For more than a year now (with the exception of a few months the Atlantic Bubble was in place) nobody can enter Nova Scotia without spending 14 days eating storm chips and watching Oprah in isolation. No shopping. No visitors. No walking around the block. It’s a total pain in the butt. And it’s been a defensive measure which kept the slimy little pathogen at bay. Now people are proud of it.

So far this year, as a result, one elderly woman died of the virus. In Ontario, sadly, two dozen perish each day. Premier Ford blames the feds for a vaccine drought. The prime minister argues back that doses have run 50% ahead of schedule. It’s political. Sad. Businesses across the province are on life support. It will be a miracle if any hair salons or restaurants are left standing by the time they’re allowed to reopen – maybe in May. Perhaps longer. The events of last weekend when the premier had to walk back provisions on Saturday that were announced on Friday only added to the confusion.

Well, as far as your money, investments, portfolio go, Ontario, BC, Saskatchewan and other places still crippled by Covid don’t much matter. The reopening of the American economy and the inevitable spread of vaccines across the world have pushed financial assets to record highs, amid massive government stimulus and central bank coddling. That will continue. Stay invested.

Meanwhile let’s come out of this long shadow understanding what we did right, and wrong.

About the picture: “This is our puppy Maggie – she will be 10 years old this summer!,” says blog dog Andrea, in Waterloo. “Maggie enjoys long walks around our neighbourhood and watching the bunnies hop through our backyard as our neighbour sold her house for $151K over asking. She wonders how much her dog house is worth these days?”

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Bringing up baby

When people have babies they’re swimming in expectations, obligations and hormones. Those are the prime days of vulnerability. The insurance guys descend, prey on emotion and walk off with nice commissions on needless policies. Realtors have a field day selling people debt and deeds even though the kid would be a happy renter. But perhaps most heinous are the baby vultures, shamelessly peddling college funds to parents of newborns.

Now, don’t mistake. Money for uni is hugely important. School costs a ton, especially if your spawn ends up being a dentist or, like David, a PhD earner. And the thing called an RESP is a valuable tool for getting there. But, but, but. Beware. A good idea twist into a costly trap.

“When my daughter was born, my father started an RESP with Canadian Scholarship Trust (CST), which is one of those mutual fund outfits you rightly decry,” says David, a 40-ish academic in BC. “He made the initial contribution and then I made regular contributions for several years until July 2019.”

It was that year that I wanted a closer look at the return on my investment. It was going “up” so it looked fine (of course it would! I was contributing monthly!). But when I calculated it, it seemed to be an annual rate of return of 2%. Remember, this is for the 10 years that started from the bottom of the GFC to the heady days of the Trump years. I asked them to show me their calculations but they never replied. That’s when I decided I needed to transfer my contributions to my self-directed account. I would have done it earlier but I did not realize I could also open an RESP in a self-directed account. I suppose the banks don’t advertise it a lot so you’ll buy their mutual funds instead.

Well, what a nightmare it has been to transfer those funds because CST doesn’t want to make it easy to lose their money. The charges are outrageous. So with a $4613.69 penalty on an approximately $26K balance, is it worth it? I’m pissed at the low returns, the high MERs, and my bank’s incompetence in handling the transfer, which has cost me at least a year of good returns. Thanks for you all you do. Feel free to share my story to your readers. Certainly a cautionary tale with real figures for those who invest in mutual funds.

When David asked for the transfer, the company initially rejected it, writing: “We want to make sure you understand the impact this will have on your child’s post-secondary education savings. Transferring your child’s RESP to another institution may have a significant effect upon your current savings and the amount of money you will have to help finance their post-secondary dreams.”

You bet. The hit for David was almost 18% – and that came after a decade of returns below the prevailing inflation rate and during a bull equity market. This is what happens when you’re talked into an RESP with an outfit that charges high fees, misinvests and erects a costly barrier to exit – just like those DSC (deferred service charges), which create a mutual fund prison for unwary investors.

Are we pregnant? Then this is what you need to know about Junior’s college fund….

The Registered Education Savings Plan is a tax-sheltered way to grow money and the government pays you to have one. Woo-hoo. Once a kid has a SIN you can start. Contribute $2,500 a year and the feds will give you a $500 grant – which is the easiest 20% you’ll ever earn. The lifetime contribution limit is $50,000 and you have over 30 years to put the funds in. The most the government will chip in is $7,200 by the time the child hits 18.

The contributions and grants swell within the RESP tax-free, which means they should be in growth-oriented assets like equity ETFs. (Way too many helo parents choose brain-dead GICs and do their kids a huge disservice – or sign up with the wrong provider.)

When university starts money can be taken out and given to the child. Contributions are tax-free, while the grants and growth are taxable in the student’s hands. But since most college kids have no taxable income, there’s nothing to pay. If the kid becomes a TikTok star and eschews school, contributions to the RESP can be taken back, the grants have to be repaid, and the growth can go into an RRSP, if you have the room and the plan’s been in place for a decade or more.

Remember that anyone (called a subscriber) can open an RESP for a child (called the beneficiary) – not just parents. Missed grants can be carried forward one year at a time. There’s no limit to the size of annual contributions – but the max is fifty grand in total (and only $2,500 a year qualifies for the grant). Beneficiaries can be changed if your kid turns out to be a stinker. Family plans give more flexibility, since funds can be shifted between offspring. All plans have to be wound up after 35 years.

In short, if you procreate, do this. Tax-free growth. Forced savings. Free grant money. What’s not to like? Just ensure the self-directed RESP is hosted somewhere that offers the ability to hold low-cost, growthy ETFs. That could be an online brokerage, robo outfit, or your family advisor. No vultures.

About the picture: “I’m one of your younger millennial blog dogs and have been reading your blog everyday for almost 2 years now,” writes Kayla. “Thank you for the great advice! Attached is a picture of my two-year old golden retriever, Marley looking oh so proud of herself after finding a mud puddle. She’s been loving that I WFH and will let out a loud sigh every couple hours while I work to let me know we aren’t doing anything fun like finding mud puddles to play in. Feel free to use it on your blog!”

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Sgt. Barnes

 

DOUG  By Guest Blogger Doug Rowat

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There are investment lessons to be found in the most unlikely of places.

Take, for instance, the first 20 seconds of this rather intense scene from Oliver Stone’s Platoon.

As Sgt. Barnes helpfully pointed out to that young soldier, it’s often in one’s best interests to “take the pain” even when—and sometimes especially when—the world around is out of control.

And so it is with investing. Quietly absorbing discomfort, particularly major discomfort, is often the best thing for your portfolio results. And what’s the most frequent source of discomfort for investors? Volatility.

There are two main types of volatility. The first is the face-melting kind, which occurs infrequently, say, once every three to five years. Recent examples of this kind of volatility occurred during the European sovereign debt crisis, the surprise Brexit vote and, of course, the Covid-19 crisis. In fact, during the Covid crisis the CBOE Volatility Index (VIX), which measures the magnitude of price change (volatility) on the S&P 500, reached an all-time high of 82.7 in February 2020, eclipsing the previous 80.7 record set during the financial crisis. For some perspective, the VIX, as of this writing, is at about 17. Investors are most likely to make emotional, fear-fueled investment decisions during such periods. This kind of volatility basically amounts to a bullet wound to the chest.

The second kind of volatility is less intense, but occurs with more regularity. Every single year, for example, the S&P 500 experiences intra-year drops. The average intra-year decline over the past 40 years has been about 14%, but it’s sometimes as mild as only 3%. Investors are less prone to make emotional investment decisions during any one of these less-intense volatility periods, but the sheer frequency of them still makes poor investment decisions a constant risk. This kind of volatility amounts to a bee sting, but if you get enough bee stings…

Both types of volatility result in an onslaught of behavioural biases: loss aversion, recency bias, herd behaviour, overconfidence and so on. All of these biases can be combated through balance and diversification, infrequent trading, rebalancing, avoiding incessant media newsflow and seeking professional investment advice.

However, it’s impossible to avoid all the hardship that capital-market investing brings. Sometimes you just have to suffer. And this is difficult, especially when you don’t have assurances that all the suffering will be worth it in the end.

While I can’t guarantee the outcome after the next round of face-melting volatility, I can show you how the S&P 500 has soared past mountains of historical volatility over the last 10 years. It’s also useful to highlight that the S&P 500 continues to advance strongly throughout the current recession (a common occurrence for equity markets):

S&P 500 (blue line, LHS) vs CBOE Volatility Index (red line, RHS) – 10 years

Source: Federal Reserve Economic Data; shaded are – recession

And while I can’t guarantee the outcome after the next, and inevitable, intra-year market decline, I can show you that the vast majority of the time, despite these declines, the S&P 500 ultimately finishes the year in the black:

S&P 500 intra-year declines vs calendar year returns.

Source: JP Morgan Asset Management ; Intra-year drop refers to the largest market drops from a peak to a trough during the year; Returns don’t include dividends

Volatility is unavoidable, but if you give in to it (sell assets) every time it occurs, it will kill your performance. If you can endure the suffering that it inflicts, your portfolio will almost certainly come out the other side of it in a better place.

So, the next time the VIX spikes (and it will), think of Sgt. Barnes leaning over you and take the pain. He’s a horrible SOB, but he’s actually doing what’s in your best interests.

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

 

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To the core

Just three more sleeps before B-Day.

Will Chrystia and Justin drop the hammer on housing? Nibble around the edges? Throw gas on the flames? The debate has been raging. Some bankers (RBC, BMO) are literally begging for a govy intervention to save people from themselves. Other financial heavyweights (TD, Scotia) argue things will self-correct, especially as Covid fades and a ton of new listings hit the market.

Realtors are lovin’ it. Buyers are disgusted. Prices have spiked wildly amid cheap money, WFH, aggressive nesting and now dollops of FOMO. What a wicked combination this has been. It’s historic. I thought I’d lived through the worst housing escalation ever in the late 1980s. Nope. This is far more intense and, maybe, destructive.

The facts are arresting. Shocking, even.

  • More properties changed hands last month than… ever. Over seventy-six thousand sales.
  • The average national house price is up 31.6% in one year. Nothing in history has come close. It sits at $713,700, so the average household cannot afford the average place.
  • The insanity is everywhere. For the first time, a real estate bubble is more suburban, rural, small-town than urban. This is completely new and socially disruptive. In Bancroft, Sooke, Owen Sound and Nanoose, Wolfville or Peachland they wonder what the hell hit them.
  • Levels of inventory have collapsed. The long-term average was five months. Now it’s less than two. Another record.
  • Leverage is off the charts. Cheap money and the delusional belief rates will never increase have seduced buyers into new territory. Almost a fifth of borrowers now have debts equal to 450% or more of their incomes.

So sales are up 76% over last year and houses cost a third more. Nobody saw this coming in March of 2020 when something called Covid-19 caused society to go into lockdowns, quarantines and restrictions unknown in modern history. A year later over a million of us got the virus, 23,500 Canadians have died and our biggest provinces are going dark as the third wave hits. Five million people are still working from home and public finances are shot. These are uncharted times.

Should government act? Or let the market run hot and possibly implode? Will the greater fool be the fool who follows, or the one who bailed?

It was interesting to read the latest missive from mortgage broker/blogger Rob McLister. “The fear is that the market is like a nuclear reactor running too hot, i.e. prone to an accident,” he says. “It’s not Chernobyl by any means, but a Chalk River-style partial meltdown could be in the cards if market imbalances take values much higher.” And he echoes what a certain pathetic blog has been yammering about for months now…

This is truly a once-in-a-generation nationwide aberration that’s leaving young buyers with fewer and fewer homeownership options. Buyer desperation has been growing by the week and it’s leading a record number of people to pay as much as lenders will approve them for.”

Meanwhile mortgage rates are plumping a little, which has spurred buyers into action. The stress test will get more onerous starting June 1st, which has accelerated buying intentions. Federal immigration quotas are about to expand, adding buyers. Building material supplies have crashed and prices bloated, spiking construction costs. And FOMO – fear of missing out – is at screaming pitch as news of the March housing stats spreads. In short, the melt-up that could lead to a melt-down continues.

Oh, and did we mention benchmark housing prices nationally rose by an annualized 37.2% last month? In Woodstock (birthplace of legendary bloggers) the price jump was 8% in March. Yup, that’s 96% per year. And it’s rutting season. What will April and May bring?

Outta control, of course. “The pace of Canadian home sales and prices is simply in uncharted territory,” says BeeMo’s Doug Porter. “Given the extreme market imbalance currently at play, almost entirely due to fiery demand, look for the record pace of price gains to spread far and wide beyond Ontario.” The old record for price hysteria – set in the late 1980s, “has been shattered.”

As mentioned, TD economists are cautioning against government diddling in the market (which rarely works), and instead saying it’s time for the Bank of Canada to throttle back on stimulus and start raising rates. “The quickest route to cooling this market and squeezing out speculation comes down to the interest rate channel, and therein lies the solution. Canada had one of the larger downward movements in mortgage rates relative to other countries, and the current monetary stance may no longer be appropriate for this segment of the market.”

Well, Monday could bring one of three outcomes. The feds do nothing of substance. The market roars. They can try to help newbie buyers with more incentives. The market roars. Or they can bring in a national spec tax, start taxing windfall equity profits on a graduated basis, increase minimum down payments, tighten debt ratios, encourage provinces to reform rules around blind auctions and end the tax-free raiding of RRSPs for real estate. But that’s not happening.

So, let it nuke.

About the picture: “I read your dog blog nearly every day,” writes Jane, “so I thought I’d toss you this photo of our 5-year old cockapoo, Charlie (or Chuckles as he is affectionately called). We weren’t looking for this designer faux-breed of a dog but a friend of ours knew of a young millennial couple who bought a cute little puppy before realizing just how much work puppies are. When they were expecting their first baby, the dog had to go. Chuckles settled right in with our family. People just need to have realistic expectations and not jump the gun. We like to call this photo “Covid hair, don’t care”.

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Suck it up

When not doing my day job, I moderate comments on this blog and try not to throw up. It’s a challenge. Here’s a recent example.

April 14, 2021.
The beginning of the end. When two of the largest banks, JP Morgan Chase, and Wells Fargo, report earnings on the same day. Between these two banks, there is $5.1 TRILLION in assets, which is an astounding 23% of US GDP.
The world will be holding its breath to see those numbers because it will be a signal of what’s to come. And when the news of the ugly chain of corporate/personal defaults and the resulting massive holes in the big banks’ balance sheet hits…
Panic will set in… And global liquidity is going to start drying up… just like it did in 2008 when Bear Stearns and Lehman Brothers troubles became public. And stock markets will crash in a spectacular fashion… Hope everyone is liquid as of tonight. 14 hours from now may be too late.
PREPARE

Well, it’s April 15th now. Let’s review and see what happened. Bank of America hit a four-bagger. Revenue up 17%, underwriting fees tripled. Earnings were $5.1 billion, beating Street estimates of $4.3 billion.  More big gains at JPMorgan, Goldman and Wells. In total revenues were 50% above estimates and the beat on earnings was 82%. Equity trade is up. Bank deposits up. Loan loss provisions way down. “These are blowout numbers,” says my wizened buddy Ed Pennock.

Oh, and did you catch the latest US jobless claims? The lowest since the pandemic began. So the reopening trade continues, based not just on expectations and hopium, but on stats. Earnings season will be awesome. Up to four million Americans are being vaccinated daily. The unemployment rate has crashed. Biden is spending up a storm. Bond yields have tapered off again. Inflation is moderate. Consumers are juiced. Personal savings are at the highest point in decades.

So did you watch Jay Powell on Sixty Minutes a few days ago? The Fed boss was clear – the economy is fine; Covid will fade; the recovery is still in its baby stages; inflation’s no biggie; the central bank is not going to withdraw support any time soon.

Meanwhile, in case you missed it, here are some recent equity market scores. The S&P 500 has advanced 49% in a year. The Dow is ahead 44%. Bay Street has added 37%. The tech-heavy Nasdaq has returned 67%. People quivering in cash on the sidelines have actually lost money to inflation, if not also to tax.

Some folks worry P/E ratios are too high by historic standards (that is the relationship of a company’s stock price to its profits). They have a point. The numbers are elevated – but hardly a surprise. We’re at the tail-end of a global pandemic which triggered a deep recession, rapid loss of jobs, a crashing GDP and an earnings plunge. Now as the Q1 numbers stream in, mostly beating estimates, the ratios decline and stocks which seemed overvalued weeks ago now look fairly priced.

So, balanced and diversified portfolios returned more than 15% in 2019. They added just over 7% in 2020, the Year from Virus Hell. So far this year things are rocking and rolling quite nicely. Anything can happen, but most analysts look at the second half of 2021 and are forced to put on their shades. So bright.

In the entirely of my financial career, which now spans 35 years (yikes), I’ve seen the same movie repeatedly. Market advances are the norm. Market corrections are the exception. The economy expands far more often and substantially than it ever contracts. Crises are sharp and short. Recessions are rare and always brief. And now we know that pandemics always end.

But I’ve also learned fear is a far greater emotion than greed. Confidence is elusive and fleeting. Humans are more worried about losing what they have than eager to gain what they want. It’s why, eternally, grifters, spammers, charlatans and weasels use panic and scare tactics to flog their stuff – from doomer websites making money through clicks, to precious metals, cryptos, newsletters, proprietary research or ‘alternative’ investments.

Should you have fear now?

Sure, be afraid of the idiots around us who won’t get vaccinated. People who don’t understand what a stay-at-home order means. Be concerned about politicians making stuff up as they go along, or governments squandering a balanced future. Fret about polarization and detachment in society. The loss of responsibility. House lust, cats and Reddit.

But don’t worry about your wealth. Not if it’s in the right place. You know where that is.

Now, the daily cookie toss. Wish me luck.

About the picture: “My husband and I are big fans of your blog,” says Zandra. “I love all the great financial advice but I also love all the dog photos. Here is a great picture of our dog really showing off his crazy tongue! I would love to see my husband open his computer to read your blog and see our dog Kooper looking at him. Thank you for all you do!”

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Mill Day

Enough clucking from the wrinklies in steerage about their fat real estate gains, dividend torrents, thirsty underwear and dangerous conservative urgings. Welcome to Millennial Wednesday here at GreaterFool. Today let’s muse on some of the things the kids are worried about, which means the oldies can spend this valuable time washing their Def Leppard T-shirts and swilling Rogaine.

First up, Patrick the urban dude. “I participated in your various surveys, so I understand the majority of your audience is much older than myself. I’m a 26 year old business professional (CPA by trade, but now working as a strategy consultant) living in downtown Toronto, and making a better-than-average pre-tax salary of just north of $100,000 with no assets and roughly $45k in my TFSA,” he reveals.

Like many younger audience members of your blog, I am renting a place for $1,350, which is a very good deal for the area that I live in. I made the choice to move downtown when I had the option of living with my parents, so that I can take advantage of the downturn in the rental market. I hope to become a homeowner – hopefully – by the time i’m in my mid-30s (which to me sounds reasonably ambitious).

My questions: (1) For higher-than-average income earning younger adults, when is the right time to open up my RRSP? Should I be allocating a good chunk of my income to RRSPs instead to get some tax benefits this year?

(2) What is the best way to manage capital allocation for different goals? Right now I have a well-diversified self-managed TFSA account. I myself am confused as to what this is for (retirement?). Does it make sense to open up a TFSA/RRSP specifically for buying a home with a less risky portfolio (assuming I’ll cash out in ~10 years)? Otherwise I would have to take a big chunk of my saving in the one TFSA account to fund a house, which I realize opens up more contribution room, but not sure if there is a better way to plan out my finances. Writing this email in between meetings, so apologies for any confusion.

First, P, if you’re living downtown for thirteen hundred bucks a month, paying nothing for a car, commuting, property tax, condo fees or property maintenance and saving most of your salary, why stop? The moment you decide to become a real estate owner will immerse you in debt, immobility, recurring costs and (sadly) adulting. Enjoy this time. Use it to build. As you are.

Now, RRSPs are meaningful and much misunderstood by the moister class. These are tax-shifting vehicles more than retirement accounts. You can chunk 18% of your earned income in there, use that to reduce taxable income, grow the money without paying a cent to Justin (even if you like him) then suck it out cheaply during a year of sabbatical, layoff or transition. Moreover, it’s the perfect thing to feed if you do end up succumbing to house lust.

The Home Buyers’ Plan allows a $35,000 withdrawal from the RSP for a deposit. No tax. You need not start making repayments for two years. Then you have a long 15 years to put the money back into the fund (if you miss a year that portion is added to income). In the year of purchase ensure you make the max contribution at least 90 days before using the HBP, so you’ll also have a tax refund to spend on new appliances.

As for establishing a separate registered, low-risk, account for a real estate buy ten years away, bad idea. You do not want to be all in bonds or wussy funds – stay balanced. Roaring Twenties, remember?

Here’s Ann. Simple question.

I am a new Ontario teacher and would like to start investing my salary since I live with my parents and I refuse to enter the crazy condo game. I have about $25,000 so far, but will add 50k every year. How do you suggest doing this for a small amount like this?

Other than hooking you up with Patrick, the first thing to do is stuff your TFSA. Teachers have enviable DB pensions (defined benefit), which means a sizeable portion of pay is directed into that plan, reducing RRSP contribution room. Besides, if a teacher retires with a sizeable RSP, when it is eventually turned into a RRIF (after age 71) the forced income can push you into a higher tax bracket. Nasty outcome.

But a giant TFSA in retirement can pump out a steady stream of cash flaw and not a single dollar will be counted as taxable income. So, start there. Load up that sucker, then spill the extra income into a non-registered account (B&D of course). In retirement this will also provide tax-efficient income, thanks to dividends and capital gains. And are you paying your parents rent, Anne? Do it.

Now, Brian is 28, works in construction, and understands the incredible benefit of the MSU. “Your blog has changed my life!” he says. “I recommend it to everyone I meet who brings up financial talk.”

My partner took my advice (all from you) and in a year went from $10,000 debt to $9,000 in a TFSA and $3,000 that’s going in an RESP for our newborn. Thank you so much! I make 55-75k a year with a net worth now of 36k.

Jan is on mat leave – she makes 45k a year now but as her seniority in her union goes up it’s 100k+ a year in 6-8 years. We just had a baby boy and rent a basement suite outside Vancouver for $1,200. I see so many people in the emails you share grovel to you and say your advice has helped them and then they ask some dumb ass question about how can they work out buying this house they NEED.

I am not gonna ask you that. I want to know how to get my partner and I’s net worth to 250k! I was wondering if everyone at my age is getting these huge mortgages and overleveraging is it not the smarter thing to try and get an investment loan? Is it smart or worth the risk for my partner and I to try and get loans to stuff our TFSAs full right now and let the gains grow while we make the payments ? And will they loan us even half of what people get in a mortgage? Thank you for your time and devotion to guiding Canadians financially.

Don’t do it, Brian. Borrowing money to invest seems seductive, but the rate on a non-secured loan would be high and using the bank’s capital would just ratchet up the stress level, maybe encourage you to seek higher gains by absorbing more risk.

Steady work, good prospects, new baby, low rent, no debt, solid relationship – you are far wealthier at this moment than so many others your age who lose their way. Be proud.

About the picture: “This is Marley,” writes blog dog Peppy Sue. “She’s our 12-year old chocolate Lab, an independent, sweet girl who loves showing off her toys to friends and strangers alike. We sometimes refer to this as ‘babies on parade’. She is much loved and adds joy to every day.”

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Froth

We talk much about the real estate bubble. It’s real. And dangerous. Fueled by emotional buyers, greed and fear.

What about a financial bubble? Is that real? Also a looming risk?

Lately equity markets have been at record levels. The Dow. The S&P. The tech-heavy Nasdaq, even Bay Street. New York markets are up more than 40% year/year. The TSX has gained 35%. The recovery from the pandemic has been exactly twice as fast as the trip back from the 2008-9 credit crisis, despite being deeper, wider and a lot slimier.

Balanced and diversified portfolios are stable, growing and have gained a year’s worth of ground in a couple of months. Bond yields surged, then stabilized. P/E ratios (the relationship between a company’s stock price and its earnings) are at an historically high level, leading some worried people to believe things are bubbly and wobbly. They also point to the incredible amount of stimulus that has been thrown at markets and economies since Covid arrived – $20 trillion in fiscal spending by governments around the world, plus crashed interest rates and massive bond-buying by central banks.

This, they say, makes financial assets just as imperiled and gossamer as a $1.8 million suburban particleboard palace.

But wait. P/Es are high for a reason. Mr. Market is expecting big things. In fact, it sees the Roaring Twenties.

Is this rational? Aren’t we in the middle of a Third Wave with lockdowns, quarantines and desperate health care workers? Why would investors and markets be so blindly optimistic? And if financial assets are going parabolic, why can’t house prices do the same?

First, some of the reasons Mr. M is so aroused these days.

Look at the latest jobs numbers. In the States almost a million new hires (916,000) in March – the most since August. It was 50% higher than anyone expected. The jobless rate is back down to the 6% range. One year ago – April of 2020 – that number stood at 14.8%. This is an unprecedented labour market recovery. Ditto in Canada. We added 303,100 jobs last month, atop the 259,000 regained positions in February. It means of the three million jobs Covid incinerated, all but 296,000 have been recovered – even with the travel, tourism and hospitality sectors still  hobbled. Our unemployment rate has dropped from 13% to 7.5%.

Next, vaccines. They have changed, or will change, everything. The US is jabbing up to four million people a day in an inoculation campaign that has rocketed ahead with the Biden administration. In Canada we 21% of  beavers are now dosed (at least with the first jab) and our supply of vax is ramping up fast. Herd immunity in both countries should be achieved by late summer. Reopening fully will, the market believes, be upon us by autumn.

Next, profits. Expectations for corporate performance in the coming months are blazing. The latest guess is a jump for the first quarter of this year of about 18%, and for Q2 of between 45% and 55%. This comes on the back of surging consumer confidence, a record heap of cash in personal bank accounts and central bankers that will start to ease up on stimulus but promise to keep a lid on rates.

Meanwhile inflation is a threat, but remains low. April is a traditionally strong month for financial assets. The pace of vaccinations will explode higher over the next eight weeks. In the US Biden is spending huge gobs of money – $4.5 trillion more between the Covid bill and the infrastructure program – while in Ottawa we’ll learn next Monday how much more spending the T2 gang has planned. Expect a lot.

The Vix (that measure of fear and market volatility) has cratered over the last year, now at the lowest point since February of 2020 – when you never thought about virus. WFH will start to dissipate by the end of 2021, and the reopening trade in urban areas will be a major economic wave next year. Currently almost all of the 11 subsectors of the S&P 500 are flashing green. The latest factory data is awesome. Business activity, new orders and wholesale prices are all increasing. It’s the Biden Supercycle. The Roaring Twenties.

In short, invest. Stay invested. Be balanced and diversified. Try not to be a cowboy. Stop reading doomer websites. Wash your hands, keep the mask on, get a shot, focus on your dog and look forward to what’s coming.

Now, what about real estate?

Yup, the gasbag isn’t done yet. Cheap rates, WFH, nesting, suburban flight, tawdry realtor tricks and now FOMO & speculation have created a sad outcome.

But, wait. Economic reopening will eventually bring higher rates, which always impact housing. Absurd prices will narrow the universe of potential buyers. The enhanced stress test will reduce the amounts newbies can borrow. The winding-down of WFH (it won’t disappear, but seriously diminish) will hit suburban and rural values. The recent rapid rise in household debt has used up much future demand. And as markets stabilize, then correct, FOMO will be so gone.

It’s always good to remember what a bubble is. It’s created by a surge in prices driven by exuberant market behavior. In a bubble, assets sell for a huge premium over intrinsic value. And therefore, it never lasts.

We have one bubble now. It’s not stocks.

About the picture: “Blog dog Robin here, to introduce my little gal Lola, from Mexico.  Approximately 6 yrs old and possibly a Jack Russell/Beagle X,  Lola thinks she won the dog lottery when she met me and immigrated to Canada from the streets of Cabo 2 years ago now. Feel free to use her photo in your wonderful blog.  Thanks for all the advice and humour.  I never miss a day.”

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Sheepless

There will be no capital gains tax inclusion rate increase in the budget next Monday. No creeping tax on realized home equity, either. And no wealth or inheritance tax.

That’s the will of the Liberal grassroots, as expressed in the policy conference just completed. Add to that comments by the federal housing minister (‘no capital gains on residential real estate) plus a major TV interview by Ontario MP and housing policy dude Adam Vaughan (‘we can’t penalize homeowners counting on their houses for retirement’) and the conclusion is inescapable….

The feds intend to let the market run hot. They’re also scared about whacking investment capital or the TSX during a nascent post-bug recovery. So accountants everywhere can stop fretting.

But, but, but. The odds are large for a new tax bracket Hoovering off more from the high-income crowd, boosting the top marginal to 55%. Maybe a tad more. Just listen to that giant sucking sound. By the way, no hike slated for overall corporate tax rates, as the Third Wave crashes hard into employers. However, count on a lot more spending, continued deficits and a relentless increase in public debt (not that anyone cares any more).

The Liberal rabble wants a UBI, which is doubtful. They also want a free drug plan for everybody (more likely) and universal cheap child care (a certainty). Our finance minister has declared this a ‘shecession’, called the loss of female jobs because of Covid ‘dangerous’ and pledged to have the state far more involved in kiddie welfare.

In short, the budget on Monday next will raise little in new revenue, commit to a huge amount of new spending, kick the can of debt/deficit down the road so Gen Z can deal with it when they stop watching TikToks, probably guarantee a nice house in a decent hood slides further from reach and sets the stage for a federal election in the autumn, right after herd immunity arrives.

Oh, one more thing…

“I’m an irritating millennial living in Vancouver,” writes Allison. “I earn well above the median household income in this self-important village of a city. I’ve been looking at buying a condo for the last 3 years and haven’t pulled the trigger because (1) everything I can afford as a single person sucks; and (2) my rent-and-invest strategy is working out pretty well.

But – I live in a crappy rental apartment that is hundreds of dollars below market. If I want to move I will pay at least $700 more per month in rent. That’s a big dent in what I can invest each month. So why do rents feel like they are increasing so much faster than income is? How is the grotesque real estate situation influencing or not influencing that? How can rents possibly be limited by local incomes when median household income is around $75k? I would love for you to write a post that digs into how rents are or aren’t related to real estate craziness and local incomes and what it means for the finances of the average person.

Actually, Ali, renters are subsidized, coddled, supported and made special by politicians who suppress rents, ban evictions and hassle landlords. The costs of home ownership far exceed those faced by tenants, even in an age of cheap mortgages. If it were not for emotional market gains and tax-free profits, renting would be the totally valid choice. There’s no other compelling reason a young, single female (or male) would accept hundreds of thousands in debt, plus monthly fees and expenses to live in a place they could rent without care or obligation, investing the difference.

But we’ve lost our way. Real estate’s a cult now. Governments have fostered and helped create that. Prices are extreme and homeowners have become the elite. The maiden Chrystia budget will not have the stones to tax windfall capital gains, but it might just throw a bone to rising voters like Allison in the form of a rental tax credit.

The logic: if people buying real estate get a massive wealth advantage by completely avoiding taxation on gains which were handed to them by Mr. Market, renters should not be penalized just because they cannot afford to buy. So it’s only ‘fair’ the government levels the paying field by allowing a portion of rent to be deducted from taxable income.

Yeah, more government dependence and debt through reduced revenue. The T2 hole deepens.

$     $     $

As of this week the word ‘master’ will no longer be allowed in Toronto. At least not as part of real estate listings. Toronto realtors have decided to follow the lead of CREA, the national organization, and cancel the word forever. From now on no master bedroom. No master ensuite, either. The politically-correct word is ‘primary.’

Why?

Master is “largely associated with terminology rooted in slavery and/or sexism,” the realtors say. It has “offensive undertones”, is an “outdated term” and inhibits “productive communication between real estate professionals and their communities.”

Of course, if there is a ‘primary’ room in a house it means the others must be ‘secondary’ or worse. That seems a bit hurtful, exclusionary, elitist and smacks of privilege. How will the people sleeping in those diminished places feel? Perhaps they need compensation.

Anyway, it’s progress. The Mills love it. And this jives with the loss of other innocuous but banned words many grew up with, like “Dominion” or “fisherman.” Could there be a master plan?

Oops.

About the picture: “Our Holly is our 16-month-old Sarplanenac,” says blog dog Sue.  “She is a Yugoslavia Mountain Dog.  They were bred to guard flocks cattle and sheep.  We are sheepless so she guards us.  She’s loveable and beautiful. You are welcome to use her photo.”

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