Let’s get personal.

After a dozen years of blissful cohabitation (sans kids). Tim & his squeeze are getting hitched. September, maybe, depending on the you-know-what. If all goes well, 150 people. Maybe a trip to Europe. The full Monty.

The romance is good. The finances may need some salve.

We currently have independent accounts but are filing our taxes together as common-law.  Ahead of our union are there any steps we should take to better align our finances?  I’ve been a long-time saver / investor.  She not so much but is starting to come around to the idea that retiring with money in our pockets isn’t such a bad idea.  Ideally freedom 55.

So here are the numbers for these 40-year-olds. He earns $110,000, with $340k in a B&D portfolio of ETFs (good boy, Tim) plus $113k in a TFSA, $155k in a non-registered account and a hundred grand sitting in chequing. She makes $65,000 with $75k in a bank mutual fund RRSP, no TFSA and twenty thou in a savings account.

No house. Rent is cheap ($1,700). Two dogs (breeds unknown, but “super cute”), cars paid for, like to travel. “What should we do?” he asks.

Okay, Tim, here’s the reality. You and she are an economic unit. You do not have independent financial lives, since that went out the window once you moved in together. Resisting an integration of your cash flow, assets and investments is a bad idea. You’ll probably pay more tax. You will likely suffer overlap and duplication among the securities you both own. You stand a good chance of not being able to retire with as much money at age 55, nor with an overall portfolio that can provide a steady, predictable and adequate income stream.

It’s always been a wonder that people get married, buy houses, have children and age together – showing immense trust and dependence, except when it comes to their money. Bad, awful habits on each side get carried into a union. Often a woman will be a risk-averse saver with a penchant for no-growth, ‘safe’ assets. Often a guy will cluelessly confuse investing with gambling, buy speculative crap and still manage to swagger. It’s a bad combo.

So how are these two doing?

Combined liquid assets of just over $800,000 put them in a sweet spot. Of course they could blow it all buying a slanty semi somewhere, also taking on a $700,000 mortgage, but they seem too smart for that. The bottom line: if they contributed no more to their current accounts, integrated them and managed to earn 6-7% on average for fifteen years, the pot should swell to just over $2 million by age 55. That would churn out $130,000 a year in cash flow, or about 75% of current working incomes. Add in CPP and OAS down the road and they’d be living on the same cash flow as now. More, actually, if they structure things the right way.

First, $120,000 is way too much cash to sit on in dead-end bank accounts. Get it working. The first place is her TFSA, which needs to go from zero to the current max of $75,500. Keep the tax-free account topped up for every one of the years until retirement, invested in growth-oriented ETFs (this is not a savings account for vacations), and it can seriously boost retirement income without causing more OAS clawback or bumping her into a higher tax bracket.

The remainder should go into a joint non-registered account, along with Tim’s existing assets.

Why joint?

It will save tax. Growth in a joint non-reg account is attributed to the account-holders equally (regardless of the origin of the funds, whatever the CRA tries to tell you), which takes advantage of her lower tax rate. There’s also a strong estate planning component. If Tim croaks before his dear partner, for example (statistically almost certain), everything in the joint account automatically becomes the property of the spouse – no probate, no wills and no waiting. Do it.

Additionally, Tim should stop making contributions to his own RRSP and direct them all to a spousal plan. He still gets the full tax break for doing so, but eventually she can cash portions of that plan in to finance retirement with less tax. In fact, even is she uses some of this money for the next Italian dalliance it will come out (after three years) at her marginal rate – while he got the big tax break.

More… she should dump the bank mutual funds and their high MERs. Converting to low-cost ETFs will help the assets grow faster. They should ensure each other are beneficiaries of their RRSPs and successor holders of their TFSAs. They should get some help – with eight hundred thousand, soon to be a million, a fee-based advisor would help ensure an overall balance and diversification and move various assets around for the best tax-efficiency. Plus draft a plan for four decades of wrinklihood. A joint chequing account is also a basic need. The days of ‘his’ money and ‘her’ money are so over.

Living with someone breeds dependence. That brings responsibility. Each to the other. Failure may lead to a break. Then what happens to the dogs?


The epiphany

Just a few days remain to contribute to your retirement plan in order to deduct it from the 2020 tax bill. Wow. Up to $27,230, plus any amount missed in the past. And money’s not required, of course. Assets already owned can be shifted over and counted as a contribution. (Watch for tax that might be triggered.) Or you can borrow the cash from the bank or CU and use the refund to pay down the loan. It’s an easy way to buck up net worth.

But, wait. We have a problem.

The slimy little pathogen has hugely increased personal savings (thanks to Trudeau Covid cash and WFH), but it’s also dashed confidence. RRSP contributions, says a new bank survey, will be far lower this year – meaning a lot of people will pay more tax. And here’s all the evidence you need that most people have never (and will never) read this pathetic blog: half the nation has no idea what can go into an RRSP (like exchange-traded funds). When it comes to women, only 40% get it.

Yup. Our enemy is financial illiteracy. It’s why most people are perfectly okay over-paying for a house with 20x leverage using a loan with a 100% chance of resetting at a higher rate, but they have no liquid assets. Or not enough for the future. It’s weird, cultural, dangerous and apparently sexist.

You have seven more sleeps to fix this. Given what Chrystia the Impaler is likely to do in her maiden budget next month (or soon thereafter) tax avoidance is a big deal. And maxing your RRSP is one of the best strategies possible since it allows tax to be shifted, and reduced. So do it.

Now, there’s also another method of revenge. That’s the tax-free account. And blog dog Nick just had a TFSA epiphany…

A non-financial world friend of mine said his accountant let him know about a loophole in the rules. The idea is that if you hit a grand slam in your TFSA, withdraw the profits, you have then just created new contribution room for yourself over and above the annual contribution limits. Example: I contribute $10k today. Somehow it becomes $100k by December. I then withdraw all of it before the calendar turns over to 2022, and then on Jan 1 I’ve created $100k of contribution room, plus the new annual contribution amount. Sounds too good to be true, right? But it seems like this might actually be allowed.

Being someone who has worked in the industry for years, I feel like I would have known if this was possible. I just assumed any added-back contribution room from withdrawals would be equal to whatever your lifetime contribution amount is, plus any new annual amounts. I never thought you’d be able to “earn” more room because you did extraordinarily well in the markets. Hoping you can clear this up in your classic Garth way in a future blog post.

Oh, Nick. You’re so cute and naïve. This is why the TFSA is the gift that just keeps on giving.

Your pal is correct. In theory there’s no limit to the amount that can be put into a tax-free account. Yes, the annual contribution limits are carved in stone – so everybody in 2021, for example, gets to dump six grand into their plan (though most will not). But assets which have been sitting in a TFSA and grown in value can be removed, opening up new contribution room. That is not a taxable event, so the TFSA did its job in allowing that expansion and ensuring you get to keep 100% of it.

(Of course assets that lose value in a TFSA drag you down. And the losses are not deductible from gains, as in a non-registered account. So stop reading r/wallstreetbets.)

Here’s exactly what the CRA allows you to put into the tax-free account: (a) the annual contribution room created automatically each January 1st, plus (b) any unused room from previous years, plus (c) an amount equal to whatever was taken out of the TFSA in the past. Thus there’s no upper limit to what a TFSA can hold. If you’re a genius at growing assets inside the plan, they can be removed, used to buy a Porsche or a golden retriever, then the tax-free account room filled up with new cash.

Also recall that when you retire a fat TFSA stuffed with growthy things can provide steady cash flow which will not be reported to the CRA. No impact on government pogey like CPP, GIS or OAS. This is in stark contrast to the RRSP (which must eventually become a RRIF), since every dollar flowing from there is added to annual taxable income. Sadly that could push your marginal rate higher.

What to do?

Fill your RRSP this week. Find the room on your NOA. Use the refund for the TFSA. Buy growth ETFs. No GICs. No HISAs. No advice from [email protected] And do it PDQ.


About the picture: Ranger, Grim, Chase, and Tracker were stars of last year’s K9 squad calendar, created by the Waterloo Police Service. Notable fund-raising dog-cop calendars are put out by several forces now, including the OPP in Ontario, Winnipeg and the granddaddy of canine beefcake publishers, the Vancouver Police.


Brain bug

Pandemic puppies. Since Covid changed everything, 12.1 million dogs have been adopted in the US. Historic. Off the charts. In Canada the CKC says inquiries about breeders are up 40% year/year. Dogs selling for $1,500 a year ago are now fetching four grand. Backyard Kijiji breeding has exploded. Sadly.

The scammers have emerged. Like “James Brooke” ([email protected]), who places online ads in local publications nationally – Montreal to Edmonton, Red Deer, Vancouver and the GTA selling pups, from Poms to Beagles to Huskies. But there are no dogs. Just pictures, and an upfront demand for a fat deposit to cover transportation costs.

MJ says she was roped in by this crew after being told to send money to a dog-shipper. “It was a service located in Manitoba that is scamming service advising they will ship your dog for a flat fee and then add additional charges along the way till you realize it’s a scam.”

So if you see something like this, ignore it.

Well, here’s the point today: the shelters are empty. The animal rescue groups have no dogs. Breeders are taking names for litters in 2022. Prices have quadrupled. TikTok and Insta teem with puppy messages asking, ‘how could you get through this year without one of these?” Puppy inventory has collapsed. Canine costs have exploded. Sellers (legit or otherwise) can ask for whatever they want. Buyers continue to line up. FOMO and YOLO, brought on by an endless pandemic, have created a seller’s market in which valuations are rising by the month.

Sound familiar?

You bet. Now let’s flip over to a comment made recently by Cathy & Tanya Rocca, sis realtors in the steamy GTA burb of Burlington.

The results for January can only be described as stupefying. The average price paid for a freehold property during the month of January was $1,315,069 as compared to $1,006,343 in January 2020 The logical expectation with that kind of increase is that sales would be down significantly but they were not. In fact, during the month of January, we saw 3% more sales then we did in January 2020.

It’s everywhere, of course. A questionable bung in Hamilton listed for $599,000 sold for $801,000. Same experience in Kelowna, where the typical property is nearing $900,000, up a third. Listings in Toronto will pass the seven-figure mark, on average, in a month or two. Halifax and Victoria are nuts.

The sisterly advice to buyers:

Don’t despair – adjust. The new reality is that you will almost certainly not be the only buyer vying for a property. There will be competition. Be prepared, know your limitations and use the most recent sales as your guide. No point in looking at what happened 30 days ago – that’s old news. As to waiting this out – the likelihood is that 6 months from now, prices will be up another 6-15% (depending on who you listen to) and you will be kicking yourself for not being more aggressive.

Covid has infected brains everywhere. Puppies and houses epitomize it. Nesting, fear of the outside world, WFH, immense social change, isolation and a destruction of routines have over the course of 12 months bent personal priorities in ways we’ll marvel at in future. We started off hoarding toilet paper. We ended up desperately buying real estate over FaceTime for hundreds of thousands more than buyers asked. Because of a pandemic we all knew would be temporary, we agreed to decades of debt.

Well, puppies grow. Wildly. They eat mountains of chow and rack up the vet bills. Some shelters have started to report five-pound bundles of joy that turned into 65-pound obligations are showing up at their doors. There will be more. The American Kennel Club figures a million canines could be looking for rehoming as the vaccines defeat the virus and, yes, people go back to work.

How will inoculation and reopening the workplaces affect housing? Is the Rocca Sisters advice – to be aggressive and not delay – wise, or suicidal?

Panic buying can end in remorse. Or tears. The outcome rarely meets the expectation. Real estate is a huge commitment involving big leverage so grabbing some in a bidding war without conditions, a home inspection or even (increasingly) a walk-through, is a leap of faith. Yet scores of people are doing just this. The stats are incredible – prices and sales in the middle of winter, in the midst of a recession and pandemic, now at historic highs.

There will be buyer’s regret. Some will be punished for not having done due diligence on the properties they selected. Others will be surprised when their 1.5% mortgage rates eventually double while their incomes do not. Many who moved to the sticks will be forced to choose between commuting or selling when the boss calls them back to work.

Inventories of houses, like dogs, will only rise from here, not fall further. The bidding wars will end. Days-on-market will increase. In time, a seller’s market will turn into one favouring buyers since high prices have drastically reduced the universe of potential purchasers. Already, in most cities, average families cannot qualify to buy average houses, even at historically-low loan rates. So where are all the future sales flow from?

If you don’t need to buy, well, don’t. If you’ve been thinking about selling, this is your moment. If you got a pandemic puppy, stare into her eyes. It’s a life. Remorse is not an option.


Tango with cash

DOUG  By Guest Blogger Doug Rowat

Years ago, when discussing insurance risk, Warren Buffett noted that the biggest earthquake in US history, which measured 8.7 on the Richter scale, didn’t occur at some tectonic fault line, rather it occurred in, of all places, New Madrid, Missouri. It was, in short, unforeseeable. Last year’s bear market, due to the completely unexpected occurrence of Covid, falls somewhere near the New Madrid earthquake on the probability spectrum.

Why am I talking New Madrid earthquakes? Because negative market events are rarely anticipated. And therefore an average investor’s decision to hold more cash is almost certainly not made prior to such events but, much more probably, made DURING the event itself. And if it’s made during the event then emotions enter strongly into the decision-making process.

This is the first problem with increasing cash positions. It’s almost always an emotional decision. In investing (and with most things, frankly) emotional decisions are bad decisions.

The second problem is that average investors rarely raise modest amounts of cash during, figuratively speaking, market earthquakes. On the contrary, they overstep and end up holding far too much of it. Here it’s instructive to look at recent Federal Reserve data. In particular, US commercial bank deposits. In other words, the sideline cash being held by average folks.

Commercial bank deposit levels almost always increase over time simply as a function of a gradually expanding economy and inflation. But during the Covid crisis, deposits have expanded dramatically. In 2019, for example, deposit levels grew by less than 6%. But in 2020, deposit levels ballooned by 22% and they continue to rise well above-trend:

Deposits, all US commercial banks

Source: Federal Reserve Economic Data; Shaded area equals recession

The third problem with holding cash is that investors now have to be correct with their re-entry point back into the market. In others words, investors have to be right twice—the correct exit AND the correct re-entry point. Needless to say, average investors usually do a poor job of both. Throughout the Covid crisis, this has certainly been the case. Here’s what it looks like when those commercial bank deposits, which continue to rise, are plotted against the S&P 500, which continues to soar to record levels:

US commercial bank deposits (red line, RHS) vs S&P 500 (blue line, LHS): cash is being held on the sidelines at the incorrect time

Source: Federal Reserve Economic Data; shaded area equals recessions

Now, admittedly, a great deal of these increased commercial bank deposits are a function of more money supply. In other words, stimulus from the US government and the Fed. But nevertheless, it’s a telling comment on average investor behaviour that more funds are being held in bank accounts earning almost nothing while capital markets skyrocket.

Beginning in 1994, independent research group Dalbar began tracking the outcome of average investor trading of mutual funds versus the underlying performance of the funds themselves. Naturally, emotion-driven, risk-avoiding average investors consistently underperform buy-and-hold, full-participation investment strategies. Very badly underperform, in fact. The 2020 report (showing 2019 performances), for example, showed that the average equity fund investor underperformed the S&P 500 by more than 500 basis points.

The Dalbar report comes out annually with the latest version set to be released March 31, 2021. Gazing at the charts above, I can only imagine how terrible the 2020 performances are going to be for average investors.

So, your options? Either start putting your cash to work now or head down to Missouri and wait for the next earthquake.

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




It doesn’t take long reading comments here to understand we’re obsessed with real estate. Yes, even when the whole raison d’être of this pathetic blog is balance. These days that’s a quaint, dusty notion. Everybody wants all-in on something. It could be GameStop. Or crypto. But usually, for the bulk of Canadians, it’s a house.

The virus made this a compelling strategy. But the pandemic will end. This year. So it’s worth understanding why our emotions have been so hoodwinked by the idea of owning property. Like with Alex. We’ll do him in a few minutes.

First, why do we think as we do about the infallibility of houses? After all, financial assets (like equities) have a vastly better long-term performance. And they’re liquid. Cash flow. You can sell in a keystoke with no realtors, open houses or deplorables poking through your bathroom. No property tax. No condo fees, insurance, utilities, gutters to clean or furnaces to fix. No land transfer tax when buying. No giant commission to sell. Yes, you can live there. But renting is a way better deal. So why are we smitten?

Well, Covid has made people want space. Cheap mortgages have reduced the cost of debt. WFH has fostered nesting. Got it. But these (as stated) are temporary things. People walking into seven-figure mortgages – all too common – and heaping their net worth into a house should be careful. The future might yield some surprises.

Anyway, here’s why real estate makes us lose our minds and 70% of Millennials crave some.

First, the media – mainstream and social – is all over this. Houses are stable, safe and profitable. Stocks (and financial stuff) are risky, volatile and dangerous. When real estate goes up fast it’s a good-news story. When stocks hit a new record high, it’s the prelude to a crash. The bias is palpable. Look at TV’s love affair with flippers.

Second, your parents. They’re hopeless. And, sadly, this is where a ton of people garner all their financial advice – from moms & dads who grew up in a period of insane inflation and economic expansion and blindly rode a one-trick pony into retirement. Buy a house, they always say. Worked for us. And so money illiteracy is passed on.

Third, the costs of housing are always suppressed by the industry while the benefits are exaggerated. No surprise there. Canada has hundreds of thousands of realtors now, all surviving on commission. They’re paid to sell assets, not be your pal. They’ll seldom tell you that throwing all you’ve got into a house means no diversification, and therefore enhanced risk. The costs of ownership, or closing fees, are almost never discussed when buying. Nor will the typical realtor remind you that 1.5% mortgages are doomed or that cities decimated by the virus will be jacking taxes (property, and transfer) or creating new ones (vacancy).

Of course, you can live in real estate. It generally increases in value over time. There’s a big tax break if you sell for a profit, but no ability to write off the significant costs of ownership. Renting is still a huge winner in terms of cash flow, confirmed by the fact that more than 50% of landlords subsidize tenants and are in negative cash flow. Meanwhile governments have become way more renter-friendly, as evidenced by no-eviction rules during the pandemic, rent controls and regulatory bodies tilted against owners.

In short, there are reasons to buy. Reasons not to buy. Renters aren’t losers. Owners take more risk and don’t always win. And in retirement everybody needs steady cash flow far more than they need to own a roof. You can always rent accommodation. You cannot rent an income. Because real estate – at today’s nosebleed levels, especially – involves taking on a whack of debt, job loss, sickness or other reversals can be life-altering events when there’s a mortgage in the balance. Finally, don’t think our virus-addled world will stay this way, in which FOMO is pandemic-induced. Houses can get illiquid. You sure don’t want that happening in the year you need to cash in to finance a layoff or quit your job.

But, nobody cares. Everybody wants a house now. The more they cost, the bigger the want. Alex, too.

He’s 39, single, a government worker, DB pension with an income of $100,000 and four hundred saved in liquid assets. So far, so good. “I’m very frugal,” he says. That allows him to save three thousand a month, since the rent on his current apartment is pretty cheap – $1,500 a month.

Of course he’s hot for a condo. In Delta (a relatively distant Van suburb) for $500,000. The plan is to use $100,000 from his investments and take on a $400,000 loan, keeping a liquid portfolio. “So with a mortgage my monthly payments would be $1,600 plus $400 strata. Of course can’t forget insurance and couple other bills of, I guess, $500. I would be paying about $1k more than my current rent and I’d still be contributing $2k a month to my portfolio.”

Why? “Benefits to buying would be twice as much space and closer to work. It would also get my parents and friends off my back. Feel free to unleash the blog dogs at me.”

If Alex were my kid, I’d mention the following.

He now has $400,000 in assets and zero debt. His rent is so affordable that he’s saving over 30% of gross pay while building a defined benefit pension. The guy is on his way to having at least $2 million (at an annual 6% return) by age 55. That means he can retire early with an annual DB payment of at least $50,000, plus the ability to pull another $120,000 from his portfolio, while renting a villa in Tuscany. Risks include potential market corrections and dying early from bliss.

If he buys, the mortgage payment, strata fees, property taxes and insurance, plus the lost opportunity cost of investing $100,000 will be $2,800 a month. Over five years that’s a premium-to-rent of more than $80,000. Add in the commission when selling ($25,000) and the condo needs to appreciate substantially for him to break even. Risks include rising mortgage rates and falling condo values, potential lack of liquidity and mobility, special assessments on the condo and maybe getting married and being talked into a $2 million house and hideously costly children.

But real estate is about feelings. Bah.



It is the best of times. It is the worst of times. It all depends if you’re selling or trying to buy a house. That time is now. Everywhere. We are setting our society up for a thumping.

Let’s fly into YYC for starters. In Calgary the jobless rate is close to 11%. The commercial vacancy rate is a withering 27%. Last week it was cold enough for the local kids on TikTok to throw hot water in the air and have it land with a thud. Given the Rona, Biden’s Keystone bomb and these damn EVs, the future’s been flickering in Alberta for a while.

So, damn, where did this come from….?

That’s the tally – as of Thursday – of property sales in Cowtown, where realtors have recently been driving Uber and delivering pizzas. Sales last month surged 40%. This month they have literally exploded by 74%. Average prices have jumped more than 8%, and multiple offers are everywhere. One agent told the local TV guys, “the market is like Mad Max.”

Not only have Calgary buyers discovered 1.5% mortgages and FOMO, but inventory is thin – down 22% from a year ago – as the virus keeps owners from flinging their doors open to the MLS masses. In short, one of the worst real estate markets in Canada has joined the frenzy. And this is not good news.

Okay, let’s pierce the Atlantic bubble now, winging into YHZ and a province where there’s virtually no virus with everything open. Halifax has traditionally been a super-affordable place to live, where three hundred grand was enough a year ago to snag a cozy little home within a walk of the historic harbour and Canada’s navy (yes, we have one).

No more. It’s nuts.

Buyers everywhere. Prices surging. No inventory.

“Things are definitely not looking good for the Spring market should this trend continue,” says blogger/agent Jeremiah Wallace, “since it’s the busiest time of year for buying and selling in our market.

“We should be seeing an inventory increase week to week at the moment, but it’s actually opposite and we need more listings before things get worse. Single family homes continue to take the brunt of reduction, and every new listing is getting swarmed with extreme showing numbers, making it really hard for buyers to gauge where they should place their offers. Obviously, the trend right now is over asking, but as this market carries on, the question become just how high do I have to go to secure bid, and will it be too much should the market turn, It’s a terrible balance for would be buyers to consider… the need for a home vs making the wrong financial decision.”

Two years ago it was a big deal for a $1 million house to sell in this city. Now heads don’t turn unless the sticker is north of $2 million. Even a hour away, along the South Shore, the price escalation has been 40% in twelve months. Most places are selling to GTA refugees, who view and buy over FaceTime to avoid the NS 14-day quarantine.

And speaking of southern Ontario, the storm clouds are gathering. Unbridled house lust, fear of missing out and the YOLO mentality of the moister gen are setting up an inevitable reckoning. Rest assured there will be political consequences.

How could there not be? Check this out…

A dodgy little house in gritty Oshawa that sold for $200,000 less than three years ago just fetched $802,000 in a multi-bid slugfest. Hours in the opposite direction, as a gobsmacked BMO economist just pointed out, the average house in little Woodstock rose $118,200 in the past year, in a community where the average income is $89,000. In fact, houses are making more money than regular people in Toronto, Peterborough, Brantford… everywhere.

Inventory is scare across Canada – in fact, at a 30-year low. Mortgage rates have never (thanks to the virus) been at this level, allowing more debt and higher sale prices. WFH has over four million people wanting space, moving to where real estate is ‘more affordable’ and totally screwing things up for millions of others who thought they lived in calm places. Juicing everything is human emotion. The higher prices go, the more people want real estate. It’s classic. We buy high because we think higher is coming. When it comes, we buy more. We believe this asset will go up forever, even though none has before. And infecting us all is Covid, instilling a fear of the wider world and an innate desire to cocoon.

What a combo.

The problem is that when a house on your street sells for a crazy-stupid pile of money, it automatically makes your worth more. Ceilings become floors. Affordability worsens. More families are shut out. Others are forced to distort their finances in order to buy, draining liquid assets from retirements and kids’ school accounts while swallowing huge gobs of debt. Rising rates could be fatal.

Meanwhile the wealth gap grows as society calves into owners and others. The top 20% of families now own 70% of real estate wealth while the bottom two-fifths hold 2% of it. None of this is sustainable. Or permissible. And, no, the government won’t ‘do anything to keep it going’ as people on this pathetic blog seem to believe.

What does this mean? Wat can we expect as this endless pandemic winds down?

RBC’s econo guy Bob Hogue says he expects, “some form of policy-induced cooling of demand” in the next few months. Plus, as reviewed here this week, it’s a slam-dunk that rates will begin their creep back towards normalcy, whatever the CB does.

Chew on that before you offer 40% over list. Ask the bunny.


It’s back

So, recall all those boring, pedantic, dorky and hectoring blog posts about the cost of money going up as inflation returns?

Sure ya do. They’re the ones nobody believed and dissed me for. Just like all the times I’ve gently reminded you to buy fresh trousers because later in 2021 you’ll be going back to work. Alas, nobody believes that either, or wants to.

But, too bad. Things you need to know for the rest of the year include:

(a) Mortgage rates may go down a little in a spring promo blitz, but by summer they’ll be on the path northward. Maybe sooner. Lock in.
(b) The suburban/hick real estate phenom has six months to live. Don’t be tricked.
(c) Thinking about selling your house? Do it now.
(d) Lots of employers are fed up. The WFH thing will end.
(e) Cities will revive, and DT condos along with them.
(f) Vaccines = recovery. As dosing the herd ramps up dramatically over the next six months, everything will change. More growth. Fewer depressing public health officials on TV. Stores, restaurants, clubs open. Get invested. Buy any dip. Eschew cash because stuff’s about to pop.

You can believe me, or doubt me. But there’s no mistaking what the bond market is convinced of…

Bond yields swell first, mortgages later

That’ the five-year GoC bond return, and while it’s still under six-tenths of one percent, you can see what’s happening. This breakout from levels we’ve been at since last Spring has one message – the economy is about to reopen. The same is happening in the US, where 10-year Treasuries have pushed through a resistance level for a one-year high in terms of yields. This has been reinforced by the latest American retail numbers (sales up 5.3% when expectations were for a 1% rise). Plus, look at energy – oil’s at sixty bucks and all that climate-change snow in Texas has lit a fire under the whole sector.

JP Morgan says Biden’s rapid-vax plan will get the US economy fully open in 40 to 70 days. Wow. The Roaring Twenties talk has rekindled. In Canada we’re lagging on our rate of jabbing, but the expectations are similar. The bond pop, says mortgage broker/blogger Rob McLister, is “a signal that better economic times lie ahead. A sign that inflation should no longer be just an afterthought. A sign that the lowest fixed rates in Canadian history are in danger of vanishing.”

And this revelation:

Bond yields are climbing because traders see the economy in a much better place in 2022, and because North American governments have deteriorating balance sheets and need to flood the market with their debt. Those who brush aside the inflationary aspect of that last point should note that after the next round of U.S. stimulus, 40% of all dollars in circulation will have been printed in just the last 12 months. Money supply still matters.

You bet it does. The Trudeau Libs are busy spending $350 billion we don’t have, pushing the national debt (mostly bonds) to $1 trillion. Meanwhile governments around the world have ponied up an historic $20 trillion to fight this slimy little pathogen and its variant spawn. This unprecedented amount of stimulus has helped inflate asset values (look at houses in Brampton, Bitcoin or shares in Tesla) and water down the value of currencies. This is why a Border Collie pup costs $2,500, plywood is a hundred bucks and there are 17 bids for every crap house that comes available.

Yes, all this has a word: inflation.

Mortgage rates, therefore, will not stay at current levels. Not a chance. Five-year money is currently in the 1.5% range and you can lock in for a whole decade at 2%. That is an insane opportunity, since Mr. Bond Market is forecasting an increase of at least 1% by the time a fiver coms up for renewal, and it could well be greater. If there’s a gush of financing activity in the next few months (people waking up to the fact they should grab a lower rate now as a once-in-a-gen chance) then demand will push rates higher, faster.

Elevated rates will also (a) push bond prices lower and (b) inflate preferred share values. So in the fixed-income portion of your 60/40 portfolio ensure you have a healthy whack of prefs (about half), as well as bonds that are higher-yielders than the federal variety (corporate and provincial). If you are among the privileged class with a DB pension and the ability to commute, be aware the lump sum value will fall as inflation pushes rates higher. Those who were in a position to take a commuted value in 2020 or (so far) in 2021 truly lucked out.

And what of houses?

When mortgage rates tick high, buyers tend to panic and rush into deals. Yeah – just what we need when we already have the tightest market in history with only 1.9 months of inventory nationally and an unprecedented 91% sales-to-new listings ratio. The second wave of the virus has helped convince owners not to become sellers, opening their homes to (yuck) strangers. But absurd, historic prices may change that. And in the long run, higher financing costs always have a chilling effect on prices and sales.

Well, that concludes another post nobody wanted to read. Don’t forget the new pants, though.

About the picture: “In the spirit of the blog,” writes BillyBob, “I thought I’d offer a pic of the family dog, Bren. He’s a 3-year-old Czechoslovakian Wolfdog,  a German shepherd/Carpathian grey wolf cross. Friendly, loyal, scarily intelligent, eyes that probe the soul. Visiting the homestead is a Calvin & Hobbes routine: bracing at the gate for 47kg of furry guided missile to joyfully launch a direct hit! Thank you for what you do. “


The everything bubble

A two-by-four at Home Depot now costs more than seven bucks. As mentioned here, puppies are going for three grand. If you can find one. Boats, RVs, quads, sleds and cruisers are sold out, backordered or just gone. Try buying a Peloton. Or a house in the suburbs, for that matter. Inventory is scarce and prices are rising two or three per cent. Weekly.

The official inflation rate was just 1% (per year) in November. Then it dropped to 0.7% as 2020 ended. That’s the latest stat, and it seems hopelessly, bizarrely inaccurate. If you’re shopping for a sheet of G1S plywood you know what we mean.

As for wages, they rose 4% between January of 2019 and a year ago. No stats since Covid hit, but given the fact we have 9.4% unemployment, they’re probably not so hot. By the way, the average salary in Canada last year was $54,630. Not enough to dwell happily in Mississauga, for example, where the average detached house costs $1.15 million and two-bedroom apartments rent for $2,100 a month.

Well, this is an odd world. It makes some people worry. Actually, lots of people. Investors, anxious to hold on to what they’ve got. Dale is one of them who just wrote me about the “overheated stock market.

“It’s just the current mania of people investing stimulus money in speculative things like Bitcoin, Gamestop, AMC and the like is enough to cause concern. The world’s economy has been crippled by this nasty virus and yet governments around the world are printing money like crazy. The music will stop like it always does, and when it does it’s reasonable to expect a serious reset in stock prices. That will directly impact the performance of our investments.”

He’s not alone.

In the midst of a pandemic, global stocks are on a 17-year tear. Everywhere. Here. The US. Europe. Japan. Tesla and Shopify are ridiculous. What the Redditers and Hoodies did was epic. Bitcoin has flown into the delirium. So it’s not just Brampton houses, paving stones, exercise bikes and Golden Retrievers. It’s everything. So, should you worry along with Dale?

Sure, it you want to. Retreat to cash or a 1% GIC. Do what makes you comfortable. But understand all this talk of a great reckoning is, well, probably just talk. Before mentioning some of those reason why, check this chart out. It’s the stock market (the S&P 500) over the last 90 years. Booms. Busts. Recessions. Depressions. Wars. Inflation. Stagflation. Crises. Trump. Reddit. The works. Two conclusions: (a) it fluctuates and (b) the long-term direction is up.

What the S&P 500 has done over 90 years

Why are markets rising now, despite the slimy little pathogen, small-business slaughter, structural unemployment, a yawning wealth divide, the Proud Boys and society’s headlong plunge into unrepayable debt?

First, stimulus. Fiscal and monetary. Governments have dealt with the virus by throwing massive amounts of money around. The CERB cheques. The central bank bond-buying. The crashed interest rates. Wage subsidies and business bailouts. Politicians have spent over $20 trillion globally because of the bug (a trillion is a thousand times a billion), and that cash has done exactly what they wanted – burrowing its way into the economy. So markets and prices go up.

Second, where else is investment cash going to go but into growth assets or real ones? Bank savings accounts pay nothing. GICs are yielding diddly. Bond yields are slowly rising but still return half a per cent for a five-year commitment. Every day that money lies around it buys less of a house, a dog or an $80,000 Princecraft fishing boat. Meanwhile Bay Street stocks are up 65% from last year’s lows and the S&P has surged 80%. In 2020 a boring B&D portfolio returned 7.5% and the two-year gain is 24%. Now bond prices are falling as most of the ‘safe’ money flows into ‘risk’ assets.

Third, vaccine lift. As this blog has said since last February, pandemics are temporary. They pass. This one is on the way out and the world will look incredibly different by the end of the summer. Global GDP will expand. A torrent of saved consumer cash will be unleashed. Retailers will reopen. People will go back to work. Downtowns will, phoenix-like, rise again. Corporate profits will augment. Markets are reflecting that now, as they’re forward-looking. If a correction occurs – a 5% or 10% plop – you can be sure the pros will be backing up their trucks.

Fourth, demand. Not only are brave couples willing to finance $1 million mortgages, but investment pros can’t stop buying. The optimism among fund managers for stocks is at 61%, the second highest measure ever. Cash levels among investors are at an eight-year low. Again, as company profits rekindle, there’s more to come. The economy could look like a Musk rocket in Q3.

But, but, but, could it still be a bubble, like Dale worries?

Of course. Nothing’s for sure. Sentiment can turn. An event can happen. A vaccine might fail. That’s exactly why smart, careful people ensure they invest correctly. No individual stocks, but a diversified holding through good ETFs with high liquidity. No big bet on any one thing, especially an asset that’s gone nuts, like GameStop did, or Bitcoin is now. That’s gambling, not investing. Never chase returns.

Be balanced, with safe assets that can cushion volatility or protect when rates starts to rise (like preferreds). No mutual funds with their performance-murdering MERs. No bank or brokerage proprietary funds which lack liquidity and often transparency. Not too much maple just coz you live here, but instead a truly global approach to holding equity exposure.

The key is to invest, stay invested, rebalance every year or so, and keep your damn emotions in check. Stop reading stupid financial blogs. Stay the hell away from Reddit. Don’t look at your portfolio every day. Or week. Or even every month.

If you can’t, then go to cash. But only if you already have heaps. And a puppy.

About the picture: Craig spotted this guy at a dog adoption centre in the Republic of Georgia. “This was a shepherd dog and we were happy to be behind glass as it appeared very ferocious until it got closer. This one was healthy (and large). The country also has numerous strays and we saw many that were living in old cars, abandoned fridges and culverts. Most of them very friendly but the professional guard dogs were often scary. They wear the collar to prevent wolf attacks.” Shelters in Canada may be mostly empty, but not there. Check this out.


A different world

Four years ago a couple paid big bucks for a suburban spread in a bidding war, in a housing bubble. The seller was a blog dog. He’d hit the jackpot.

Afraid house prices were out of control (then rising 30% year/year) and young potential buyers would be locked out forever, politicians sprang into action. Mortgage regs were tightened. Foreign buyer curbs announced. Rent controls enhanced. Task forces established. Media briefings held.

It was, the Ontario government said, “a comprehensive package of measures to help more people find affordable homes, increase supply, protect buyers and renters and bring stability to the real estate market.” And as this took place, similar changes happened in Vancouver, which now has a speculation tax, enhanced property taxes, a vacancy tax and relaxed zoning to quell prices, punt flippers and increase supply.

What happened to our blog buddy?

After the government measures were announced the market plopped. Prices plunged. The buyers walked. The sellers sued. The courts ruled, awarding our guy almost $500,000 in damages (the difference between the offered price and the eventual resale value, plus costs). Then the buyers declared bankruptcy. Legal chaos ensued. Everybody lost.

That was then. This is now. And, man, what a different world.

First, we have real estate hyper-inflation – a bigger, scarier, more gaseous airbag than anyone in 2017 could have imagined. And it’s bloating by the day.

Second, the government no longer gives a fig. In fact, most people have reached the conclusion that politicians want this to happen. It seems they’re right.

Third, it will end. When and how is unknown, but every day the danger accentuates.

Source: Realosophy; GreaterFool

The epicentre of the irrational asset inflation – a.k.a. the bubble – is once again in 905. That crazed arc around Toronto is this time the Promised Land because of the virus. With the region in rolling restrictions, lockdowns, quarantines and panic for almost a year an exodus out of urbanity has overwhelmed the burbs. People have fled germy condo elevators and common corridors. Nesting is an obsession. WFH has created the desire for more space. Shuttered schools and online learning have parents clamouring for more room. And stupid-cheap mortgage rates have allowed people to buy far more on the same income, reaching for real estate they could never otherwise afford.

But as demand for this kind of housing has soared, supply has not. The last thing most owners want is to list their houses during a pandemic when they must open their doors to strangers (and realtors in PPE), then seek another place to live when prices are romping and choices are few. So Covid creates an army of buyers. But the virus is also shrinking supply. Prices are therefore insane.

How nuts?

This blog has furnished a few examples lately. Annualized increases of 150% in the last few months. On average, 905 houses are rising 8-10% a month, or four times the rate of 2017. There are three realities flowing out of this. First, affordability is diving. Every week young couples are being punished as prices rise far faster than incomes. Second, the wealth divide is exploding. WFH salaried homeowners are seeing their unearned net worth swell. Hourly workers and renters whacked by virus shutdowns are suffering disproportionately. Third, the bubble has brought back the flippers – those grifters and vermin who scuttle around the darkest bits of the MLS baseboards using leverage and FOMO to grease their sullied paws.

Months of inventory have dropped to mere weeks. Days-on-market stats are into single digits in some hoods. Over-asking bids of fifty or a hundred grand are routine. House values have completely disconnected from rents, or incomes. Lenders hungry for market share continue to squeeze rates and shovel out loans. Hour by hour we create two classes in a troubled society. The owners and the others.

Why does government not care? In fact, are politicians purposefully facilitating this? Is their silence condoning house lust, speculation and panic?

Well, it’s sad. The Bank of Canada has been instrumental in depressing bond yields through its debt-buying while keeping its benchmark rate close to zero. This has resulted in both 1.5% mortgages and wilful blindness on the part of the governor who says no bubble exists.

Governments at all levels have refused to drop the hammer on speculation, opting instead to raise taxes on buyers and owners which only inflates the cost of housing. And staring at what’s obviously the most humungous, quivering, inflating property bubble of our time, politicians are frozen, terrified, because of Covid. They’d rather endure the consequences of this event than move to mitigate the danger, as every morsel of economic activity is needed. They’re desperate. Out of options. Next time we should vote with more care.

Well, what now?

More. This is out of control and will stay that way for months to come. Only rising interest rates as the vaccine spreads will dampen the fires. Meanwhile the infectious prices have crept out many hours from the city core.

Prices soar because people expect them to. They rise because buyers think there is no risk. When leaders don’t care, why should we?

The reckoning will be quite an event.

About the picture: The photo, says Kris, “is of our rescue Collie, Danny, a non-judgemental listener and faithful companion. During Lockdown Madness, my 2 daily diversions are reading your blog and writing music. Upon reviewing one of my recent productions, I feel that some of your influence has crept into my lyrics… For your and Dorothy’s amusement, I have attached a recording of “Talking To My Dog “.  And here it is.


A behavioural perspective on…

RYAN   By Guest Blogger Ryan Lewenza

Getting tired of hearing about GameStop yet? No, ok, here’s some more red meat for you!

Today I’m going to review the GameStop madness but this time from a behavioural perspective, since what I’m seeing from these Reddit traders would make a behavioural finance professor roll over in their grave.

We all have behavioural biases that impact our emotions and in turn, our investment decisions. Behavioural finance is a growing field in the academic and investment world that studies these biases and how they impact our investment decision-making process. So today I’m going to review some of these biases that Reddit traders are exhibiting when investing in GameStop, so we can try to learn from these biases (and their mistakes) to be better investors ourselves.

The first obvious bias that jumps out is ‘overconfidence’. Overconfidence bias is the tendency of investors to overestimate their own skill, intellect or talent. This bias often manifests in excessive trading and risking taking, and ultimately, poor investment outcomes.

Are we seeing this from the Reddit traders? You bet!

Through the Reddit chatrooms they are pumping up GameStop, trying to induce more investors to pile in and drive the stock higher. There was no analysis of GameStop and how it was grossly undervalued. There was no consideration of the risk involved in buying a struggling company like GameStop. And there was surely little to no consideration of diversification or whether this stock made sense from a portfolio perspective. It was simply driven by more investors piling in, creating an unprecedented ‘short squeeze’, and on the hope that someone would pay a higher price in a few days (a greater fool).

To me this all screams overconfidence as these traders confuse their luck for skill (for the few winners that sold at the top), took incredible risks in buying this struggling company, all of which has led to a very poor investment outcome for most Reditt traders (GME is down 90% since its intraday peak of $483 on 1/28).

The second prominent bias is ‘pride and regret’. One of my behavioural finance books says it best, “People avoid actions that create regret and seek actions that cause pride. Regret is the emotional pain that comes with realizing that a previous decision turned out to be a bad one.

Pride is the emotional joy of realizing that a decision turned out well.” That is pretty insightful and accurately describes how many of us think about investing and realizing gains and losses.

I believe the GameStop traders are already feeling this regret as they begin to take realized losses and/or still mounting unrealized losses. I read one quote from a Reddit trader that said he didn’t care if he lost all his money, as he’s more interested in beating up the hedge fund guys. I think he’s saying this to make himself feel better about his big losses, likely having bought near the top, and now the reality that almost all of his investment is wiped out. He’s simply delaying recognizing his loss in order to avoid feeling regret over his poor investment decision.

So, ‘overconfidence’ helped to drive the stock from $20 to over $400 two weeks ago, but it is now ‘pride and regret’ that is prevalent as the stock craters 90% from its recent high.

Price Performance of GameStop

Source: Stockcharts.com, Turner Investments

The next bias that these Reddit traders are exhibiting is an extreme case of ‘herd mentality’, which is when investors blindly follow what other investors are doing. These investors fear missing out so they follow the ‘herd’ and all pile into the stock, in this case GameStop. The Reddit traders are not doing their own independent analysis, rather they are all just following the herd, hoping it will all work out and the stock will keep going up. This can work for a bit, but once the majority of investors who will be buy the stock are in, then there is no one left to buy and drive the stock further. Then, pop! The stock implodes, and we’re on to the next thing. Like a herd.

Lastly, I’m seeing a lot of ‘confirmation bias’ in the GameStop speculators, which is when we seek out information that confirms own pre-existing ideas and ignore contrary information. The Reddit traders are exhibiting this confirmation bias as they focus on the information/data that supports their thesis (the stock will go higher given the huge short position) while ignoring information that counters their pre-existing ideas (the bulk of shorts have covered the position and the stock is extremely overvalued). One important key to successful investing is to counter this bias by seeking out opinions and information that challenges our existing beliefs and be prepared to change our view if the information/outlook changes.

Emotions are a great thing, but when it comes to investing you really want to keep those in check. These behavioural biases that we all possess can stir emotions in us, and as I outlined today, can drive us to make poor investment decisions like selling after a big market drop, or buying GameStop in the $400s.

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.