Author: garth turner

  By Guest Blogger Doug Rowat

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During the bull-market years of the 2000s, Bay Street investment firms were freely throwing money around to win business. Sometimes literally.

I remember visiting the Sprott Asset Management office near King and Bay during the mid-2000s commodity boom. Priceless artwork lined the walls (like, Van Gogh priceless) and a massive pure-gold coin sat perched in the lobby. Incredibly, it weighed 100 kg and had a face value of $1 million, but even more spectacularly, it had a bullion value of probably closer to $4 million.

Such were the Bay Street extravagances in those days.

And about the money being thrown at me? When I arrived at their office, they handed me a 1-ounce silver coin. Just for visiting. My colleague, who was a Bay Street veteran, said that he already had five of them. I still have mine:

Around this time, there was also a rumour that Eric Sprott had hosted a Bay Street event wearing a T-Shirt emblazed with Bonds Are For Losers. I don’t know if this was actually true, but it certainly fit with the bullish excesses of Bay Street at the time.

Though the T-shirt’s sentiment was infinitely less accurate once the financial crisis hit less than a year later, there was definitely—and still is—a kernel of truth to it.

Make no mistake, your portfolio needs bonds. They offer stability and guard against the unexpected (Covid—to highlight a perfect and very recent example). And if we were all dispassionate investors we could do without bonds, but we bring—especially new investors—our irrational fears and biases to every investment decision that we make. Though the returns for bonds over the long term are inferior to equities, the ability of bonds to control volatility (and therefore our emotions) is invaluable. It does no good to hold only equities if you sell them at every hint of trouble.

So are bonds for losers? Definitely not. However, they certainly aren’t for winners either. Take it from one of the biggest financial-market winners of all time, Warren Buffett. He had this to say in his latest Berkshire Hathaway shareholder newsletter:

Bonds are not the place to be these days… In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed income investors worldwide—whether pension funds, insurance companies or retirees—face a bleak future.

In terms of having negative (or at least near-zero) bond yields, Japan and Germany aren’t alone. They’re joined by France, the Netherlands, Switzerland, Sweden, Spain and Portugal, which all have, for example, flat-to-negative yields on their 10-year benchmarks.

While the recent rise in US bond yields gives some hope to yield investors, over the long term, it’s a losing battle. The chart below indicates the steadily diminishing returns for US bonds over the decades. Buffett also highlighted in his newsletter that the yield on the US 10-year Treasury was actually 15.8% in 1981! Those days are ancient history. Bond yields have plummeted more than 90% since.

The steadily diminishing return of US bonds

Source: Bloomberg; Turner Investments

And while there are a multitude of reasons for the long-term decline in bond yields, perhaps the biggest factor is simply an ageing population. Older investors, understandably, gravitate towards safer investments and the below chart shows the inexorable trend that bond investors are presently up against. This trend isn’t changing.

The lesson of these charts is simple: investors (of any age) need equity exposure in addition to fixed income. Your long-term results will almost certainly disappoint otherwise.

Long term US government bond yields (red line, RHS) vs US population age 55 and older (blue line LHS)

Source: Federal Reserve Economic Data

Naturally, as we struggle through a global recession, investment firms no longer throw money at me just for walking through the door. Those days are over.

But realizing meaningful returns from bond-only portfolios? Those days are over too.

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

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Most of the major banks have popped rates in the last few days. RBC, for example, added almost a quarter point to its fiver. Tangerine blasted its 10-year loan higher by a hefty 70 basis points. It was all too good, too cheap, too insane to last.

Five-year Canadas are pushing 1% again, so this may be just the beginning. US jobs numbers blew the doors off Friday morning. Combine that with two million vaccinations a day now taking place and the Fed wimping out and the future seems fairly predictable. Up. Way up.

CIBC’s cuddly little economics guy, Benny Tal, now says Canadians have never been more threatened by interest rates. We’re not ready for what’s coming, he’s been telling anyone in the media who’s listening (not many). No wonder. Mortgage debt went up 5x faster than inflation last year. We borrowed almost $120 billion more when rates were at levels impossible to maintain. Ticking. Time. Bomb.

The world is awash in money now after governments spent $20 trillion globally (the size of the entire US economy) to fight the virus and debase currencies. Ottawa is running a deficit of at least $400 billion, with cash spewing from every orifice. Household borrowing has hit a crescendo, but so have savings. Weird. Credit card balances and LOCs have been paid down. Housing debt has exploded.

Well, the impact of loosey-goosey monetary policy, spendy politicians and myopic borrowers is now all around us. In explicit detail. Like the famous garage that went on sale in Toronto this week – a 20-foot-wide, ill-placed lot for $729,000. It was last listed at $600,000. Here it is.

It’s not just real estate, either. Bicycle prices are nuts. Boats, RVs the same. Home exercise equipment. Building materials. Homeowners who can’t justify moving have created an insatiable demand for drywall, studs, PEX, paving stones, even paint.

Then of course, there’s the GFPI – Greater Fool Puppy Index. As breathlessly detailed here, Golden Retrievers have tipped the $3,000 mark in most parts of the country and breeders of everything from wee terriers to lumbering Newfs have a year(s)-long waiting list. Now we have a new record high. On Kijiji, no less, where the desperate shop…

What’s all this called? Ah yes, inflation. Prices you never thought you’d see are now the norm. And topping the list are houses which, hourly, seem to be slipping the surly bonds of earth. Economists are flummoxed. Even realtors are calling current conditions a textbook bubble. Canada has never seen a seller’s market like this, in almost every city and region simultaneously. In fact, it’s continent-wide. People with housing assets to sell are reaping windfalls. Those buying are probably straining and sacrificing to get in at the very top. And already there have been historic consequences.

This week came some evidence from property-flogging Zoocasa. It confirms what we’ve reported here since the slimy little pathogen arrived on our shores – lots of Millennial buyers have fled the germy city, convinced themselves that WFH is forever, loaded up on debt and bought detached houses in the distant burbs and hick cities where they can breed, age and domesticate.

The consequence: price escalation in places hours away from the city cores and a big drop in real estate affordability everywhere. Yup, more inflation. The survey found a third of buyers ended up in areas they never would have considered before Covid. Of these folks 70% admitted their new digs were further away than expected and half report they live in a spot with fewer people. Almost 80% of all buyers understand that the pandemic has caused suburban and rural prices to inflate “at an unsustainable rate.”

Moreover, the kids get it. Low mortgage rates, they agree overwhelmingly, have driven up prices rewarding owners and locking out the rest – at least for a while: “aspiring buyers felt the obstacles from the pandemic set them back 1-5 years.”

The reality of our times, then, is obvious. Fiscal (government) and monetary (central bank) stimulus have combined to create an everything-bubble. Houses, taps, Harleys and puppies are growing more dear daily. It’s exacerbating the wealth divide and having negative social consequences. As the vaccines flow and the economy reopens, more inflationary pressures will come from increased demand as unemployment fades. Along the way, the cost of debt will rise as interest rates reflect inflationary pressures and hunkier yields in the bond market. At the same time, governments will have to cut back on their largesse. Maybe even start the tax grind higher.

It’s a formula for clash. So don’t expect things to remain as they are.

Worth repeating: (a) if you have floating debt, lock it up. (b) If you’ve been thinking about selling and cashing in your real estate lottery prize, do it now. (c) If you are a prospective buyer, cool your jets. Wait for inventory to build, rates to increase and the bidding wars to end. (d) Remember you’re always better off having less debt at a higher rate than vice versa. (e) Don’t count on a WFH future. (f) And if you crave a dog, wait. Empty shelters won’t be that way six months from now. Leave the canine pirates looting on Kijiji and find a friend in need.

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Are we out of control yet?

Oh, you bet. ‘Insane’ was January. Now it’s Elon-Musk-batshit-crazy. (That’s a technical term.)

Look at little Kelowna, for example. An okay house up the hill on Bowron Street had an appraised value of $626,000 last summer. It just hit the market for $920,000, with a realtor’s note saying, “Priced to sell!!! Sellers have young children. Long closing or rent-back requested.” Offers will be reviewed Sunday at five. Multiples are expected.

“Kelowna is having a Vancouver moment here,” says our undercover Blog Dog agent. “Listing prices are shooting 200-300k over assessed values and up about 150k in price from just a few months ago and it is going to show big in upcoming data.

“Who are the buyers? From what I have seen as a small snapshot is mid 20s, Caucasian couples with kids. There are crowds of them showing up to these listings that are selling day-of. Anyway, I have never seen anything like this in my life, which includes 15 years in Vancouver during the mania of 2007 and 2014/2015.”

Sales-to-listing ratio goes nuts in the Okanagan

Click to enlarge

And you heard about the GTA?

A few weeks ago we reported the average property price would exceed $1 million this year. Well, it did that in a few days. Up 15% year/year to $1,045,488. Detached sales in 416 jumped 23% to $1.6 million. In the soulless 905 there were 28% more deals for SFHs, taking the average to $1.3 million. And let’s remember that for most of the past 100 days the region has been in a stay-at-home-or-die lockdown. The realtors (gleefully) forecast more: “In the absence of a marked uptick in inventory, the current relationship between demand and supply supports continued double-digit average home price growth this year.”

It’s everywhere. Ottawa. Halifax. Montreal. Victoria. Even in Calgary sales exploded higher by 55%. In Vancouver transactions are 73% above this time a year ago – before the virus hit and when we were still naive

The gain is across property types, too. Look at Toronto condos, for example. Last month sales surged 65% as investors swooped in to Hoover up listings that had oh-so-temporarily dipped about 15% as renters were crushed.

Meanwhile mortgage debt has rocketed, rates have begun to creep higher (bond yields erupted again today) and all the dosing promises to reopen society. Contributions to TFSAs and RRSPs, as well as corporate pension plans are flatlining or declining. Every day that goes by, FOMO and YOLO guarantee more families will be buying real estate at all-time inflated values because, well, it’s going to the moon with Elon!

This, says Scotia’s big economist. Derek Holt, “is off the charts. Ottawa has been caught completely off-guard in the magnitude of the housing response to very low financing costs.” His prediction: Chrystia the Impaler’s virgin budget – likely to come next month – may well include “macroprudential regulatory measures” to stem what’s clearly become a dangerous mania. Without curbs, this guarantees the average family will never afford the average house and the evil wealth divide in society yawns even further.

Vaccines change everything. They make it possible for the feds to drop the housing hammer – something that was not on anyone’s radar when this nonsense started last summer.

What could that be?

Hmm. As you know, Ottawa’s tried to stop the real estate juggernaut before. Amortization periods were cut, down payments modified, debt ratios changed, insurance costs increased, a mortgage cap introduced and a stress test hatched. Plus provinces have increased transfer taxes, allowed a levy on under-used homes, taxed speculators and offshore owners and coddled renters at the expense of landlords.

Nah, nothing worked. So what will?

There could be a cue in a speech given a few years ago by the outgoing CMHC boss, wild Evan Siddall. Prime targets of macroprudential diddling, he suggests, are down payments and loan ratios.

Did you know it’s only been since 1998 that buyers needed just 5% down to secure an insured mortgage – moving risk from the lender to the taxpayer? Yup. Before that only first-timers could use that amount of leverage, and prior to 1992 everybody had to have at least 10% to put down.

“Politicians are tempted to help first-time homebuyers enter the market, but low down payments may be part of the problem adding to affordability pressures and macro-economic vulnerabilities,” said Siddall.

“Coupled with the personal exemption from capital gains taxes on the sale of principal residences and other programs, Canadians have very powerful incentives to own homes… I have yet to be convinced that people in our country “need” access to 19:1 leverage to buy homes. In fact, it may be a fool’s bargain with the extra demand simply feeding higher house prices: the benefits of the policy accruing to wealthier home sellers rather than to the young first-time homebuyers it purports to help.”

You bet. It’s obvious. Either down payments go up or the capital gains exemption is trimmed.

As for the amount people can borrow relative to what they earn, maybe it’s time for a cap, says Siddall. “In a low-for-long environment, it is also worth exploring the future merits of a loan-to-income limit, which the U.K., Ireland and others have introduced.”

What’s that?

It means hard-capping the amount a person can borrow based on earnings, rather than deciding if he/she can carry the debt. In the UK, the cap since 2014 has been 4.5. Imagine what that would mean in, say, Vancouver where average houses cost 11 times average incomes.

Will Mr. Socks & Crew address this runaway asset, or let her rip? The needle may just have flipped.

A seller’s market across Canada… like no other

Source: CREA; RateSpy

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Yesterday we dissed the CMHC boss who made a bad call. The housing market did not go down because of Covid. It went up. More than up. It went ballistic. Look at the February stats. Insanely unsustainable. But crusty Evan may be vindicated still. This movie ain’t over.

This week RBC’s housing economist made a point in saying “the market is far from risk-free.” No, the threat is not a melt-down, but a further melting-up.

“Super-strong demand is quickly depleting inventories across the country. Competition between buyers is extremely fierce in many markets (including smaller ones), and a ‘fear of missing out’ is taking hold. Such dynamics often lead to self-reinforcing price trends. The market then becomes highly vulnerable to a correction or crash when some event (e.g. bad economic news, a rise in interest rates or some policy announcement) causes bullish sentiment to turn bearish.”

The biggest publicized event is an uptick in mortgage rates. As the vaccines spread, the economy reopens, consumer spending ignites and inflation rekindles, rates will surely continue to plump. Everybody in the lending business knows that. It’s baked in.

But something else is afoot. It could be just as consequential. It involves pants.

How much of the real estate pandemic phenom was caused by five million people leaving their employers and working from home? Lots. Tons. In fact, WFH is the key driver of why suburban properties have inflated wildly in value, attracting flippers and speckers, and why satellite cities – often far beyond the realm of commuting – have been indelibly altered by urban refugees.

None of this is good for anyone other than owners with the smarts to recognize it as an historic selling opportunity. Remote working made millions feel they could stray beyond city limits, relocate in areas where getting a detached house on a big lot was still possible and find a work-life balance. In the process they imported urban real estate valuations, priced out the natives and depended on non-local income streams to finance their new lives.

Sound familiar? Yup, just like those ‘satellite families’ from offshore that citizens in Vancouver think destroyed their city. Interesting.

But it won’t last. Despite the bleatings, moaning and protestations of those on this site who never want to go back to work and be judged, well, suck it up. Once the herd is dosed (about six months from now) many won’t have the option. Employers are completely within their rights to call you back to a safe workplace, and most will be doing so. Maybe the schedule will be a hybrid one for a while – two or three days at the ant farm – but even that’ll be a challenge if you just moved 200 km away and now have pigs to slop.

First, the facts.

The vax has changed everything. Expect new virus infections and especially hospitalizations and deaths to plummet over the coming months. All Canadian governments are promising that every willing adult will have been jabbed by September. All Americans will be done (says Biden) by the end of May. Soon you’ll stop seeing Covid dominate every newsfeed. Then we can concentrate on the usual important stuff, like Kim Kardashian’s butt or how Prince Harry was gelded.

A new Nik Nanos survey finds 64% of DT office workers are okay to go back into the towers with another 21% feeling neutral about it. That’s a far cry from the 15% who were ready to return six months ago. The Toronto Board of Trade piles on, saying, “It’s the fatigue of this non-stop virtual world, of not being as productive as you can be if you can just get into a meeting face to face and work things through.”

Of course. WFH isn’t really work. Not really home. It’s a blurring of the lines between ‘work’ and ‘not work’ so most people end up doing everything in a fog of compromise. Zoom meetings suck. Emails fly around at all hours. Kids, chores, spouses, pets get in the way. Brain space is fractured. Stress builds. Lots of Covid psych surveys show people who thought WFH would give them more peace, time and balance find it’s turned their lives into a cocktail of competing demands. The lanes are gone. It’s a mess.

From the employer’s point of view, WFH is a gathering disaster. Not for all bosses, of course, since some sectors (like IT) can work perfectly with nobody sitting in a cubicle. But in most workplaces people need to interact, collaborate, assist each other, work collectively and accomplish goals in concert.

New employees need to be mentored, indoctrinated, trained, guided and immersed in a workplace culture. Those wanting careers instead of just jobs need to be seen, heard, experienced, noticed and evaluated. Zoom can’t do that. The virus didn’t change human nature. Nor how we judge each other.

The CEO of Goldman Sachs (34,000 employees) says WFH, “is not ideal for us and it’s not a new normal. It’s an aberration that we are going to correct as quickly as possible.” The boss of JPMorgan says WFH is killing spontaneous creativity. “There are a lot of people who have been hired into our companies who have never been into our company. How do you build a culture and character? How are you going to learn properly?”

And here’s the result of a survey of several thousand WFH folks in over 40 countries:

The vast majority of us are struggling with general and workplace well-being as the pandemic continues to rage. These struggles are affecting our mental health and involve some of the key predictors of burnout, including an unsustainable workload, the absence of a supportive community, and the feeling that you don’t have control over your life and work. Overwhelmingly, respondents reported mental health declines, challenges with meeting basic needs, and feelings of loneliness and isolation. They also noted increased job demands and growing disengagement at work.

People need people. For most, work is not an isolated set of chores. You fit into a structure, a company, an office, a workplace, a hierarchy, a group of colleagues. While the virus made the last year of remote employment a necessity, it’s also damaged productivity along with messing up heads. It’s unsocial. It will not last.

The implications?

Expect more listings in the sticks. Way fewer buyers. Thus, declining prices and seller angst. The condo revival will continue. Investors already swooped in and grabbed the bargains (when we told you they existed). Inventory will be a lot higher in two months. Rates will swell, too. But the real impact will be in a year, when we look back and understand how a virus not only killed and infected, but tricked.

The biggest losers? All those pandemic pups. They thought you’d be home forever. But the cat’s relieved.

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Sigh*.

Well, sometimes you just blow it. This may be one of them. And Evan is truly sorry about it. Almost.

Did you see that latest? The average property price in Toronto is just breaking the $1 million level. Detached homes are at the $1.68 million mark. As predicted here, condos have rushed back with an 85% sales surge and price bump. And, gasp, the burbs are on fire. The average in big-box Peel is just over a mill and in Halton, where the cows come from, it’s $1.2 million. Ditto in York.

Even Calgary’s weird. Feb sales soared 54%. It’s the best since 2014 when everyone was humming that dipstick song by Pharrell Williams.

Nationally house prices are up 25% year/year. In some places (like Lunenburg), 40%. In others (like Brampton) some hoods are ahead 70%. In Oshawa, it’s 35%. The flippers are back. In Victoria condo sales hiked 66% last month compared with 2020. In Toronto inventory of detached homes and most condos is down to a little more than two weeks. It used to be four months.

   So recall that prediction CMHC’s boss, Evan Siddall, made a few months ago? The agency said it expected house prices could decline by up to 18% because of the virus, double-digit unemployment, a plop in immigration, the mortgage deferral cliff and crumbling confidence. But as it turned out, houses now cost a helluva lot more.

416 realtor John Pasalis (who hates me), just sent out this told-ya-so Tweet: “Imagine saving for years so you can have a $70K down payment to buy a home in Durham. Then in a single year the avg home price there jumps from $685K last year to $942K today 38% – $257K in 1 year. And our government couldn’t care less. Young buyers have a right to be furious!” (Be angry at realtors who merrily conduct blind auctions and treat buyers like curs? Never!)

So what went wrong? How did Siddall – normally a smart, perceptive dude – blow it so epicly?

“Our recent work highlights compositional/mix changes, shifting preferences, heightened savings rates, decline in immigration and reverse urbanization as unforeseen developments that help explain our forecast errors,” he says. And he adds this in his defence:

“I don’t recall anyone predicting accurately what actually transpired. Recall that 25% of our workforce was on income support, we had activated $150B of liquidity for lenders, mortgages were being deferred in huge #s and house prices were already inflated. Our publication noted reservations and caveats, and described the -18% case as a highly unlikely worst case, which critics focused on. No one foresaw the extent of the discriminatory impact the virus would have on lower paid workers/renters.”

But the housing czar warns we’re not out of the woods yet. Risks include, “economic adjustments, increased debt, the diversion of economically valuable investment $ into housing, increasing inequality and increased GHG emissions post-pandemic with cities less populated.”

Meanwhile two banks have now come forward with warnings about mortgage rates. CIBC’s chief economic Benny Tal says homeowners, “are simply not ready” for the increases that are likely coming, which could have an “adverse impact” on real estate. And BMO states, “It looks pretty safe to say that five-year fixed rates will soon start grinding back up… Unless there’s another significant shock to the economy coming, we could be looking at a last chance to lock in these rates for some time.”

Yup. Like forever.

Okay, so Siddall admits failure. Like almost everybody who doesn’t think with their pants, he looked at widespread unemployment, the worst recession in decades, lockdowns crippling airlines, retailers and tourist economies, a shrinking GDP, travel restrictions and over twenty thousand dead virus victims in ten months. After all, close to a million people decided to stop paying their mortgages, the borders were closed to newcomers and the government had to go $380 billion in hock to bail society out. How could that possibly end well?

Well, here’s the missing piece.

Turns out the greatest misery was saved for people who could least weather it – those making less money, in lower-paying jobs, in sectors vulnerable to disruption, with little security and fewer assets to fall back on. They got whacked. Many are renters – which helped explained a condo glut and falling lease rates.

The rest of us – like most on this pathetic yet erudite blog – have had a different Covid experience. About five million ended up in the WFH economy, with stable jobs, continued income and yet a drastic drop in household costs. Net worth went up, especially as housing become an object of desire.

Being relegated to home, people craved – and bought – more space. Urbanites afraid of elevator germs moved out into suburban detacheds. Those who had thought about buying a first home took the plunge as mortgage rates dropped to 1.5% or below. Finally they qualified for enough debt. So during the pandemic we borrowed $118 billion more, went into panic-buying mode, jacked real estate to a new unaffordable level and along the way crushed Mr. Siddall.

And it continues. One legacy of the slimy little pathogen will have been to make once-affordable towns and cities into de facto burbs of the big smoke, complete with irritating Millennials walking around in plaid and tats. Like Owen Sound. That Ontario backwater just launched a campaign claiming to be the ‘Work From Home Capital of Canada’. If you visit its web site, you get free pajamas.

And that says it all.

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It might not be exciting as watching the latest version of Seal Team, but the bond market show has been just as full of blood and grit. On Friday five-year Canadas zipped briefly about 1%. Wow. That’s a three-fold increase in four months. It’s a half-point surge in two weeks. And while the yield backed off a little as the weekend dawned, it still felt like a Predator or Reaper killer drone strike. The target being neutralized: hapless newbie house-hunters.

First they faced relentless price inflation, the return of the flippers and speckers, multiple offers, bidding wars and arrogant, let-them-rent realtor rockstars. Now the days of the 1.5% five-year mortgage are doomed.

On Friday we laid out why the bond market’s in turmoil as debt prices fall, yields surge and investors scoff at central bank assurances inflation’s under control. CBs are losing it. Suddenly there’s too much stimulus – government cash, cheap rates and bond-buying – in addition to the vaccines, mass inoculations, corporate profit plumping, a big drop in infections/deaths and economic reopening.

Despite new borrowed billions every week to buy up bonds and suppress rates, it ain’t working. The cost of money is increasing right along with the debt. It’s evident to anyone buying a house, a two-by-four, a puppy, a boat, a few litres of gas or hiring a plumber that inflation is out of the bag. Wage pressures will follow. Imagine where oil prices go when planes start flying again. Rates will keep rising. Governments that spent wildly beyond their means, banking on historically low carrying costs, could whack us all. From pandemic depression to pathogen excess in a few short months. Who knew?

Ron is a Toronto realtor who’s been chucking properties for decades. This weekend he sent me predictions worth sharing. (I’m unsure if he drives an Audi, but let’s take that risk…)

1) Those living off their house ATM will feel it first. Banks will pull the plug on further lending, and reduce lines of credit. The stress would kick in earlier for some than others, but I figure by 6 months those who needed the LOC in the first place will be feeling the heat. Frequently they turn to the grey market @ 10% or above, then capitulate and dump the house.

2) Affordability takes a nose dive as the cost of money jumps up. That takes the real buyers out of the market. The specs will sit on the sidelines waiting for more blood in the water. Bottom line is demand drops, and supply pops.

3) Many Boomers have been waiting for the Pandemic to list because they were uncomfortable selling with all of those germs hanging around.  Look for thousands of listings to hit the market in April onwards.

4) My inbox if flooded every day with Condo developers offering me a full 6% to sell one of their 2 and 3 bedroom units. In the recent past those sales were done by salaried employees, who cost a fraction of the 6% of sale price. Now they just need to move the product. Thousand more units are coming on stream that were planned before the world changed

5) At our office meeting this week, one of the managers more or less read verbatim the glowing 2021 projection prepared by the Toronto Board. It was so bright, I had to dim the monitor on my computer. Being a good team player, I said nothing, as did the other old timers who have seen this rodeo before, a long time ago.

6) Wild card? When. The sweet spot for a Federal election is between the early economic dead cat bounce that will begin by early May, and the havoc caused by higher interest rates, that kick in after July.  I think the second half of the year is going to be a lot rougher than the first half.

Some practical news flowing from these changes: lenders are being deluged with mortgage applications as people desperately grasp for the lowest rates in Canadian history. TD moved a quarter-point higher on Friday. Others will follow. If you have a variable rate, lock in. If you haven’t pre-approved yet to finance a purchase, do so. It was only a matter of time, after all, before the cost of money started to normalize. All those people in the steerage section who told you higher rates were impossible were snorting hopium.

What else?

Well, it’s March now, going into the eight or ten most frenetic weeks of the year for housing. There have never before been conditions like this – insane-high prices, a global pandemic, mass vaccinations, historic govy spending, central bank intervention, rapid rate changes, crushed affordability, plus the virus, nesting and WFH that erased listings and inflated demand. It’s a new world for buyers. And not a swell one.

But maybe Ron’s right. Inventories could jump along with loan costs. Maybe a slew of smart owners will realize it’s an historic opportunity to be sellers – cashing out at the top then buying into falling prices. Maybe the kids will grasp that it’s better to have a higher rate on less debt than the opposite. Or that FOMO is lethal. Or that the future may look nothing like the present.

Or not.

What a rutting season this will be. Incoming!

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   By Guest Blogger Ryan Lewenza

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Hey, do you want the inside scoop on the stock market? Do you want to know with a high probability where the S&P 500 will be in a year from now and what will be the main driver of this move? Well, you’re in luck! Below I provide the most important chart that investors need to be following over the next 9-12 months. Interestingly enough, I used to cite the importance of this chart during the recovery from the 2008 financial crisis. It’s funny how history repeats.

During economic recessions central banks respond by adding monetary stimulus to help reflate their economies and engineer an economic recovery. Historically, the main policy tool used by central bankers was lowering interest rates. This changed in the financial crisis as the Federal Reserve (Fed) took rates down to zero but with little effect. Given the severity of the downturn and damage done by the financial crisis, the Fed initiated a new policy tool, known as ‘quantitative easing’ (QE).

QE simply entails the Fed printing money and with the newly printed dollars they turn around and purchase bonds. They do this to help drive long-term interest rates lower.

During the financial crisis the Fed implemented a number of rounds of QE and now they are back at it and this time they are not messing around. Every single month the Fed is purchasing US$120 billion of government bonds and for the first time, corporate bonds. In total, since Covid-19 hit, the Fed has printed and injected over US$3 trillion into the US financial system. Just breathtaking figures.

What’s the connection with the stock markets?

Stocks love Fed money printing and QE. There’s two key reasons for this. First, the bond buying drives bond yields lower, which makes stocks more attractive, on a relative basis. Second, the message this sends to market participants is that the Fed has our back and they will do whatever it takes to reflate the economy.

Below I capture this relationship between the Fed’s bond buying and the S&P 500. Note the tight relationship and correlation of the S&P 500 and the Fed’s expanding balance sheet. So, given the Fed will continue its bond buying program, likely for the remainder of the year, this should help to keep driving the equity markets higher.

S&P 500 and Federal Reserve Bond Buying

Source: Bloomberg, Turner Investments

Now this can’t last forever, and likely doesn’t need to as the stimulus from this bond buying and low interest rates should help lead to an economic recovery over the next few years. Effectively we should see a ‘handoff’ from all the Fed money printing and support, to the US economy then strong enough to grow on its own without the need for all the stimulus. I’ve been using the analogy of a relay race where the baton will pass from one runner (the Fed) to the next runner (the overall economy). That’s exactly what happened during the 2008 financial crisis/recession.

In total the Fed implemented three rounds of QE from 2008 through to 2013. In the above chart you can see this with the green line (Fed balance sheet) rising from roughly US$2 trillion in 2009 to over US$4 trillion by 2013.

Then the ‘handoff’ occurred.

Finally the US economy was strong enough to stand on its own two feet and no longer required these emergency policy measures. The Fed ended its QE policies and we then started to see the economic recovery pick up.

Below I chart S&P 500 earnings and US total people employed from this time. You can see from 2013 (when Fed ended their QE policies) up till 2019 that S&P 500 earnings rose from $100/share to over $150/share. Similarly, total US persons employed rose from 135 mln to over 150 mln. Essentially, there was a successful handoff from the Fed to the economy and I see the same thing playing out this go around.

I believe the Fed will continue these emergency policy measures with them buying additional bonds for the remainder of the year. Then as the economy rebounds with the recovery really taking hold, the Fed will then curtail their bond buying (expect a market correction when this happens), effectively resulting in a ‘handoff’ from the Fed to the economy.

So now you know the most important chart to be watching and how we see the next year or two playing out. You’re welcome! And if I’m wrong just blame Garth. He was crazy enough to let me on here.

Fundamental (Jobs and Earnings) Improved following end of QE

Source: Bloomberg, Turner Investments

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

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In case you’ve been arousing yourself with MLS temptations lately and missed the big news, here’s a recap.

Six out of six big Canadian banks have posted fat profits, beat the Street and slashed their loan-loss provisions. In the middle of a pandemic and recession, what does this mean? Simply that the virus is so done – at least as the main determining macroeconomic factor. We now know where we’re going. Only the speed is uncertain. Several implications flow from this. They all support the themes a certain pathetic blog has been proselytizing for a weeks now.

Our reptilian Bank of Canada boss, for example, is admitting that as the herd is dosed (and that will erupt come April) the economy will rebound. The central bank rate will stay low, but sentiment is growing the CB will start ratcheting back its bond buying – also in April.

Put it together: (a) corporate profits jumping, (b) vaccinations ramping up, (c) infections and hospitalizations falling, (d) economy reopening and rebounding, and (e) the slow retreat of monetary stimulus. And this is what you get…

Yes, I know we published a chart of the bond market erection two days ago, but the growth since has been dramatic. The return on 5-year G0C debt has now tripled in three months. The bond market ain’t blind. It sees growth, wage pressures, retail therapy, less stimulus and more inflation. By the way, StatsCan says payroll employment rose by 44,200 in December after decreasing by 64,500 in November.

So, you can expect mortgage rates to begin their ascent momentarily. Hope you locked in. As suggested.

Now, some people wonder – if Covid’s being crushed, workplaces will reopen, offices repopulated and herd immunity achieved – why this insane nesting real estate boom would continue. Pandemics are temporary, after all, but moving your family to Marmora or Comox is not. How come public officials, like the central bank governor, keep denying the speculative FOMO fever that’s embraced the land?

It’s wilful blindness. The CB wants growth, no matter from whence it comes. The big banks are entering a critical spring housing market and want to sell a slew of mortgages. And floggers like Royal LePage just want to, well, flog.

Did you see the latest survey that outfit published? What have we done to the children?

LePage says 48% between ages 25 and 35 own real estate with half of those having bought during the pandemic – yes, when prices were at an historic high. Among those who have not purchased, 84% say they will soon. And when asked if real estate (now the most expensive it has ever been because of a unique set of temporary circumstances, already passing) is “a good financial investment”, 92% stick up their hands in joyous agreement.

Yes, we know the nation’s biggest real estate marketing company creates media interest with these pieces of ‘news’ routinely fed to journalists now working in their basements and broadcasting over Skype. But this is a scary as it is suspect. We’re also being told that the young cohort believes WFH will last forever (because they want it to), which gives carte blanche to go rogue-suburban and borrow their brains out. “The pandemic provided an unexpected prize for young Canadians,” says the company’s CEO mouthpiece, “a path to home ownership.”

Some prize. It also allowed this generation to spend more than any previous one on accommodation, increase household debt by a record amount ($100 billion+) in a single year, restrict mobility, suck up scarce liquid assets, become less diversified or flexible and – in many cases – physically remove them from workplaces where advancement, recognition and career potential are achieved.

Hey, but that’s just the Boomer in me talking, right? Houses will go up forever. Mortgage rates won’t double in five years. The boss will keep giving you raises and job security even when you don’t come to work. And putting 100% of your net worth into a single asset a suicidal commuting distance from the office is a “good financial investment”. Coz, of course, everybody wants to live there. With the chickens.

Well, time will tell. But experienced eyes see a generation embracing risk, betting on a one-asset strategy and mistaking a weird little (but intense) chapter in modern history as an inflection point for the future. It’s not.

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Pete and Julie called to ask if they should list their Mississauga detached house (after eight years) this summer. “I figure it’s worth about $1.6 million now,” he says. “We can hardly believe it and, man, we sure need the money.” Covid stole Pete’s food importing business. No surprise since three-quarters of his clients were restaurants. Now all closed. Julie only works half-time these days in the office at the dental clinic.

“So,” he queried,” is this a good plan?”

No, I said. List now.

It’s becoming evident the market cannot sustain its velocity. Things are too nuts. The world is changing too fast. Even our vastly out-of-touch and wooden central bank boss, Tiff Macklem, is starting to get it. Here’s what he said yesterday: “We are starting to see some early signs of excess exuberance. What we get worried about is when we start to see extrapolative expectations,” he said. “That’s when homebuyers believe that past strength will carry on indefinitely.” You bet. However he then added: “but we’re a long way from where we were say in 2016, 2017 when things were really hot.”

Really, Tiff?

Let’s review recent detached home sales in Toronto, for example (and things are even more torrid in Woodstock, ON, Kelowna, Oshawa or Halifax). This chart from Scott Ingram, account and property guru, clearly shows the volume of properties selling for over the asking price in 2021 is running neck-and-neck with the insanity of 2017 – that brought down emergency government action.

We’re doing a GoFundMe page for the Tiffer so he can get some new glasses. Are you in?

And, yikes, are you watching what’s going on in the steamy bond market?

Traders are dumping debt because they smell inflation. That’s jacking yields and ensuring mortgage increases are closer at hand. There’s no mystery why this is happening. Commodity prices are shooting higher (there’s serious talk of oil at $100 again); we’re on the precipice of a major inflow of vaccine and mass inoculations (the US has now romped far ahead of schedule); the Biden White House will soon have a $2 trillion Covid stimulus package in place; the infections/deaths/hospitalizations have plunged across North America; over 70% of US companies are beating earnings estimates so far this season; when it comes to profits our banks are crushing it; demand for borrowing has hit a crescendo.

All these reasons combine to deliver this…

The bond market sees what’s coming…

That’s what five-year Government of Canada bonds are doing at the moment. The yield has almost doubled so far this year- and it’s still February. The same is happening with long US Treasuries, where a tripling is within sight. (Inflation and rising rates are one reason tech stocks got thumped recently and poor Tesla was road kill.) All this means it really doesn’t matter if the Bank of Canada says its key lending rate will stay low for the next two years, because the bond market has already rung the bell. Up she goes. Canadian fixed-rate mortgages are not set by the CB but rather by the commercial market, so increases seem inevitable. As we told you, the days of 1.5% (or less) five-year home loans are doomed.

Some smaller lenders have already started to swell their rates. “Others are threatening to hike rates imminently,” says mortgage broker/blogger Rob McLister. “There’s still no sign of increases from the big guns (major banks), but if this yield climb persists, it’s just a matter of time.”

And there’s one more chart the Pete and Julie need to consider. It plots the extent of house lust in our nation, showing conclusively that the Boom of ’21 is far more dangerous than that of ’17 because families are chowing down on record debt at rates we now know are destined to rise. Ouch.

…while Canadians chow down epic mortgage debt

During a time of global pandemic, recession, double-digit unemployment and no inflation Canadians added almost 8% to overall mortgage debt. Between home loans and LOCs we now owe $1.97 trillion, equal to the entire Canadian economy. It’s the fastest rate of debt accumulation in a decade, and the first time ever we embraced over $100 billion in a single year in fresh household debt.

This is why Peter and Julie can probably get $1.6 million. Now. Most people will never read the 700 words above. They think houses will go up forever because rates can’t rise. They see swelling prices. They get FOMO. They panic buy. How can you blame them? It’s a cash cow.

But don’t feed it. Milk it.

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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?

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