Author: garth turner

   By Guest Blogger Ryan Lewenza

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Let’s all take a big deep breath in and exhale. Then let’s turn off the TV with all those scary headlines, which will only stoke fear leading to emotional investment decisions. Finally, let’s remind ourselves of a few key investing facts – 1) 75% of the time US equity markets rise and on average return 9% over the long-run; 2) equity markets do sell-off from time-to-time, sometimes violently like at present, but they always recover; and 3) most investors still have years of market growth before retiring so this will end up being just a blip in that long-term plan and even for those in retirement, you’re not going to spend all your savings today so you have plenty of time for markets to recover from this recent sell-off. Now that we’re all calm as a Buddhist Monk, let’s take stock of this week’s market correction and try to make sense of it all.

I want to start today’s blog by helping readers get some perspective on this recent market decline. As Garth quoted me earlier this week “no one should be surprised by this sell-off”.

Since 2019 the S&P 500 and TSX had rallied an incredible 36% and 26%, respectively, coming into early February. Moreover, during this period there was little “give back” so with the huge gains and lack of market volatility, we were overdue for this pullback. You can see in the chart below that the S&P 500 and TSX have declined over 10% since the peak in February, but even with this correction, the S&P 500 and TSX are still up 23% and 17%, respectively since 2019. Sure 1,000 point drops in the Dow is scary but let’s not lose perspective of the larger trend.

North American Equity Performance Since 2019

Source: Stockcharts, Turner Investments
As of February 27, 2020

As markets head higher investors can become complacent and forget that equity markets often incur small pullbacks (greater than 5% declines), larger corrections (10%+ declines) and occasionally bear markets (20%+ declines). In fact, I crunched the numbers and on average the S&P 500 endures one 10% correction and three 5% pullbacks every year. So the 10%+ market correction since mid-February is entirely consistent with history.

And by the way I predicted this higher volatility in our market outlook. From our January 4th, 2020 blog post “That doesn’t mean we won’t see bouts of volatility and sell-offs occurring this year. In fact, I see the potential for higher volatility this year.” Admittedly, I didn’t see the Coronavirus causing this market pullback (or it being so violent) but this volatility is exactly what I called for in our outlook report.

So where do we go from here?

First let me state that I have no idea when this virus scare/pandemic will peak and get under control. But ultimately it will and the scary headlines will fade until some other scary thing takes its place. We’re currently in the “eye of the storm” but the storm will end. It’s important to remember this!

Looking back at previous pandemic scares such as the Ebola scare in 2014, the S&P 500 and TSX dropped 7% and 10%, respectively, but they then recovered in short order. Charles Schwab crunched the numbers of all the past pandemic scares and found that global equities are up 3% on average after 3 months and 8.5% after 6 months. As I said before, the storm will end.

Now what I’ll be focusing on to try to determine when the correction is over and when we’re “through the storm” will be the number of new Coronavirus cases in China and the Asian equity markets. Since China is at the epicenter, the bottom will probably start there.

Below is a great chart from Credit Suisse, which shows that the Hang Seng bottomed roughly one month after the peak in new SARS cases back in 2003. I think this could provide a similar road map for the current virus.

And on this front I am seeing some potentially positive developments. According to Johns Hopkins University data, the growth rate of new cases in China is slowing, which could be a positive first sign that we’re approaching the worst of this current scare. Now it’s spreading globally, which is the big concern, but we need to see a peak in Chinese cases before feeling confident the worst is behind us.

Asian Markets Stabilized One Month After SARS Infections Peaked

Source: Credit Suisse

Looking at the economic impact of this outbreak, it remains my view that this event will weigh on economic growth over the next quarter or two, but it will not derail this current economic expansion or bull market. In the US the labour market remains incredibly strong, confidence is high, manufacturing is potentially bottoming and the Fed could potentially cut rates adding further stimulus should their economy soften.

In China, Q1 will be a disaster as industry has come to a halt, travel is non-existent, while consumer spending will be greatly curtailed. But if, or rather when the outbreak fades, then economic activity should come surging back.

Finally, let’s step back and review the long-term trend of the US equity markets, which remains very bullish. Below is the technical chart of the S&P 500 and you can see that the recent decline has been relatively muted within the context and this incredible bull market and no major damage has been done to this trend. So yes we need to be vigilant in assessing the impact of this pandemic scare, but let’s not get ahead of ourselves as its not the end of the world and above all keep your emotions in check.

And if you still disagree with all this, then move way up north and buy lots of cans of tuna.

S&P 500 Remains in a Long-term Uptrend

Source: Stockcharts, 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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This story has been told before here. But tough. Listen to it again.

My first market bloodbath was in October, thirty-three years ago. I was the hotshot, know-everything, financial-guru-editor-columnist at a large daily newspaper. In my office was a big metal box which spewed a continuous ribbon of newsprint covered with breaking news headlines, market data and bulletins. This Dow Jones terminal was the candy-ass of technology at the time. It even had a bell. When something awesome was happening, it dinged at me.

So the bell started in the morning and basically continued all day. Markets were free-falling and back then none of today’s trip mechanisms were in place. The selling was relentless and historic. By the time the trading ended Wall Street had shed 22.61%. In one session. That compares with the 3-4% declines this week, and an 11% drop in 1929.

Naturally I assumed life was ending. A new depression was coming. This was unparalleled. It was different this time.

The next day hundreds of thousands of readers were treated to pictures of bread lines, hollow-eyed vagrant children on flatbed trucks and an army of unemployed men. My words matched. They were alarmist, shallow, unhelpful and reeked of inexperience and lack of judgment.

I regret it still.

Needless to say, central banks moved in, flooded the economy with liquidity and markets rebounded. A few days later stocks jumped by more than 10% in a day – the 7th-best gain on record. Within a couple of months, investors had shrugged it all off.

So, when the dot-com bubble burst and tech stocks lost 80% of their value in 1999, I remembered that. It was on my mind during the Y2K panic. Also in the terrible days and market collapse surrounding Nine Eleven. Same with the 2008-9 housing-induced meltdown and financial plunge. Plus the US debt ceiling crisis in 2011. And now.

Through every one of these never-happened-before moments many folks got scared, sold things shedding value, retreated to cash and did so on the advice of panicked, inexperienced, unwise and incorrect voices. They missed the good days that followed, crystallizing losses and robbed themselves of wealth. Today it’s far worse. Social media has removed the professional, sober-second-thought media filter, allowing a torrent of conjecture, fear-mongering and falsehoods to wash over us all.

In every instance of market mayhem in my life, certain things have been true. People who act out of emotion get whacked. Those who ignore the end-of-days gloom around them come out okay. Those who dive in when other flee make out like bandits.

Each time the system has self-corrected. Central banks get activist and adjust rates. Governments unleash capital. Stimulus packages and incentives emerge. Nobody wants a 1930s rerun, and with every crisis, scare, panic and pandemic, new ways are found to prevent one.

I’ve also learned markets are far more extreme than the rest of society. They swing from irrational exuberance to group suicide. The highs are too high. The lows too low. The pendulum always swings back. As one Wall Street smartie said on Friday: “With markets on the brink of correction territory, panic-selling, mis-pricing of high quality equities, and lower entry points, this could turn out to be one of the key buying opportunities in the last 10 years.”

As stated here yesterday, the bottom is unknown but we might be only half way there. A top-to-trough rout of 20% seems quite possible, and history shows us a wave of buying will follow. The world is still growing. US unemployment’s the lowest in 50 years. Great companies abound. Technology is improving life. Central banks will act. The immense disruption caused by this virus so far – and to come – is not erasing demand or corporate revenue, but pushing it into the future.

These things I did not understand clearly three decades ago. Now, yes.

Let’s end with Josh. He’s got a burning question for you:

I’ve been practicing what you preach for a few years now and have passing on the good work of BDL (balance, diversity and liquidity). I found my person and we’re getting married on July 1, 2020. My parents just gave us $10 000 for the wedding. Should I buy up the S&P 500 once it drops 20%. or just leave it in cash until the wedding? Thanks for everything you do.

Did I just hear a bell?

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Nancy’s in a state. “Hope you pick a scared-looking puppy for this post,” she says.  “Feels very appropriate.”

No, we’re gonna use a cat.

However, she caught my attention with a pretty good MSU: “My husband initially forced me to read your blog (out loud to him) with plenty of sighs and eye rolls on my end but now I look forward to our nightly ritual, I swear!”

Okay, N. You’re in. Now what’s this anxiety thing?

I’m hoping you can quell my anxiety right now by helping us not lose all of our money. We make 160k combined and have close to 900k invested in rrsps and tfsas. Our investments are relatively balanced but we do own pretty large portions in our “winning” stocks (Tesla, Shopify, Apple and Facebook) the rest are in ETFs. As the stock market is currently taking a gargantuan tumble, what should we do? Should we take our money out now and buy again at the bottom? Should we stay put hoping this sneaky virus goes away and things return to normal? Should we buy a house with our money – seems like that market isn’t being effected by the virus… Please help otherwise I’m afraid we’ll be right where we started years ago with nothing left in our savings!

Yes, fear is the strongest of emotions. It trumps greed, sex or the way you feel when someone says ‘hereditary chiefs.’ This week has been ugly for investors as the virus spreads, traders take risk off the table and the stock market lurches into a correction (down 10%). As described here two days ago, money has cascaded from equities into bonds, driving prices up and yields down. Oil’s been whacked as have most commodities. And look at volatility – wow, an eruption. Similar to 2011.

Now contemplate the comment made by blog dog Bill about the stock market’s slide from record highs. This is what I mean about the effect of fear:

Garth doesn’t get it. This virus is the real deal. Tens of millions will die. The global economy will be completely wrecked. I think we break the 2008 lows. Ultimately, your investment portfolio right now is going to be less of a concern than how much food and supplies you have stocked up on. It’s going to be a shock when this hits people and they will panic when they realize how unprepared they are. Grocery store shelves will get cleared out one day soon. It’s happening.

Covid-19 cases are fading in China and growing outside. The crap on social media and the icy fingers gripping the hearts of some of wussy doubters down in the steerage section are predictable. People never change. They think half the world will get this and countless millions die. But in Wuhan, a city of 11 million, there were (at most) 70,000 cases – .6% of folks. Deaths there have run at 0.02% of the population at large.

So, Nancy, there may be empty store shelves in the coming weeks but you probably won’t get the virus and you surely will not die. Nor is this what Mr. Market has been worried about, either. Instead the issue is a drop in global economic output caused by the public health response, leading to diminished corporate profits. If you think that sounds like a temporary hit, well, bingo. Exactly the case. And in that reality there is much optimism.

Investors hate uncertainty, so until a timetable emerges, the selling will continue. We’re maybe half-way there. The correction of 10% that has occurred could turn into a 20% drop – the technical definition of a bear market (the same thing happened at the end of 2018, when people on this blog utterly capitulated. Then markets gained 30%.).

What’s likely to occur at that point (or sooner)? Central bank action, for one. The market now believes rates will drop two or three times by the end of the year, lopping 60-70 basis points off existing levels. That will inject a huge amount of liquidity into the economy, and because this is a global issue there will be a global response. Central banks will likely move in a coordinated fashion, while governments also scramble to restore equilibrium. Look at Hong Kong. This week they handed spending cash to every adult.

Meanwhile the reasons markets went up two months ago are still in place. “Even with the retracement… we’re still at cycle highs,” says a Wall Street manager. “But once we get through this very large uncertainty, markets will have an enormous coordinated tailwind of fiscal and monetary stimulus to help those equity valuations in 2021.”

Expect the Bank of Canada to trim its key rate in April, given the virus, the FN blockades, the oil sands disaster and the plopping price of oil. (There should be a cut next week, the CD Howe Institute argued on Thursday.) All that is pushing Canada towards a temporary recession, and pushing the bank to act. Which it will.

So the virus may be a new challenge, but the ultimate pattern should follow that of past shocks – from the GFC to Y2K to 9-11. It may come with more emotion, and more disruption in daily lives if subways and schools close for a while. And the sight of malls full of people in surgical masks is chilling.

But in terms of your portfolio, Nancy, sit tight. Never sell into a storm. The balanced and diversified part will be fine. The individual stocks will be more at risk. Sounds like you failed to realize capital gains and move them into safer, broader assets. Remember that lesson for next time.

Yes, there’ll be one. We shall have exactly this conversation again. Count on it. Now go and load up on toilet paper before Bill hoards it all.

Letter from a Chinese blog dog…

Thursday, 8 pm ET. I just received the following letter from a regular reader working in China, who is living through the Covid-19 storm. You might find this of interest.

Writing you again as a Canadian investor working and living in China through the Coronavirus.  I’ve written you in the past, but I just thought I’d share with you a response to Bill who you featured a fearful comment from today on how the Coronavirus is going to destroy the worlds population and market.

Over here in China (where I’ve been living and working for over 2 years now), at least in my southern city near the Hong Kong border things are returning to normal. More and more shops are open.  People are out and about in parks and sidewalks.  People have returned to work – myself included.  Everyone still wears masks outside their house all day and we sign in to every location we visit via an app so potential outbreaks could be tracked quickly.  But there hasn’t been any new confirmed cases in this City of nearly 20 million in days.

As a daily reader of this blog for years now, who’s recently started a new job with a 30% salary increase, I’m excited to see this downturn and will be investing every cent I possibly can into this storm to take advantage of these sale prices!

Thanks again for all that you do!  You’ve helped this moister relate more to boomers financially, and looking at my portfolio, that’s a good thing.

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Made your RRSP contribution yet?

Wait, keep reading. This isn’t another tedious piece on tax-free compounding, using a retirement plan to split family income, making a contribution without having any money, how to remove funds without being taxed nor how the entire system is dramatically skewed to benefit high income-earners, medical professionals, lawyers and the self-employed. You already know that stuff.

Instead, let’s revisit a fav topic: how pooched everyone else is.

How much do you need to retire? That depends on when you hang ’em up and how much you spend, of course. Plus if you have kids or wish to leave an estate for others to squander on stuff you’d never buy. There is no static answer. Some people say 30x your annual working income is the right number. Investment giant Schwab suggests $1.7 million is a reasonable goal. Fidelity says you need enough saved/invested to replace 80% of your work salary. Anyway, the Internet teems with financial calculators you can use to come up with your own target.

Then compare your readiness with this dismal set of facts:

• As mentioned before, people retiring without a defined corporate pension have an average of $3,000 saved. Yeah, they probably have a house, too. But you can’t eat that.
• About a third (32%) between 45 and 64 have saved… nothing. Seriously.
• Roughly a fifth (19%) have less than fifty grand. But the average amount Canadians have saved/invested for the future is $184,000. That tells us a small slice of folks have saved a boodle. A giant slice of people are heading for a future of KD and CPP.

Now on that point, we all need to understand clearly the public pension system in Canada will not save you. Not with the recent enhancements, either. If you’re a Millennial, the higher benefits (a max of just over $20,000 a year) don’t click in until the average moister is 76.

Today the max someone can collect in CPP is $1,175 a month, but very few qualify. So the average received is $672, or eight grand a year. Grocery money. Old Age Security goes to everyone at age 65 (for now), and that adds $613. So the total in government pogey the average person receives is $15,420. If that were your only income, then the GIS (Guaranteed Income Supplement) kicks in at a max of $876 per month, bringing  the grand total of public assistance to $25,932 – or about two thousand a month.

Married people get less GIS, but it’s still possible for an average household of two to receive a total of about $45,000 annually. Maybe all the people with little or nothing think this is enough to get by on, which is why they don’t save or invest. Given that the median household income in Canada is north of $90,000, this translates into a 50% drop in retirement. So ask yourself, could you suddenly live on half the money you’re getting from employment?

Let’s compare with the deplorables in Trumpland (which some people think may soon be the home of Bernie’s Sandersnistas).

The average monthly Social Security payment in the US is $1,471, or about $1,900 in moose money. Therefore it’s three times more than CPP pays (on average). By the way, the max SS payment of $2,210 at age 62 is about twice as generous as CPP – and it grows from there: $2,900 a month if you wait until 66 and $3,770 monthly ($45,300 US) at 70. So a couple of wrinklie old pensioners who worked all their lives could actually see up to ninety grand a year.

But what about household savings?

A new survey by TD Ameritrade says 50% of Americans have more than $100,000 – way better than us. Most of this is in the hands of people over the age of 40 (no surprise there), yet Millennials in the US are the ones most often stuffing their Roth IRAs (the American equivalent of our TFSA).

Hmm. The average American has saved more money for retirement, and the US system is far more generous with public pensions. So how did we get so smarmy and snooty, believing the States is a land of dumpster-divers, people who spend everything on Glocks and trailer park rednecks where financial illiteracy reigns supreme and society is divided between billionaires and losers?

Beats me. The CBC maybe. Or our political elite. Maybe it’s the whole real estate-government complex.

After all, the US rate of home ownership is lower than in Canada by almost 10%. American households carry far less debt, and actually reduced borrowing a ton after the housing market blew up. Plus the median cost of an American house is just $228,000. The average paid by first-time buyers is $219,000. There are porta-potties in Vancouver worth more.

Thus, when it comes to the financial state of Canadians, this pathetic blog’s thesis stands. It’s suicide by house.

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Virus. Oil sands crisis. Pipeline constipation. Pop-up FN blockades. Tumbling oil prices. Vanishing capital. A timorous federal government. Oy. The news lately has been dire.

Well, for all you people in Alberta, stranded by illegal protests, watching real estate equity fade, seeing energy jobs snuffed by the Forces of Greta, feeling alienated and wondering why people burning tires on railway lines are getting more attention than you, stop being so darn selfish. I mean, sheesh, there are people in Toronto who actually can’t afford a nice, seven-figure house.

Seriously, the divide is growing. Yawning. Covid-19’s impact on the price of crude is just the latest assault, as the black stuff heads south of fifty bucks, and Canadian oil drops through $29 – down 6% on Tuesday. Ouch. As global economic activity is impacted, energy consumption takes a hit, with Calgary and our oil patch along with it.

Now the FN protests have turned a structural problem into an intractable mess. They’re not about just a pipeline anymore. It’s land. Residential schools. Missing aboriginal women and girls. Unceded land. Treaty rights. A thousand years of injustice and colonialism. Plus climate change. Just as crazy Bernie has mobilized America’s young in favour of wealth redistribution, endless tax and more government control, so have indigenous activists in the land of maple co-opted the kids who want climate revolution. Behold the faces on the urban protest lines.

Meanwhile it looks like the virus will end up pushing Canadian mortgage rates into the ditch. As stocks swoon and viral fears mount, money slides into bonds, driving prices higher and yields lower. Look at the return on a five-year Canada bond – down below 1.2% on Tuesday.

Lenders fund fixed-rate mortgages in the bond market, so a drop there of this size pretty much guarantees the cost of a home loan may be dropping again. Says mortgage blogger-brokerguy Rob McLister: “There’s now no doubt that this global outbreak has the potential to take fixed rates down another 1/4 to 1/2 point, if not more.”

You bet. And remember that the mortgage stress test was recently diddled by the finance minister, under direct order from T2. This means the anticipated new rate of 4.89% (a drop from 5.19%) could turn into something even juicier for newbie borrowers, increasing their ability to more easily slip beneath the waves of debt.

Therefore get ready for a five-year fixed at 2.5%. And don’t be surprised if some hopped-up CU comes out with a buck-ninety-nine offering for the prime rutting season. Combined with the current paucity of listings in the GTA (as in Vancouver and Montreal), it means more price pressure. More bidders. More borrowing. More unaffordability.

By the way, nobody seems to be enjoying this. A Zillow/Ipsos poll just found 77% of GTA residents are concerned they can’t afford the real estate they want. Also 70% of sellers/owners fret that they can’t either – which is exactly why listings have taken a kick. When people figure they can’t afford to move, they don’t sell.

The same survey found 84% of people think Toronto’s in a bubble, at risk of correction. Compare that with just 61% in YVR or a dribble of 8% in Cowtown. Like I said, we’re drifting into two economic solitudes. Worse, the very concept of our nation is being shafted and disrespected by the #ShutDownCanada movement, the FN rebels and their dewey-eyed young altruistic, Twitter-fed disciples.

Well, let’s see what the virus news is in a week, a month and a season. So far it appears poised to exacerbate tensions in the land of the beaver. Low oil, lost investment, pipeline gridlock and environmental rebellion on one side. Cheap money, FOMO and exploding household debt on the other.

It’s interesting an entire Calgary downtown tower is now standing empty – 600,000 square feet, no tenants. (The overall commercial vacancy rate is a withering 30%). In 416 these days kids are paying $1,200 to $1,400 for a single square foot of space. A 500-foot condo can fetch $650,000, which is 50% more than a nice detached house on real dirt in Edmonton.

Outside the GTA on Tuesday activists shut down commuter train lines. On the west coast they blocked access to the Port of Vancouver. Elsewhere in BC, Ontario and Quebec roads and rails were rendered useless to traffic. And in Toronto there are apparently heavy casualties from the bidding wars.

Remember what this blog told you about being liquid and living quietly among the masses? Dancing with your dog? It’s time.

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After roaring through 2019 and romping to new record highs in past weeks, stocks markets have gone into a funk. Yup, the Dow shed over a thousand points Monday. Guts everywhere. A global plop. Bonds soared. Gold advanced. Oil sunk. The US dollar jumped.

First, let’s have context. The drop Monday didn’t even make it into the Top 20 days for losses on the Dow. Not even close. The granddaddy was a 22.6% rout in 1987, and the worst day during the GFC was 7.8%. So the current drop of  3% was like shutting the car door on your foot. Painful but not fatal.

Having said that, there’s no covering over the fact Mr. Market is upset. The virus is a tricky little bugger, and has now made unwelcome inroads into Europe and the Middle East after munching its way through Asia. It’s not that Covid-19 will kill millions of people – thankfully the mortality rate is low – but it’s kicking the hell out of local economies because of massive quarantine efforts.

More than a million companies in China might fail. Supply chains for behemoths like Apple are starting to break down. The cruise business is dead. Travel is massively disrupted. Q1 GDP in China will be a disaster. Global economic activity has started to decline. That’s cratered oil and commodity prices as investors anticipate weak demand.

In response equity markets – at record levels – have shed froth. That money has coursed into the usual safe havens, especially government bonds. As demand boosted their prices, yields plunged. The return on a 10-year US Treasury is close to its all-time low. Government of Canada five-year bond yields crashed 7%, back down to just 1.2%. Unless things spike it pretty much guarantees lower mortgage rates are coming.

In fact, events of Monday increased the odds central banks will cut rates more than anticipated, and battle the virus with a big shot of chicken soup and liquidity. Look for major stimulus from the Chinese bank, the ECB in Europe and the American Fed. By the way, Canada seems okay in the context of this evolving mess. Despite the Teck decision and the goofball railway blockades, our CB has kept rates at tolerable levels, giving the Bank of Canada more room to soft-land things.

Well, the deplorables cry, how bad is this? Are we doomed the way all the web sites selling gold bullion and ammo claim?

Nah. It’s noise.

The virus is real, spreading, unpredictable and will take months to overcome. But it’s not the plague. A vaccine will emerge. The flu kills way, way, way more people every year, and markets totally ignore it. This has the hallmarks of a temporary crisis. Like Y2K.

So it’s wise to focus on what drove markets higher before some moron somewhere ate a bat and puked on his neighbour. Markets have risen on a tide of robust corporate profits thanks to the power of the US economy, where unemployment is at a 50-year low, consumer confidence is on a roll and an 11-year-long expansion is firmly in place. Virtual full employment has fueled an economy which is 70% powered by consumer spending.

Says fancy portfolio manager (and second-rate blogger) Ryan: “No one should be surprised by this sell off. Since October markets are up huge leaving the equity markets extremely overbought and vulnerable to a pullback. This sell off should be expected and welcomed as it will work off the overbought technical condition and reset expectations. While the news updates on the Coronavirus are scary this should not derail the global economy and bull market.”

Yeah, but what about Trump?

No doubt his corporate tax cut helped ignite the spending which created jobs, as did deregulation and protectionism. Under this president inflation has returned, government deficits have exploded and expansion has been startling. Markets love that. They want more. And Bernie’s giving it to them.

  The victory of Democratic presidential contender Bernie Sanders in Nevada on the weekend was all Trump could have hoped for. The 78-year-old socialist has a good shot of being the orange guy’s rival in November, and radical enough to keep millions of Dems at home for the vote. Unless Super Tuesday changes everything – launching little Mike Bloomberg or resuscitating Joe Biden – then Bernie’s the guy. And Trump wins again.

As you know, Trump takes the market and the economy as proxies for his presidency. He thinks the Fed should seriously chop rates again. He’s busy doing trade deals around the world (India this week). He thinks climate change is an expensive hoax and the energy business should have free reign. Moreover it’s hard to imagine he’d let the US transportation system be shut down for weeks because of a few FN radicals in a snowplow pickup truck.

So, the virus will likely get worse, then better. Central banks will intervene. Economies will spike back in the midst of pent-up demand. Markets will recover as the American election cycle draws to a conclusion. Corporate profits will continue. Interest rates will drop. People who ignore things will sail through. Those who panic and sell will regret it.

“If the US November Election follows the UK results where the Socialists get the worst defeat since 1935,” says one Bay Street vet, “then markets will like that. Markets will probably like another 4 years of 45. The confusion and chaos are set against the background of solid economic growth. Not so bad.”

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  By Guest Blogger Doug Rowat

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Admit it, your neighbour’s flashy new SUV pisses you off.

You’re not jealous to the extent that you wish a tree falls on it, but it still aggravates you.

This has been one of the most significant revelations of my financial-advisor career: the extent to which people evaluate their financial situation against that of their peers. One of my most frequently asked client questions is, without a doubt, “how am I doing relative to your other clients?” In a sense, we’re always, figuratively and literally, comparing our SUVs.

Now, almost every personal finance website gives similar advice: don’t compare, refrain from jealousy, set your own goals, be your best self, etc.

While this advice is nurturing and politically correct, it certainly isn’t pushing anyone to take their finances to the next level. Comparing yourself to others can be useful and motivating. Mario Lemieux didn’t have pictures of fourth-round draft picks on his wall, he had pictures of Guy Lafleur. Using the success of others as aspirational fuel is helpful. Even occasionally becoming angry at the achievements of others has merit. Again, Mario Lemieux went on to overtake Wayne Gretzky as the world’s best hockey player shortly after Gretzky was named (unjustifiably?) MVP of the 1987 Canada Cup. Lemieux didn’t like that one bit and their feud continued quietly for more than a decade—a decade where Lemieux clearly became the better player.

What these personal finance websites do correctly observe, however, is that the true financial state of your neighbour is impossible to know. And looking only at someone’s apparent financial success is pointless. Was your neighbour’s SUV, for example, bought on expensive credit? Did a rich relative help them out? Did they simply overextend just to impress?

It’s important to measure yourself against TRUE, not imagined, wealth. In other words, compare yourself to benchmarks that are transparent and accurate. The financial goalposts that you’re chasing should be based on empirically gathered data, not uncertain conclusions drawn from catching a glimpse of your neighbour’s new Q7.

Statistics Canada last year published its Indebtedness and Wealth Among Canadian Households report and this report might be as good as we’re going to get in terms of determining how well we’re actually doing versus others in this country.

It turns out that the median net worth in Canada is around $300,000 and it’s been growing by about 4% annually since 1999:

Median family net worth: Canada and selected cities

Source: Statistics Canada, Turner Investments

Keep in mind that net worth is only one indicator of financial health. You might have a net worth well above the median, but if you have high debt levels that require perfect job security in order to service that debt, then your financial situation might actually be quite precarious. However, net worth does set some rough goalposts.

If you want to dig further into the numbers based on age ranges and family types, you can do so here.

So, how do you stack up? If you don’t like the picture that the report paints for you, don’t wait for the figurative tree to fall on Canada’s SUV—go out and change your own financial situation. Start by educating yourself—and regularly reading this blog’s a good start.

Earn yourself that new SUV (or whatever it is that’s important to you). And if it turns out to be nicer than your neighbour’s? Well, so be it.

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

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Best estimates are that half of all new condo sales are to investors. Well, they may call themselves that, but in reality they’re cannon fodder for the real estate development business. Without them, prices would be lower, urban skylines not be pierced by cranes and reasonable companies would be building nice rental accommodation instead of acres of concrete boxes fetching a grand a foot.

(Actually a new launch in Toronto’s Liberty Village this week boasted of prices ‘only in the $1,200 range – $200 to $300 less than standard.’ So a 445-foot apartment – barely large enough to swing the average cat – is on for $544,000. Plus $6,500 for a locker and $75,000 for a parking spot. Yikes!)

Why do investors snap up precon units, buying real estate that doesn’t exist yet which has no dirt?

First, it seems cheap. Five grand down. Another 5% in a month, with the remainder of the deposit spread over a year. Second, condos always go up, right? Your friend Vinny’s cousin’s girlfriend made out like a bandit on that unit, somewhere, that she sold on assignment before construction even finished. So this is a sure thing. And then there’s the visceral pleasure of potentially being a landlord, and ‘letting someone else pay your mortgage.’

It’s a pitch that has lured tens of thousands of people in the past couple of years, and kept those cranes going up. Yes, some folks have made money. But many have not. And many, many more may learn the same lesson – these days landlords subsidize renters, not the other way ‘round.

A suspicious blog dog recently sent me the pitch for a new condo building in Barrie, where the elk and caribou go to diddle and mayhem reigns on Hwy. 400. Aimed 100% at amateur investors, it promises to double your money in three years. Could this be true?

It turns out a one-bedroom unit of 563 square feet sells for $410,000 – which is cheaper than Liberty Village, but you need lithium battery-powered thermal undies to live there. A 20% deposit of eighty-two grand leaves a mortgage of $328,000 and combined with condo fees and taxes, the monthly nut is almost $1,900.

The developer says this will command rent of $1,830 – which is brazenly optimistic, since the market rate in Barrie is $1,400 for a one-bedder (a whole house can be rented for less than two grand). So the odds are an investor would be in negative cash flow from the get-go.

So how do you double your money in 36 months?

Here’s the formula given to the suckers contemplating a purchase:

Click to enlarge. Wear protection.

Turns out the modest (and inflated) positive monthly cash flow is added to the reduction in mortgage principal over the course of three years, then goosed wildly by an anticipated $64,600 increase in the value of the condo unit. That totals a $94,670 ‘return on investment’ of the $96,231 an investor spent. So the logic is you receive 98% of your money back, which is an “Average Annual ROI of 32.79%”

Really?

In actual fact, a buyer would have received (maybe, if lucky) $245 per month while actually spending $96,231. That’s cash flow of $8,820, for a real-world ROI of 3% – about the same as a GIC, and taxed at the identical rate. The only way an investor could realize more is in the event of (a) a sale and (b) at the fantasy future price. Of course, that would come after paying a commission of $28,500 (plus HST) which would seriously reduce any potential return.

“Double Your Money in 3 Years!” is a lie. Shame on the marketing company which produced this material. Shame on the regulator for allowing it. Shame on Hersh Condos for preying on the gullibility and greed of others.

But if you really want one, these beauties are available for four hours only, next Wednesday afternoon. In Toronto, of course. Barrie isn’t safe this month. Bears.

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By gelding the mortgage stress test the feds just doled out a giant gift. No, it’s not to the kids who can now borrow more, swallow additional debt and offer a premium for inflated houses. Instead, it’s to the real estate-industrial complex. The lenders. The insurers. The reno guys. The appraisers. And, above all, the realtors. Sorry, that should be Realtors®.

As you know, the Trudeau guys – the ones who surrendered on Thursday to the lawless aboriginal protestors – dropped the stress test hurdle this week by about a third of a point. By changing the formula, the qualifying rate fell from 5.19% to 4.89%. It’s a big deal. The first meaningful drop since the thing was created. And it comes at a weird time – when nobody needed to step on the gas.

Here are a few of the reasons this sucks…

First, it’s spring, almost. At least there are cherry blossoms in Vancouver and hormones everywhere. This period – March through May – is the strongest of the year for residential real estate sales. Prices always peak before settling back a bit for the summer. The nesting instinct grows irresistible as the green shoots erect. Otherwise reasonable people turn into goey masses of residential desire, stumbling through open houses muttering, “Where do I sign?”

Second, major markets are toasty, verging on boiling. Prices have been snaking higher in Toronto, southern Ontario, Ottawa, Montreal, Halifax and even in YVR and Victoria. Not only has the impact of the stress test faded in the last two years, but mortgage rates have plopped to near-historic lows while listings have shriveled along with them. More demand and less supply is a formula for price pressure. Homeowners watching property values inflate have concluded they can’t afford to move, may not pass the test if in need of more financing, or just want to bank bigger gains before bailing out. In any case, they ain’t going to market.

Third, the ‘housing crisis’ that every government has been trying to address comes down to one word. Affordability. The average family can’t afford the average house in these places, given the asset inflation that’s occurred since central banks trashed rates back in 2009. So how will reducing the stress test and giving buyers more borrowing power improve affordability? Right. It won’t. Things just get worse.

Fourth, making mortgages fatter by allowing buyers to qualify for greater amounts means more debt. Sheesh. Already we’re at record debt-to-income levels. A majority of buyers in the GTA, for example, have ratios of 450% or more. The savings rate is down. Four in ten people have trouble servicing existing debts. Mortgage totals now exceed $2 trillion. Is it remotely responsible for the government to signal that borrowing should increase?

And, as a result, you can kiss off any further Bank of Canada rate cuts. At least for a while. Seems the central bank is the only adult left in the room these days, worrying about the steaming mountain of borrowing and the potential negative impact that could have on the entire economy – which is two-thirds made of consumer spending.

Meanwhile the national mortgage association says the stress test is still too high, “especially given our current economic climate and general expectations of future interest rates. Uncoupling the stress test from the Bank of Canada rate is the right public policy move but a reduction in the percentage test itself is also needed.”

Yeah, right. And everybody gets a pony.

On Thursday I spent time with a couple who emigrated here (from Cuba) a dozen years ago. Nice people. One kid. Rent in the GTA where he’s an engineer. At 50 years of age, they’ve managed to save about $250,000, which is a true accomplishment after starting with nothing – including no English.

Mars wants to invest this money since they have no pensions. Venus wants a house. “All of our friends say they’re making so much money and that we’re throwing it away on rent. The bank says we can afford a house worth about $750,000.”

Said Garth: buying would erase your savings, give you a half-million mortgage debt, double monthly living costs, impact saving for your kid and in ten years you’d have to sell and hope for enough of a gain – after fees, expenses and elevated monthly costs – to fund retirement. What a gamble. After scratching your way this far, why take the risk?

“But did you hear?” she said. “They just dropped the mortgage rules!”

I give up.

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Whadda nation.

Domestic terrorists shut down the railways, throwing thousands out of work, whacking the economy and the federal government calls for… negotiation. Houses, already unaffordable, escalate in price so the feds… lower mortgage requirements, goosing values. Iran shoots down a passenger plane full of Canadians, and Ottawa is…  silent.

Four in ten families pay no tax as government handouts increase, forcing just 10% of citizens to generate 54% of all revenues. And now yet another province – the one where it costs the most to live – will be taking over half of what successful people earn.

Let’s flip to Vancouver, and a comment from blog dogs calling themselves “Dr. and Mr. Moneybags”. Yes, two of the hated 1%ers that Comrade Horgan & The Dippers wish to turn into proletariat.

That was a nice little surprise that the BC Premier gave us the other day eh? Out of nowhere he decided to raise the top marginal rate from 16.8% to 20.5%. My wife is a doctor (apparently “ultra wealthy” according to the BC finance minister) and we were just getting ready to  put in offers on houses in the next couple of weeks and instantly our available cashflow is reduced by nearly $1,000 a month. This means we now have to adjust our expectations downward by a couple hundred grand. We rent in a nice area for $5k a month currently and are definitely not in the NDP demographic it seems.

Any tips for us “ultra wealthy” people who “need to pay a ‘little bit’ more? I was thinking of deferring my wife’s entire RRSP deduction to the next tax year, suggesting she incorporate and take a salary below $220k (or less), and seriously step back and see what kind of house we can afford in the part of Vancouver where the poor people do NOT live…..or buy in East Van instead where it is cheap but has that doobie smoking anarchist vibe. Also this is retroactive to Jan 1, but was announced today! Is this even legal?

What did BC do?

For the second time in three years tax rates on people at the top of the income scale were rammed higher. A lot. The trip has been from 13% to 20.5% (on top of federal taxes), for an increase of more than half. This means that a little over 40,000 people will be milked for more than $200 million in extra payments. It boosts the top marginal rate in BC to 53.5%, which is the same as Ontario – where it costs less to live and there are no silly second-property and vacant-house taxes in place.

As politicians drift left – pulled that way by voters looking for more government in their lives – the system becomes more and more unequal. The top 10% of Canadians includes everyone earning $96,000 or more. As stated, they pay 54% of all income tax. The other 90% foot the rest – 46%. We give money to people because they have children. We give them more because they get old. We excuse close to half of them from contributing into the system. And while we have a Minister of Middle Class Prosperity, we’re hammering those who make an upper-middle class income of less than a hundred grand.

Since 1982 the number of people in the top ten per cent has risen by 13%, but their tax load has increased by almost 25%. Despite this, governments wallow in red ink. The feds will run a deficit of $28 billion this fiscal year, and incur more debts annually. There is no target time for when taxes will meet expenditures. It’s a formula for even higher taxes in ten future – which should be terrifying a lot of Millennials.

And what of Dr. Moneybags?

Take enough salary from your professional corporation to max the RRSP contribution of $27,230 – and put that into a spousal plan. Dividend the rest. Doc gets to deduct it from her income but hubs gets the money to withdraw at a lower rate, now or later. Consider keeping money invested inside the PC to the allowable limit (before the Morneau tax hit happens) and also mull using it to buy that house.

Future appreciation would be taxed at the capital gains rate (very low for most corps), and you’d live there for free with the exception of a taxable benefit approximating rent. If you open an office in the basement to see patients, much of the financing would be deductible. Of course, Doc could just decide to work part-time, keeping her salary below the top rate threshold, and making the primary care crisis worse. That’s NDP math. Spend billions on doctors, then tax them so much they stop working. Genius.

Media coverage of the BC budget this week referred to people like our blog dogs as alternatively “wealthy” or “rich.” But people in Vancouver earning $250,000 a year are neither. It’s barely enough to qualify for financing a Vancouver Special unrenovated dump. Earning a lot of money doesn’t mean you have instant wealth, high net worth or investible assets. But it does make you a target. In the hands of zealots and power-mongering pols, envy is a lethal weapon.

By the way, have you heard any opposition politician, anywhere, stand up and argue that excessively taxing successful people – like those who spend a decade in school and residency to become doctors, or start companies which employ thousands – is insane? An incentive to leave?

Nope. You haven’t. They leave that for a pathetic blog.

Whadda country.

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