Author: garth turner

  By Guest Blogger Doug Rowat

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It turns out that bats are the source of all the world’s major virus problems. According to Business Insider:

In the past 45 years, at least three other pandemics (besides SARS) have been traced back to bats. The creatures were the original source of Ebola, which has killed 13,500 people in multiple outbreaks since 1976; Middle Eastern respiratory syndrome, better known as MERS, which can be found in 28 countries; and the Nipah virus, which has a 78% fatality rate.

And the coronavirus is apparently no exception: bats are the most likely cause. And with 10 billion or so bats in the world, future pandemics are a certainty.

At last count, the number of global coronavirus infections sits at about 26,000. However, it’s spreading so fast that by the time you’re reading this that number has likely jumped significantly.

With all the drug companies now involved in vaccine research, you’re probably thinking that the health care sector must have been a pretty good investment over the past month. But, alas, the S&P 500 Health Care Index has actually underperformed the broader market over this span.

This is probably because investors recognize that the coronavirus will have limited-to-zero impact on the bottom lines for drug companies. The approval period for most vaccines is about 10 years, and even if it’s fast-tracked, an approved vaccine could still be 2–3 years away. So, looking to the drug developers to save us from the coronavirus is a misplaced trust. The solution, as it was with SARS and Ebola, is likely to be simple containment. But, of course, if the virus is contained then the revenue opportunity for a vaccine is, needless to say, significantly diminished.

The health care sector actually does best not when the world’s health problems require quick action, but rather when its health problems are lingering and not completely solvable: high cholesterol, arthritis, heart disease, cancer, long-term care, etc.

So, buying the health care sector to ‘play’ the coronavirus is certainly the wrong reason to own the sector; however, allow me to explain a few of the right reasons.

Most importantly, the world’s population is rapidly aging, which results in more demand for health care services. In particular, the wealthy regions of Europe and North America have rapidly aged over the past 15 years (2000–2015). The below chart shows the relationship between the shift in demographics and the massive outperformance of the S&P 500 Health Care Index:

United Nations: percentage population 60 and over

Source: United Nations, Bloomberg, Turner Investments; market returns are cumulative total return from 2000 to 2015

The dotted lines show the forecasts—the accelerating trend clearly won’t be moderating in the coming decades. Obviously, the future performance of the health care sector can’t be predicted precisely, but the favourable demographics will, undoubtedly, be strongly supportive of the sector.

Having health care exposure also provides another built-in benefit for your portfolio: defensiveness. This is illustrated in the performance of the sector over the previous three US recessions dating to the 1990s. In each instance, the health care sector outperformed, often strongly. So, if you’re looking for added volatility control and downside protection, look no further than health care.

US recessions are the S&P 500 Health Care Index (%): health care shines defensively

Source: Bloomberg; NBER; Turner Investments; market returns are the cumulative total return during each recession

So, the health care sector won’t save us from the next pandemic, but if you’re a long-term investor, it just might help save your portfolio.

We’ll let Ozzy Osbourne save us from the bats.

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

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Okay, it sucks. Snow and crisis in Vancouver. Freezing rain n the GTA. Deep chill in the flat places. Eight feet of snow on the Rock. It’s  winter, and we’re all supposed to be hibernating. So, what’s up with the real estate market?

Well, sales are pretty decent in most places and we’re back on the price escalator – except in Vancouver where the socialists outlawed everything. Toronto saw a 12% escalation last month, especially with detached houses. There are multiple bids erupting in Kelowna. Montreal single-family home prices are ahead 13% and even Halifax is booming.

All that’s the result of a decent job market which is fueling demand, plus pliant lenders and mortgage rates solidly sub-3%. But probably the biggest phenom right now is supply. Sellers aren’t selling. Inventory’s plopped. So every time a decent listing comes out a bunch of horny buyers are ready to pounce. It’s even brought back that disgusting realtor tactic of pricing a property low, accepting bids only on a specific day and hoping for a blind auction, pushing the market value even higher.

In Vancouver new listings have fallen by a fifth and the number of houses for sale is 20.3% lower than this time a year ago. In Montreal (the second-largest market in the nation, and one of the most affordable) inventories have fallen for 52 consecutive months. Total listings are 28% below last year’s level and the local board says, “a drop this large has never been seen in a month of January since the real estate brokers’ system began compiling this data in the year 2000.”

Ditto in the GTA, where a plunge of 17% in listings is being held responsible for a 12% jump in average price as more buyers fight over fewer properties. This was the biggest monthly hike in two years, ever since the stress test arrived. Now realtors are projecting a 10% increase in values over the course of 2020, with one major company saying it;ll be more like 20%. And just imagine what might happen if the feds are dumb enough to gut the stress test. Or if the virus spreads, infecting financial markets and sending bond yields lower.

Meanwhile, as stated, it’s winter. Early Feb. It just snowed again in YVR. Not even rutting season. So ponder what things might look like come April. Lately condo prices in the GTA have erupted, especially with pre-cons, where buyers are weirdly paying 30% more a foot than resales are commanding. FOMO is here. Again. Spring of ’20 could feel like 2017. And nobody should be happy about that.

Why are sellers not selling?

It’s FOSC – fear of selling cheap. People see residential real estate chugging higher and think they’ll get more later, so they wait. Others believe if they bail from the market they may never get in again, especially with the 5.19% stress test mortgage hurdle in place. Not only has that sucked off buying power from potential buyers, but it’s scared owners who may be sitting on windfall equity yet lack the income to actually borrow money and get back in, if they sold.

Meanwhile, all of the ‘fixes’ governments have come up with for housing has been on the demand side. The enhanced RRSP buyers program, for example. First-timer tax credits. The shared-equity mortgage. The Bank of Canada’s investor-house idea. But as FOMO is goosed and buyers encouraged, the number of available properties falls. Demand up. Supply down. Prices swell. More FOMO. It’s the same vicious circle we saw develop three years ago, when prices were surging over 30% annually.

Say Toronto realtors: “It is clear that many buyers who were on the sidelines due to the OSFI stress test are moving back into the market, driving very strong year-over-year sales growth in the detached segment.  Strong sales up against a constrained supply continues to result in an accelerating rate of price growth.”

Well, let’s see what the T2 budget brings. The best possible outcome would be nothing.

Time for an Audrey update. You know, the moister princess with the laundry outsourcing fetish that we dissected yesterday…

“I hope you didn’t delete any comments for my sake,” the tough girl wrote me this morning. “I’ll call you in a few years when/if reality hits me in the face. Until then, we will spend our free weekends taking our son to a million gender-neutral and socially-acceptable activities while being total helicopter parents!”

How can you not like her?

Anyway, this brings us to Matt. He teaches high school and understands financial literacy training is seriously lacking in our society – in order to prevent the wholesale production of more Audreys. He wants your help.

“I’ve enjoyed reading your blog on a nightly basis (and my wife really appreciates the dog pictures!). I am a high school math teacher who has managed to find a couple weeks in the Grade 11 curriculum to focus on financial literacy. In the past we have looked at budgeting, compound interest, mortgages/loans and credit cards. What am i missing? In your view, what are the key aspects of financial literacy that young adults need to learn?”

So let’s have it. What are the three things you think Matt should be imparting to his students? How can we save them from themselves?

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Meet Audrey. Cheeky Millennial. Ambitious. Upwardly mobile. House proud. Compared to most of her cohort, doing okay. Big spender, though. She’s okay with that. But not with me.

This is her letter (lightly edited). Please join me for a trip into A’s world…

Ok, Boomer. I am writing you to follow up on your current TFSA theme of the week. I wish money grew on trees right about now because TFSA contributions are a very distant dream for us…and a lot of my entourage.

Here’s our scenario. I am 31 and my husband is 34 with a 4.5-year-old child. I’ve been with the same company for 8+ years and make $100,000 (with room to grow), hubby makes $50,000 (paid hourly) and supports my career/crazy overtime schedule (because it’s 2020 as per T2).

Housing – bought a townhouse at the age of 23 (with a loan from the parent bank) outside of Hamilton. Sold it 4 years later and bought a blue print for a very narrow house in an “up and coming” neighborhood in Hamilton. We stayed for 2.5 years and flipped it when we got tired of the abandon shopping carts on the road and found our dream place. In 2019, we bought a house for $700,000 and we have a mortgage of $520,000. Monthly payment of $2,000. We bought on a whim and carried two mortgages for 3 months because apparently, you can’t bridge your mortgage loan if your current house isn’t even on the market. What a discovery. I also discovered it was a bad idea to ask for a $180,000 loan from your parents by text message. We paid them back in full with interests, of course.

Investments – $70,000 in pension fund from work and I’ve been contributing to hubby’s RRSP for the past 2.5 years for a total of $36,000 because he’s so supportive and I want the tax break. Hubby gets the tax break of $8,000 from the daycare cost of $12,000+ a year. He also wants to buy out the current owner of his security company in a few years (around $250,000), so we are planning to use his RRSPs to cover any shortfalls, as required. We have $7,000 in RESP for junior.

Debt – We have $45,000 in LOC debts because of our recent real estate flip with two mortgage payments, wedding in 2019 and mat leave, $35,000 car loan (single car household) and a $15,000 RRSP loan for hubby (I really wanted that tax break)..oh and the mortgage. It’s all very manageable given we are paying it down.

I work long hours and outsource a lot because time is money and I prefer to pay a cleaner vs. fighting over chores.  As a true millennial, we pay $4,500/year for weekly cleaners and outsource our laundry (wash/fold) for $1,500/year (they even remove the food stains!). It’s a small price to pay to climb the corporate ladder in a job you love and have a happy hubby take care of junior. Also, I haven’t been to a grocery/clothing store in 4 years – but free shipping is a thing.

Now tell me, boomer – where am I supposed to find “a hundred bucks a week” for our TFSA with our debt? With his plan to buy out the company? With our RRSP/RESP contributions? Daycare costs? Overtime hours = outsourcing costs? Hubby finishing the basement?

Also, why would I spend my 30s cleaning and folding clothes when I’ll have plenty of time when I’m retired at 65… I love your posts but I couldn’t contain myself with all the TFSA emphasis this week. Now…time to get back to my work…

So, in summary. Household income, $150,000. Debt, $615,000. Equity, $180,000. Investments, $43,000. She, modest pension plan. He, none. Goal – find $250,000 to buy his job. Goal – she wants to be a CEO.

Audrey thinks they’re doing okay and dudes like me should shove a pickle in it. When can people get a hundred bucks a week for a TFSA when there’s dry cleaning to pay for? Seems like a fair question.

But, of course, you learn stuff as you age. Like risk. If either A or her squeeze lose their job, they’re pooched. If another kid materializes and a mat leave punctuates her career path, there could be an income interruption. A mortgage renewal at a higher rate would hurt. And if he really wants to buy out his boss, that investment could wipe out all savings and add to the debt. Is a $50,000 job worth spending five times that amount, plus the obligations and hassles of a business?

It also sounds like eight years of real estate ownership/flipping – maybe the best ones ever for price appreciation in southern Ontario – haven’t exactly lined their pockets. But, hey, they have some equity – more than most moisters can claim these days.

Actually I like this woman. She gets it. Spirited. Aspirational. Reads a pathetic financial blog. Splits income. Respects her partner. And her parents. Pays her debts. But, Audrey, reign in the spending! Would it kill your hubs to turn on the washing machine while he’s looking after the squirt? Real men vacuum, too. And understand the house doesn’t cost you $2,000 a month – add in property tax, insurance, utilities, renos and the cost of the downpayment. (Imagine if you rented – no debt and a hundred grand closer to hubby’s target.)

Pensions, retirements and other adulting stuff may seem distant at the moment, but that’ll change. As I’ve shown, TFSAs are money machines. Do what you must to fund yours. And never dis folding, princess.

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 – Andy Seliverstoff photo

Days ago we flummoxed over the possibility Ottawa could sideswipe TFSAs. This came on the heels of a socialist economist suggesting tax-free savings accounts favour the wealthy. Contribution limits should be capped (at current levels) he argued. And there also needs to be a lifetime limit on what an account can hold in taxless assets.

In response, naturally, this blog slobbered and squirted in protest, pointing out TFSAs are (unlike RRSPs) democratic and universal. We all get the same chance to make some dough and pay no tax on it. So is it the fault of those who do, that most people don’t?

To refresh your memory: the limit now is $69,500 per person, or almost $140,000 for a couple. If you invest that in a nice B&D portfolio, and keep making the annual contribution, this will become about $1.1 million in twenty years. That will produce at least $5,000 a month in cash flow, no tax. Add in a couple’s CPP and OAS and, presto, a household retirement income of (at today’s benefit level) of about $80,000. No income tax.

Obviously it’s a money machine. This bothers the lefties who argue average people cannot find $6,000 a year to stuff into their TFSAs, so nobody should. On their planet everyone should have a universal basic income, which rolls into a livable public pension. Who funds it all? Other people, of course.

Now, what are most folks doing?

According to an Ipsos poll of the four-in-ten little beavers who have opened a TFSA, 42% have their money sitting in cash, most often a HISA. A chunk of others have GICs at 2% or 3%. And what do people use their accounts for? What life goals?

A quarter keep day-to-day savings in there – money used for nice shoes and Puerto Vallarta. One in ten are saving for a house. Another 35% keep it in cash as an emergency fund (have you ever had one?) About a third are holding TFSAs for retirement. And guess what? Wealthy people are not more into TFSAs than anyone else. Just 23% of 1%ers max their plans, about the same as lower-income folks.

Well, let’s assume no changes are made to the TFSA for a while, despite the haters. Here are six strategies to consider:

• If you make a modest amount, have no gold-plated defined benefit pension and your parents won’t leave you their portfolio of Tesla stock plus a house in Kits, then stuff the TFSA for retirement. After all, you may have to rely on public pogey – CPP plus OAS and the GIS payment. None of those things will be taxed away if you take regular income from a fat TFSA.
• Conversely, if you make a lot, save a lot, have an boodle invested and a rich pension there’s a good chance your marginal tax rate will be as high, or higher, when you retire as it is while working. In that case, having a mess of RRSP money could mean paying more in tax when you take income than the break received for contributing. Sucks. So a TFSA is a better alternative than a registered retirement plan.
• If you’re young and clever build a sizzling TFSA now, then shift some of that money over into RRSP later on where your career flowers and income jumps.  Use TFSA tax-free growth to get a big tax refund when its slides into the RRSP. Smile.
• Planning to die? Me neither, but it’ll probably happen. So make sure your squeeze is named as ‘successor holder’ on your plan, and not as beneficiary. That way your entire TFSA becomes his/her property with no assets moved out.
• People heading for retirement with low incomes and RRSPs might consider this: slowly cash out those retirement plans and move the money into TFSAs. The tax paid on collapsing the RRSPs will likely be less than the amount of government benefits  that are lost after you retire.
• And for wealthier folks with RRSPs, when your estate is settled retirement plans are deemed to have been cashed out and the assets fully taxed. So move  money into TFSAs, which are taxless. Your spawn will be happy.

Most of all, use this vehicle fully. Now. Find a few hundred a month to keep it loaded. Invest in a sane mix of growth assets. Lend your spouse money to max his/her account. Ditto for your adult children. No gains will be attributed back to you. It matters not if you’re a 1%er or a 99%, have a fat DB pension, or none. This is a flexible, modern tool that can substantially improve your financial future.

Unless the commies take it. Over my chiseled abs.

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You may be SOL on buying a N95 face mask in Vancouver, and the Toronto subway’s packed with wearers, but the markets think this virus thing is old. After an uncertain, risk-off plop last week, the bulls are back.

Oil’s rebounded. Copper, too. Bond yields have jumped higher and prices fallen. Gold gave up another twenty bucks an ounce on Tuesday. Even Chinese markets were crawling with bargain-hunters – and there were lots of them to be had. North American equities have resumed their steady upward trajectory, led by the legendary, weird, iconoclastic Elon Musk and his red Tesla.

The S&P 500 is on a tear. European stocks have jumped. The world seems to think hard-asses in Beijing did the right thing by quarantining 50 million people and taking extreme measures to halt the spread of the coronavirus, despite the economic damage. So, it’s done. Now investors are focused on the stuff that makes them money – a US manufacturing rebound, lower trade tensions, and the re-election of the orange guy.

The S&P 500 is sitting on a 12-month gain of 23% while Bay Street is ahead 16% for the last 12 months and above 3% just for 2020. Both markets are closing in on new record highs. Balanced, diversified, predictable, boring, comatose, wake-me-when-retired portfolios were ahead about 15% in 2019, and that continues. Once again people who sold on market panic were spanked. They forgot our cardinal rule: it’s all noise.

The reason? Corporate earnings continue to be robust. Central bankers have investors’ backs. Inflation is contained. Trade tensions are fading. Brexit is over, sort of. US unemployment is at a 50-year low and consumer confidence is high. And did I mention the orange guy will be re-elected?

Trump’s approval rate just hit its highest level – even as his abuse of power allegations were proven in Congress – and meanwhile the Democrats apparently couldn’t organize a two-car funeral in Iowa. As the Dems drift left, with the irascible Sanders spouting socialism atop the shoulders of his clueless Millennial army, the more the current president looks normal. Now, who ever thought that would happen?

Lessons from the virus?

Mr. Market is a lot less emotional than you. Stocks have been going up because of corporate profits, GDP growth, the restoration of free trade and – yes, kids – globalism. China acted responsibly, quickly and in doing so earned new respect. I think it’s time we gave Meng back, don’t you?

One of the big banks, the green one, dropped its posted 5-year mortgage rate this week. The decline is about a third of a point, and it comes (a) after the bank regulator hinted the stress test rate should no longer be attached to posted rates because they’re too high and (b) just as listings are pushing their way through the snow and the spring rutting season begins.

No, nobody borrows money at the bank posted rate (now 4.99% at TD), but not only does this set the stress test, it ripples through to other lending costs. For example, a five-year mortgage at the green bank is now available for about 2.8% if you’re nice and tell TNL@TB she has kind eyes. Given inflation is 2.2% (at least), this is the kind of loan you should be in no hurry to pay off.

As for the stress test, if another bank or two follows the TD’s lead, the hurdle borrowers must clear could drop to a little under 5% for the first time in a couple of years. (It’s currently 5.19%.) This would mean less income required to qualify for a loan, and an increase in the amount someone can borrow. Yes, just what we need – more people heading into the busiest buying season of the year with more money when there’s a listings shortage.

A stress test rate chop also means bigger refis – the amount of money available to people looking to borrow when they renew so they can have a remodeled bathroom. Additionally, a drop in the posted rate means it costs less to get out of an existing mortgage, clearing the way to move into a bigger house!

Well, there you go. FOMO money.

Now just imagine if Chateau Bill follows the orders contained in the prime minister’s mandate letter and makes the stress test “more dynamic’ by relaxing its requirements through the coming budget. This comes after the Libs boosted the money available through the RRSP Home Buyer’s Plan by 40%, plus enhanced the equity-shared mortgage by inflating the ceiling to $800,000.

Government ain’t helping. Quelle surprise.

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What’s that thumpa-thumpa-thumpa resonating in the atmosphere? Yes, you’re right. We have Helicopter Parents incoming! Prepare the surface-to-air defenses!

“I am normally quite good with money,” says Felix, disembarking, “but a situation has come up that makes me feel like curling up in the fetal position.”

Our daughter has been living in Vancouver, and has decided that she does not want to settle there because of the high cost of living. She is 24, university educated and an only child. My wife and myself are trying decide whether to buy her a condo or house in Edmonton, where we live, and where she is moving to

I would appreciate your thoughts. I am 56, my wife 50. Our daughter is an only child.  We both will have small db plans. Net worth 7 mill (not including commuted values) invested in farm land and stock market, some  fixed income. No debts. We have the ability to pay cash for the property, but I worry about the message we are sending to her, and also that is 400k gone from the investment portfolio. Ultimately, she gets everything anyways. Thoughts?

You really want to know? By the way, what’s she coming home to Edmonton for, now that she’s finished with uni? If it’s a job, she should be able to support herself, and certainly doesn’t need to buy a house or (Dog forbid) a condo. Renting is fine. This is not the time to be acquiring anything in the Wexit-&-woeful capital city of AB.

Besides, why should you buy her property? The ‘message’ you’re sending is obvious. You consider her a child, a helpless appendage of yourself, someone who needs sheltering and protection. This is no way to build independence, which comes from confidence, which flows from experience. The sooner your princess can look after herself, pay her own rent and cell bill, the more she can cope with everything life has to offer.

By the way, don’t leave her seven million. She’ll be doomed.

Now to Cynthia, who’s trying to orchestrate a mortgage rate for her kid. Sheesh.

You mentioned in your blog that February may see lower mortgage rates. My son has a 2.7%, 5 year mortgage with 2 years left.   Should he shop around and lock in at 2.6 for 5 more years?  Not sure of the penalty… What’s your advice?

Yes, there is some downward pressure on long-term mortgages, thanks to the virus. But obviously Mr. Market has been reassessing that in recent days, so the bond market plop may end up being less of an issue.

Two thoughts for you: first, why on earth would anyone break a 2.7% mortgage in order to lock up at 2.6%? Are you nuts? Unless your kid has borrowed a couple of million bucks the payment difference will be negligible. Bad idea. Second, why are you even involved in your offspring’s loan rate? How do you even know what it is? That’s just weird. Please rotor out of here.

Next up is Lee, a Mom of three who is trying to get her children involved in finance. That would be a good idea, but they’re all infants. Hmmm.

“I have been a long time reader of your blog and it has helped my husband and I become less risk averse,” she says. “My only regret is that we wasted our 20s on GICs and cash funds. Ugh!”

Anyway, I wondered if you had any thoughts on “informal trust” funds?  We are tempted to set up accounts for our three children (aged three and under) and purchase ETFs in order to give them a head start. The cost to set up these funds/taxation rules are vague and I’m not sure if it is worth the hassle. We have maxed out our RRSPs, TFSAs, RESPs and have no debt.  Would it be smart to put our extra income into more ETFs for ourselves or pass it to our kids now?  That way they have a fund of cash that is legally in their name at age 18?

Thank you again for your “pathetic blog”.  We looking forward to your new posts everyday!

First, worry about you own financial stability and security. The best think you can do for small children is try not to screw up your life. No giant mortgage. No philandering or divorce. Keep working. And establish a joint non-registered account

Regarding the squirts, there’s no such thing as an informal trust account. No matter what TNL@TB tells you. Something is a trust, or it’s not. There’s no middle ground. A true trust account is set up for a minor child (the beneficiary) since the kid cannot enter into a contract. You as trustee have a fiduciary responsibility to prudently manage the funds. If you do a lousy job, your kids will eventually be able to sue. That would be interesting.

The good news is a trust account can have any usage – not just for schooling, as with an RESP. The bad news is there’s no tax sheltering of interest or dividends – all income is attributed back to you, taxable at your marginal rate. Only unrealized capital gains stay with the child. Also the money cannot be taken back. Once in a trust it is permanently the property of the child, and must be handed over in its entirety when s/he reaches the age of majority. Is that what you want for an 18-year-old? BTW, if you refuse to  release the money, Junior can litigate. Finally, trusts cost money. Lawyers, documents, account-opening forms – and this cannot be done at the bank branch.

In short, Lee, fuggedaboutit. Did your parents give you a big no-strings pot of cash when you turned 18?

Didn’t think so. Thumpa. Thumpa.

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Five years ago the man who would be prime minister promised a balanced budget by 2019, fairer elections and a modest deficit for three years. He also promised to soak the rich and gut the TFSA. Being prudent and democratic was hard. Gutting and soaking was easy. So here we are.

The tax-free contribution limit tumbled from ten grand to just five, and has inched up to $6,000 a year. Trudeau dissed the Tories in 2015, arguing because only wealthy people could afford to invest $10,000 a year, the TFSA was a sop to the rich. Now the hate continues.

This weekend the Lib-friendly Toronto Star carried an article by Montreal academic Amir Barnea which may be a prelude to the next T2 assault on our most democratic tax shelter. (There’s a federal budget coming in a few weeks.) The arguments are familiar: because most Canadians are (a) too financially illiterate, (b) too poor, (c) too dumb or (d) too house lusty to find $6,000 a year to max their TFSAs, they should be frozen and capped.

Says the prof: tax-free accounts cost Ottawa money in forgone tax revenue. If they didn’t exist the feds would be collecting $1 billion more this year from people. Second, they’re unfair, since only 10% of people have maxed their plans. Third, they’re elitist, as people in the top tax bracket have more in their TFSAs than regular schmucks. “Based on this we have to conclude that TFSAs are effectively a regressive tax measure, offering the greatest tax breaks to those with the most money.”

His solution (and this may become Liberal policy) is (1) a lifetime cap on contributions. “To make things simple,” he says, “the current contribution room of $69,500 can be used…” And (2) a cap on the overall amount a TFSA could ever contain. “This could be set at $250,000 per individual. If an account reaches a higher value, the difference would be taxed like regular investment income.”

Well, let’s hope Barnea is not being a Trudeau/Morneau mouthpiece. Not everybody teaches university and has a DB pension, after all, so maybe you can excuse an academic for being an out-of-touch tool. But let’s use the next few paragraphs to state the obvious.

TFSAs were invented to be the most democratic vehicle possible, giving everyone a chance to save and invest for their futures. I know. I was there. Regardless of income or resources, we all get the same contribution limit. If you can’t afford to use it this year, it rolls over into the future – always giving you the chance to get ahead.

This is in stark contrast to RRSPs, which favour big money-earners by increasing the contribution limit as income grows – right up to $26,000 a year, or 18% of annual pay. Why the Libs would choose to gut and attack the one universal, accessible option everyone has while being silent on the 1%er RRSP gift is beyond me.

Let’s also not forget TFSA contributions are made with after-tax dollars – what’s left after people’s incomes have been hoovered by taxes and decimated by living costs. So is it really unfair that a family making $300,000 or more a year and forking over up to 50% of that in tax, while 40% of all families pay no net tax, should lose a modest way to save? Why do Liberals hate and punish success?

Then there’s the issue of independence. Given an aging population, governments that cannot live within their means and a health care/retirement bomb on the horizon, shouldn’t politicians encourage self-reliance? The TFSA was intended by F (and me) to be a supplement to the RRSP and inadequate, crappy corporate pension plans. Open, accessible, effective and democratic, it held out the promise of providing a meaningful income boost in old age. Let’s face the fact CPP/OAS will never provide enough to live on.

Moreover, why the war on responsibility? Ottawa gives tax-free money to people for breeding, which has removed hundreds of thousands from the tax rolls. But it’s ‘regressive’ that others manage to make their TFSA contributions? Meanwhile, 14 million Canadians opened TFSAs and contributed $280 billion precisely because of the rules put in place. To change them now because ‘the government needs money’ when it’s been Ottawa’s fiscal incompetence leading to structural deficits and higher taxes, is a sham. The problem lies not with people being responsible. It’s with the feds’ irresponsibility.

Wealthier people usually get that way for a reason. They pursue higher-paying careers, take risk and open businesses, budget, invest, save and plan. The fact most people want houses they cannot afford, borrow their way to oblivion and make appalling financial decisions is not the fault of anyone else. Get over it.

Gutting this tax shelter was bad public policy. Capping contributions or account balances would be a giant step backwards – unless you believe socialism works.

It doesn’t. Write your MP.

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By Guest Blogger Ryan Lewenza

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As a financial analyst (and someone with a curious mind) I read quite a bit. This includes research reports, financial articles, newspapers, books, etc. One recent article really caught my attention and I was taken aback by the findings.

The article referenced an annual survey called the Edelman Trust Barometer, which measures the public’s trust in different institutions like governments, businesses and the media. What really stood out for me was one of the key findings from their 2020 survey that 56% of respondents now believe that capitalism does more harm than good.

This to me was shocking given all the incredible benefits that have, and continue to accrue as a result of this economic system. Of course there are critical issues that exist today like climate change, poverty, and income inequality that capitalism can do a better job of addressing, but in totality, capitalism continues to do much more good than harm, contrary to the survey results. So this week I review some of the benefits that capitalism has given the world and our society, and why the alternative – socialism and planned economies – are inferior systems for addressing issues of job creation, higher standards of living, and our overall quality of life.

Percent Who Agree Capitalism Does More Harm Than Good

Source: Edelman Trust Barometer 2020

Let’s start big picture. Capitalism started to emerge around the 16th and 17th centuries in Europe and slowly replaced the existing economic system at the time, feudalism. The early foundations of capitalism included money lending, the rapid development of trade and commerce, and the establishment of chartered companies. The first chartered stock company was Muscovy Company, an English trading company that was established in 1555.

Capitalism then got a big boost from Adam Smith, an economist and philosopher from Kirkcaldy, Scotland (same city my grandfather was from). In his seminal book, Wealth of Nations, he expounded on the key principles of capitalism including minimizing government intervention, our human tendency towards self-interest and free trade.

What did this new system accomplish? Well, only the greatest human achievement since the creation of man. Without capitalism, human progress would have been materially stunted and we would have a lower standard of living. Capitalism helped to address famine and poverty and to combat deadly diseases like smallpox. Capitalism led to the greatest advancements in human history including things like the light bulb and electricity, the steam engine, the internal combustion engine, airplanes, vaccines, computers, and smartphones. Socialism didn’t create the iPhone! Capitalism (and a maniacal genius) did!
Below is a great chart that really hits home the point that the world is better off today as a result of capitalism. It charts world GDP per person over the last 2000 years and you can see how our standard of living exploded over the last few centuries as capitalism became the prevailing economic system. Indeed, under capitalism our standard of living has risen by over 10,000 percent!

World GDP per Person

Source: Angus Maddison

You might be saying, “Well Ryan you’re just cherry picking the data to make your point, and other factors could help explain that growth”.

Ok, let’s get a little deeper and contrast the US (the paragon of capitalism) with more socialist and planned economies like Russia and China.

Below I chart GDP per capita for the US, Russia and China since the early 1990s. According to the IMF, US GDP per capita has risen from US$25,392 in 1992 to US$67,426 today and dwarfs that of Russia and China currently at US$11,305 and US$10,872, respectively. While these two countries are now starting to embrace market reforms, the difference in GDP can largely be attributed to capitalism, in my view.

GDP per Capita for US, Russia and China

Source: Bloomberg, Turner Investments

Another example of the benefits of capitalism is the big decline in poverty rates. Below I show a chart of the global poverty rate and it has been declining steadily since 1990 as capitalism continued to grow and be adopted by other countries and regions. In 1990, 36% of the world’s population lived in “extreme poverty”, which the World Bank Group defines as someone living on less than US$1.90/day. Today 10% of the world’s population are living below poverty. Put another way, over 1 billion people have been lifted out of poverty since 1990.

Global Extreme Poverty Rate and Headcount

Source: World Bank Group

Lastly, I believe and it’s been shown, that there is a linkage between capitalism and personal freedom. George W Bush once declared that “political liberty is the natural byproduct of economic openness.”

In Benjamin Friedman’s book, The Moral Consequences of Economic Growth, he argues that economic growth is essential to “greater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy.” He believed that economic stagnation veers toward authoritarianism, and essentially that economic growth leads to higher standards of living, liberalization and increased human rights.

Below is an interesting visual that hits home this point. It comes from the Frasier Institute where they calculate the Human Freedom Index (HFI) for every major country. This index measures a number of different indicators of personal and economic freedoms including the rule of law, security and safety and size of government. The dark blue countries have more freedom based on this index and it’s pretty obvious that these countries are the leading supporters of capitalism.

The Human Freedom Index

Source: The Fraser Institute

Now capitalism is not perfect. Far from it. That’s one reason why governments exist to oversee and protect against unlawful and immoral corporate behavior. Purely focusing on profit will lead to bad decisions and inevitably cause harm to people and the planet. This is never acceptable. But big picture, capitalism remains the single best economic system that exists today as it helps foster economic advancement and improves our way of life.

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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Mr. Market is having second thoughts about the virus thing. Flights to China now cancelled. More US cases. Fifty million under quarantine. The threat’s not that thousands (or even hundreds of thousands) will perish, but the world’s second-biggest economy will take a kick. GDP could tumble from 6% to 4.5% this quarter. That’s a big deal.

That has equity markets wavering after hitting record highs with more money flowing into safe stuff. Bonds. Always a refuge in times of uncertainty, even when they pay peanuts. This is one good reason why every prudent investor should have about 40% of their overall portfolio in fixed income, including government, corporate and provincial bond ETFs. Not only do they provide shelter in a storm, they can be profitable. One nice bond fund we like plumped 10% last year, for example.

When money moves into bonds from stocks, demand increases and prices rise. So bonds become more valuable. As that happens they pay less. Yields fall as capital values jump. (A bond always pays you 100 cents on each dollar of face value when it eventually matures. But along the way the price fluctuates. That can be caused by a change in rates, by demand or risk. A bond that’s worth more in the market sells at a premium to its face value, so it pays less. Bonds selling at a discount have a higher yield, typically because rates are rising. Clear as mud, right?)

Since the virus infected the media, bond demand has risen, yields plopped, and it looks like this will translate into lower mortgage costs. The yield on five-year Government of Canada debt has dropped over the last two weeks, and is weakening again. If this continues (seems likely at the moment) five-year mortgages could drop widely to 2.5% in February – just in time for the Spring rutting season.

This is cheap, cheap, cheap. Recall that the inflation rate is 2.2%, so locking in to a loan for half a decade at 2.5% is a gift. The cost of money will not stay at these levels, and it pretty much eliminates the logic in paying down such a mortgage. Most people will be far better off throwing their extra monthly cash flow into their TFSAs, in nice growthy equity-based ETFs, where they can enjoy a higher long-term pop.

As for morbidity and mortality, well, Mr. Market cares more about corporate earnings, US economic growth and Trump. They will prevail. Just be glad you’re not a prisoner on a damn cruise

Now, speaking of mortgages, remember that Trudeau mandate to Chateau Bill to make the stress test “more dynamic”?

Some Lib MPs are getting antsy, speaking out in favour of gutting the thing. Now we have word the bank cop – OSFI – may be considering exactly that. What an uncanny coincidence!

The current stress test for buyers who don’t need mortgage insurance (at least 20% down) is the rate the bank offers +2%, or the posted benchmark rate (now 5.19%) – whichever is greater. Given you can get a fiver now for under 3%, this becomes a high hurdle – one that will be even steeper if the virus discount takes hold in the bond market.

OSFI gets this (the real estate industry has been squawking in protest for months) and a recent speech by the No.2 guy there has opened the door to change. Seems the bank regulator will allow the test to be based on the contract price plus two per cent, and ditch the benchmark hurdle. The result? A decrease by about a third of a point – which increases the purchasing power of buyers. By the way, this is not an unreasonable position, given that the spread between the benchmark rate and on-the-street mortgage pricing has been gapping a lot lately. But you know the likely result, of course. A hormonal spring.

Now, what else can we expect?

Ah yes, the political diddling. It’s contagious.

As you know, governments have played a key role in helping make residential real estate unaffordable. The last election campaign was shameless, as all parties scrambled to woe Mills with housing bait. The Libs enhanced their silly shared-equity mortgage plan, raised the RRSP buyers plan limit and showered owners/buyers with new credits and green money. The Cons essentially matched the gifts and vowed to whack the stress test. The Dippers and Greens said, well, who cares?

While OSFI – not Morneau – is technically in charge of this thing, the fact Trudeau gave him the mandate for change shows what’s coming. The benchmark hurdle of 5.19% will not be around much longer, along with changes again seducing our glorious youth to become pickled, immobilized, paralyzed and hollowed-out by unrepayable mortgage debt. Just like they want.

Looking for something to worry about? It’s not a virus.

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So remember that crazy idea outgoing central bank boss Poloz was selling in a recent interview? In order to make houses more affordable, he asked, why not let private investors easily buy a hunk of other people’s equity? Families could live in homes they had less-than-100% ownership of (and lower costs) then hand over a share of the profit to an investor when they sold.

This echoes Ottawa’s current mutual-equity mortgage, of course, in which CMHC shares a deed in return for footing part of the down payment (more on this turkey in a moment). The benefit is that people can move into houses they could not otherwise afford. The downside is this increases demand, further turning houses into investment assets, pushing prices.

Anyway, Poloz is apparently just aping an existing reality in the US.

Check out Unison.com, a San Francisco outfit which is doing exactly this – both for new homebuyers and existing owners. By the way, SF is like the GTA or the LM – home to some of the most expensive residential real estate on the planet, where Mills have been totally shut out as prices appreciated wildly. So, no coincidence this is Ground Zero for the shared-equity experiment.

Here’s how it works: Unison will match a buyer’s down payment up to 20% of the property’s value, or a max of $500,000 (US). The buyer then gets a mortgage for up to 30 years from one of the partner lenders, paying an origination fee of 2.5% plus the usual closing costs. After three years the owner can request an appraisal and buy out Unison’s share of the house. The option is to wait until it’s sold, or 30 years – whichever comes first – before handing over the company’s share of the appreciation. There are no payments to make on the loan. No interest, either. And because the down payment was twice the size the buyer could afford, the mortgage is smaller. If the house goes down in value, Unison takes the hit with you. If you pay them off earlier, the company collects what it originally invested.

There’s more. The company will also take over 17.5% of an existing owner’s equity, up to $500,000, in exchange for cash. It’s like a reverse mortgage, but without interest piling up, making the debt ever-larger. Upon a sale, or after three decades, Unison gets its share. To play, you need a debt-to-income ratio of 50% or less, and at least 20% equity in the real estate.

The downside, of course, in making expensive houses easier to buy is that they will stay expensive. In fact, they’ll probably get even more unaffordable. That’s what happens when demand is facilitated. By opening residential real estate to its investors – mostly pension funds and university endowments – Unison helps commoditize residential real estate, turning it into a truly investible asset. Hard to see how this ends well.

Meanwhile whazzup with T2’s vaunted shared-mortgage thingy?

You may remember it as a centerpiece of the Libs’ housing policy in the last campaign – goosing the upper price limit to $800,000 in a program designed to provide moisters some free down payment money. The budget allocated was $1.25 billion. In return for giving over the deposit, CMHC would take equity and a share in the real estate gains.

Well, the kids ain’t buying it. There were only 3,000 applications for the so-called incentive program last year, for $55 million in funding. Veteran mortgage broker and blogger Rob McLister tells us why this was a truly bad idea…

• It helps almost no one buy a home (due to the overly strict qualification criteria)
• was ill-conceived (with virtually no industry consultation)
• was a government subsidy for already qualified homebuyers
• was hard to understand for mortgage advisors and consumers alike, and
• made it difficult for borrowers to quantify the benefit (largely because CMHC didn’t initially launch a useful calculator for people to run scenarios).

Worse, it makes houses cost more. Just another example of politicians trying to increase demand for real estate at a time when too much of it is chasing too few listings. Mr. Market would sort a lot of this out if left on its own, especially if we stopped letting people buy houses with 20x leverage and taxpayer-funded insurance. Yikes.

Whether it’s San Fran, 416 or YVR, the idea of sharing residential real estate equity is a dodgy one. We don’t need more stimulus. And now Liberal MPs are getting restless about gutting the mortgage stress test. Will Chateau Bill hold firm, or cave to his leader and caucus?

Are you kidding?

Maybe the feds should do something about this, instead: TD will next month become the first bank to charge interest on interest. If you fail to pay all of your credit card bill, including the interest charged on unpaid balances, The green guys will levy new interest charges (at godawful rates) on that outstanding interest.

Says a notice Dorothy received this week. “We are adding your unpaid interest charge to your balance at the end of each statement period. As a result, we will now charge interest on unpaid interest.”

She immediately cut up Bandit’s $50,000 limit Golden Rewards Cashback Classic Insider Avion Special Breed Stud Privilege Affinity TD Visa. He may also pee on the branch.

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