Author: garth turner

I have no kids. Forty-nine years ago I married Dorothy to be with her. Not to have a family. She was good with that. If you get through this life with one true, forever friend, she once told me, you’re lucky. I got mine.

Why do most people have children?

Historically, it made great sense.  Farming families needed hands and backs. Having children was like creating loyal employees you didn’t need to pay.

Tribes and cohesive societies needed to thrive, protect their turf, survive. Numbers were critical. Children give us a way of passing on culture, values and purpose.

Religions need fresh adherents. Size matters to the faith leadership. So organized religion has always made motherhood and parenting godly.

Mostly though, people have kids just because they want to. They replicate and relive their own experiences as children. They’re wired to reproduce. Nature is all about the propagation of a species. In case you were not so inclined, the divine powers made sex. It’s fun.  And guess where that leads you?

Of course people love their offspring. Sacrifice for them. Turn parenting into a life-long job. It gives many their sole or greatest sense of meaning and accomplishment. Not a week passes I am not astonished at the lengths parents will go to in order to cushion their offspring from the realities of life.  Look at the legions of young adults at home these days. It’s historic. We coddle and protect our spawn even when they’re far from youth.

Children are expensive. Zero to 18 costs about a quarter million, all in, studies show. But it’s not just daycare, clothes, food, sports, toys, programs, bail and schooling. Many maternity leaves are unpaid. Lots of new moms decide nurturing their child trumps a paycheque. People buy houses when they have families, even if the kids don’t care. They load up on needless insurance out of hormonal guilt. They eschew mobility and job opportunities because they don’t want a six-year-old to leave her friends. They eat into retirement savings to keep a 28-year-old cocooned at home. The economic sacrifices are endless.

On a larger plane, human reproduction has forever changed the earth. When I was born there were a little over two billion people. Now we’re pushing eight billion. My parents had four kids, which was normal. Now the fertility rate is 1.6 per woman, and the average family is 2.5 people. As women have become universally educated, more critical to the economy and equal in all regards, motherhood has waned. This is most evident in the developed world. As a vibrant middle class explodes in developing nations, the same trend emerges. The fertility rate in China now equals ours, and births are falling by two million a year.

So humans evolve. Now that we’re all talking about climate change, living in a world where half the animals have perished over the course of my marriage, that must be good. Eight billion cannot become twelve or sixteen without dystopian consequences. Why would anyone wish to birth children into a dying world? Perhaps we have turned that corner. If so, it will be an improving global standard of living, more education and economic opportunity that does it.

By the way in Canada we have a negative birth rate. The population would be steadily declining, were it not for immigration. Look at government policies. We pay people – actually quite a lot – to have children. The child benefit has helped remove millions from the tax roles. Kids are as good for the economy as they are tough on family assets.

In fact the decision to have a son or daughter is probably the most profound financial one people ever make. It ripples through every aspect of daily, professional and matrimonial life, and lasts decades. And yet it’s the one that’s most emotional, least logical and often taken as granted. Like breathing.

If you have a family, consider this advice from a guy with no skin in the game: plan for it. Utilize the tax-free growth of an RESP. Collect the free grant money. Don’t go out and load up on the wrong kind of insurance. Don’t buy real estate you can’t afford because of junior. The kid can be a happy renter. Try not to helicopter. Don’t forget your own financial well-being and retirement savings. Ask adultlets at home to pay rent, or the utilities. Good training. Only fair. Move if your family will be stronger financially. Kids adapt. Realize that having a big educational nestegg for your child is worth more than annual trips to Mexico. Teach them what schools don’t. Ethics and (of course) finances.

There. You’re all set.

By the way, Dorothy told me I’d be a complete moron if I wrote this blog. “I’m trying,” she said, “to save you from yourself.”

What’s your best friend for?

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And now for the news. Sit, stay and pay attention.

MOMS BUSTED: Yup, the cops moved their squatter butts out of that house in Oakland, California during a morning operation. It took several sheriffs, some guns, 30 SWAT guys and a mini cop-tank to do it, but the Moms4Housing are now kaput. There were four arrests. Supporters milled around. The media showed up. Outrage ensued. And the house, finally vacant after three months of illegal occupation, was boarded up by the corporate owners who will reno, sell and donate the proceeds to charity.

Is housing a human right? Not in California, obviously. You can’t squat and stay. But in Canada, thanks to the current government, it is now a human right. At the same time, Canadians have no constitutional provision to own property. Keep your eye on this.

THEY DON’T CARE: Like you didn’t know this, but a new survey makes it official. Many lenders in Canada, like opioid docs, don’t really care about the impact of their loans. Incredibly, over 40% of financial institutions admit their operations are sales-oriented instead of customer-focused, and clients ‘don’t understand the financial products they purchase.’

Yikes. No wonder close to half of all Millennials would rather deal with an app than a banker, saying they avoid contact with financial types. And no wonder we’re drenched, saturated, pickled and drowning in debt. This survey comes from a credit union (DUCA), so it’s self-serving, but revealing. What is all this debt doing to us?

“Nearly half of borrowers surveyed report that personal debt has impacted their ability to save and build wealth. The report shows a significant number of borrowers surveyed experience stress due to personal debt and are driven to unhealthy behaviours as a result, including trouble sleeping, and poor lifestyle choices like skipping meals, eating unhealthy foods and spending more time alone.”

We knew it. Over-eating, fatigue, criminal behaviour and sexual frustration – it’s all the fault of TNL@TB who made us borrow. Bad, bad bankers. When the revolution arrives, we’re coming for you.

SURPRISE, KIDS: The current rage is MMT – modern monetary theory – which says since governments have the ability to print money, why not crank out enough to pay for all of society’s needs? Education, health and a guaranteed income, for example. Of course the more money, the less all existing money is worth, so the greater the inflation. The other option for spendy governments is to borrow wildly – which is what Ottawa’s chosen to do.

A new report says the Trudeauites added $56 billion to the national debt between 2015 and 2018, and this is set to explode higher. Another $26 billion year. Another $28 billion next year. In fact, there is no timetable whatsoever for the borrowing to stop. Despite coming tax increases, Ottawa will be spending far more than is takes in.

Where does it end?

With future generations, says the Centre for Productivity and Prosperity in Montreal. If interest rates rise a little (will happen) then today’s youth will be tomorrow’s pooched. “All it will take is a few percentage points and the situation could deteriorate quite quickly,” it says. ”The day an economic shock occurs, we’ll have bought ourselves trouble by accumulating a more-or-less useless debt.”

So if you think taxes are high now when national debt service costs equal 7% of federal revenues, just wait and see what happens when they hit 30%. Like the credit union people (above) said, nothing good comes of binging.

OF COURSE YOU CAN: And we have time left for a quick MSU plus a burning question:

Good day Garth, you helped me out a few years ago when selling my house in Ft Mac). I literally made zero money on owning it, and now looking back in hind sight, my sale was an early trigger to a declining market which would only get worse (even before the fires). Thank you for listening, thank you for responding, and thank you for your blog. Anyways, I’m hoping in your infinite wisdom (obligatory sucking up taken care of), you may be able to help me out as Mr. Google hasn’t really been able to directly answer my question.

I have about $40k in no-foreseeable-use-for-it cash currently sitting in a Tangerine account right now. I figured that I’d give it to my wife for her TFSA, but will either of us pay any taxes on that, even if I officially loan her the money and charge her interest? I keep reading that I can gift money to her tax free, but then if she uses that money to invest, I’d be on the hook for the tax bill, but what about if it goes into a TFSA? This is what I can’t find an answer on and I’m hoping you can help me out? I’m assuming the tax man would eventually discover my deposit one day and her transfer to her TFSA the next day. What would you recommend we do here? Thanks! Freezing in Alberta – Chris

Relax. It’s all good. You can certainly fund your squeeze’s TFSA and a spousal loan structure is not required. Just move the funds into her hands (a bank account) then she can put them into a TFSA and invest in growthy assets. There will be no attribution back to you, since all gains will be free of tax within the plan. Remember to make each other ‘successor holder’ (not beneficiary) of each other’s accounts.

If you have money for her to invest in a non-registered account, earning income at her lower tax rate, a spousal loan is the best option. The rate is just 2%. It’s deductible from her taxes. No attribution to you. Just be nice to her. Like always.

Okay, back to watching Animal Planet now. No bankers there.

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Ruth is 72. Spry. Her kid, Marion, is 44. Worried. Harold, husband and father, checked out eight years ago. Dead. No pension, but he left his wife of forty years a nice house.

“I’ve pleaded with her to sell it,” says M, “and even suggested she read your pathetic blog, but nothing works. This week mom told me she’s got a reverse mortgage for some ridiculous amount – like $500,000 – and I should mind my own business.”

So mom has no income other than government OAS pogey (she never worked, no CPP) and lost her part-time job at the library. In other words, she’s broke – living in a million-dollar place which she can’t afford to heat. Or pay the property taxes on. But it’s home.

Ruth ain’t alone. Thousand of wrinklies are making exactly this choice – deciding their best option is to dig into real estate equity to compensate for a dearth of savings, investments or pension income. In doing so they reap the fruit of housing inflation at the same time taking on debt that will eat its way through their net worth and their kids’ inheritance.

It’s time for a reverse mortgage update because, well, the old hippies are going nuts over them.   The amount of debt taken on in the last five years has tripled – to about $4 billion. Back in 2014 it was just $1.3 billion, which makes reverse mortgages the fastest-growing form of borrowing. For example, five years ago HomeEquity Bank (the CHIP people) was handing out about $300 million a year to the Geritol set. This year they expect to hit $900 million in new originations. And there’s competition, too, since Equitable Bank got into the RM business a couple of years ago.

Here’s the deal: people over 55 can borrow up to 55% of the equity in their homes and use the money for whatever. No payments. No repayment until they sell or croak. The funds are not taxed. It seems like a dream since they get to stay in the same house and can stop sharing meals with the cat

But it’s debt. Debt costs money. In this case the rate of interest is extreme – 5.6% or twice the cost of a conventional five-year mortgage. Since no payments are being made, the debt grows and grows with all of the accumulated interest added to the outstanding principal. So a $150,000 reverse mortgage becomes a $200,000 obligation after five years. Plus there are substantial set-up charges when the deal is arranged.

Why would someone opt for this when a conventional mortgage is cheaper or a HELOC can be arranged with much lower simple-interest payments and no increase in the debt?

Simple. It’s the new reality for wrinklies – the majority retire without pension plans, without adequate savings or investments and too much reliance on the public purse. People vastly overestimate the amount they’ll get from CPP or OAS and figure if they stop working and have a paid-off house they’ll get by – no matter what.

But houses cost a heap. Maintenance, utilities, insurance, property tax – everything’s getting more expensive, and meanwhile all that equity is producing zero income. There’s also the stress test in place, preventing people who are house-rich and income-starved from qualifying for traditional mortgage financing. Outfits like HomeEquity and Equitable Bank are exempt from that test when they hook new clients. All that matters is a piece of real estate with value in it that can be Hoovered out.

Of course, once the debt is in place, it stays forever. Seniors having a hard time buying home heating oil or groceries are unlikely to ever pay down a reverse mortgage. So when they sell or, more likely, die, their estate is responsible for it. Surprise, kids!

The lenders think they have an outstanding business opportunity, given the fact there are 9.6 million Boomers in Canada. At the same time only 25.3% of all working Canadians have a defined benefit pension – one that will yield a known and continuous income stream in retirement. Worse, a record number of retirees are now going into their post-employment years with consumer debt in place. Many have real estate, lousy savings and poor income. So, what are they thinking?

Mortgage debt in Canada is rising by about 5% a year. That’s a worry since we already owe $1.2 trillion. But reverse mortgage debt’s increasing at 25% every 12 months. And every single borrower is (a) no spring chicken and (b) doing it because they have to.

What should Marion do?

Mind her own business, of course. Like mom says. It’s her asset to squander. Being old doesn’t make you right. Just a tasty target.

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Last week ended with news of 35,000 jobs created in December. Big relief after a disaster the month before. As it turns out, Canada churned out 320,000 jobs last year – one of the best performances since the lights went out back in 2008.

Who’s working?

Well, almost all new jobs last year came in the services sector. The number of people who actually make stuff (including oil & gas production) fell by 50,000. The ranks of those who serve stuff grew by 367,300. Wow. And a big chunk of those were in the FIRE sector – financing, insuring or selling real estate.

But wait. It seems about two million people are now a part of the gig economy. That accounted for more than 8% of the workforce in 2016 and is estimated at 10% now (no official stats are available). A gig job is just what it sounds like. Here’s the definition: “self-employed workers who enter into various contracts with firms or individuals to complete a specific task or to work for a specific period of time.”

The biggest gig is IT. Nobody seems to want a full-time tech guy hanging around earning vacation time, getting dental benefits or contributing to a crappy group RRSP. And yet without robust technology, most corps would be dead in the water. Weird.

The proportion of gigers has doubled in the last 15 years. Think Uber. It includes free-lancers and baristas, musicians and roofers. Corporations would much rather have some incorporated dude come in and fix machines than have another employee costing payroll taxes and being impossible to lay off without grief and money. As labour regs and minimum wages become more onerous, the gig economy grows. So do the ranks of workers who never get paid, get sick, take time off to have babies, go on vacation or come to work looped.

Walmart gets it.

The world’s biggest retailer has just announced robots will be added this year to 650 more stores, bringing the number of locations to over a thousand. These machines prowl the store aisles, scan shelves and take inventory. Information is sent immediately to human employees who then order stock. What once took actual people two weeks to accomplish is now done twice a day.

Consultants McKinsey & Co. estimate half of all retail jobs will be automated away. And look at the banks. My office is a perfect example – I’m writing this sitting in an historic stone palace that Bank of Montreal operated out of for more than 100 years before they replaced it with an ATM next door and gave the place to me. Bank tellers are going. So are travel agents. Canada Post delivery people. Printers. Then realtors. Almost all newspaper and magazine jobs. Cashiers. Even soldiers.

The nature of work is changing daily. Selling stuff is going online and major corporations strive to shed costly, unpredictable and needy humans with robotics, automation and apps. This is a big reason why the gig economy is growing, full-time employment is more precarious and 70% of people no longer have corporate pensions.

Says McKinsey: “Activities most susceptible to automation involve physical activities in highly structured and predictable environments, as well as the collection and processing of data. In the United States, these activities make up 51% of activities in the economy accounting for almost $2.7 trillion in wages. They are most prevalent in manufacturing, accommodation and food service, and retail trade, and include some middle-skill jobs.”

Think about that. Half the jobs likely to go. The bulk of them in the service sector – which created all the new employment in Canada last year, and accounts for 70% of the American economy. Stats Canada, in detailing the gig economy, hints at the huge social impact this brings. Those in the bottom 40% of the income ladder are twice as likely to be shut out of full-time employment, as robots and labour cost-cutting prevail.

Okay, what does this mean?

First, everyone gets a vote. So expect more political upheaval as it becomes more difficult to find employment which is (a) full-time, (b) has benefits and (c) a career path forward. Already happening, as you know, which helps explain why Mills have been forming families a lot later than those promiscuous, lucky Boomers did.

Second, politicians catering to this angst and proffering solutions will get elected. So the inevitable outcome will be (a) more taxes, especially on property owners, (b) the embracing of some form of modern monetary theory allowing for much greater deficit spending by governments that will offer (c) a guaranteed annual income.

Third, bad news for housing markets. Prices will inevitably trend lower over time regardless of the level of interest rates. Also bad news for rich people, since we’re likely to see a wealth tax plus an inheritance levy.

Finally, for those with assets they foolishly want to keep, think about reducing real estate exposure and pumping up financial wealth. Houses are just too easy to target, and symbolize social disparity. Fully utilize government tax shelters like RRSPs, TFSAs, RESPs, RDSPs and LIRAs. They’ll be the last to feel political heat. Hedge against the dollar by maintaining about a quarter of your portfolio in US$-denominated assets. Invest, don’t save. What’s coming will stoke inflation and chew through savings.

Above all, live quietly among the masses. Consider driving a Kia. Yes, that bad.

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Once a radio and TV guy, then a municipal politician, Adam Vaughan is now a federal Liberal MP from Toronto. During the last election campaign the Cons made a big deal of publicizing a proposal from Vaughan to start taxing residential real estate. The plan, as stated, was to charge people capital gains tax on the profit they made selling principal residences on a sliding scale based on length of ownership.

  Vaughan denied it. The Libs denied it. Even though documentation emerged showing the plan had been adopted by the party’s regional Ontario caucus. Voters yawned.

So here’s the sequel.

Vaughan emerged unscathed. He won his seat. He was appointed by the prime minister as a Parliamentary Secretary, which means he works closely with a cabinet minister on policy, legislative matters and implementation. The minister in question is in charge of CMHC, also recently mandated with making housing a basic human right in Canada.

Last June the Trudeau government’s Bill C-97 took effect. Here’s what it says about housing:

It is declared to be the housing policy of the Government of Canada to
(a) recognize that the right to adequate housing is a fundamental human right affirmed in international law;
(b) recognize that housing is essential to the inherent dignity and well-being of the person and to building sustainable and inclusive communities;
(c) support improved housing outcomes for the people of Canada; and
(d) further the progressive realization of the right to adequate housing as recognized in the International Covenant on Economic, Social and Cultural Rights.

As a result of this, Vaughan’s minister, “must develop and maintain a national housing strategy to further the housing policy, taking into account key principles of a human rights-based approach to housing.”

What does this mean, exactly? We have no idea. But it bears watching, given recent moves by governments at all levels to record real estate transactions and heap on new levies. Since affordability is now being touted as a ‘housing crisis’ in Canada, taxing real estate profits would be the easiest, fastest way of squashing prices. And Adam is probably ready to help make that happen.

But this is pure speculation. And let’s contrast it with a drama now being played out in northern California, where this real-estate-as-a-human-right battle has come to a head. Remember Moms 4 Housing? Here’s an update on the mother-squatters who moved into a nice, vacant house and refused to leave.

Interestingly, real estate in that neck of the woods is similar to Toronto. Houses cost a million. Rents are two or three grand a month. The tech-heavy economy is booming and the population expanding. Average wage-earners cannot afford average-priced homes. It’s a story Canadians know well.

Last autumn six women who claim homelessness (but have jobs) broke into and occupied a house which a real estate investment firm had bought in foreclosure for $501,000, intending to reno and resell. They adopted a group name, a logo, embraced a media strategy and had a nice Christmas complete with a tree. Meanwhile the property owners went to court and on Friday a judgment was rendered.

Predictably, the squatters were told to get out, and given five days to do so. They refuse. The home’s owner (Wedgewood Properties) offered to pay the moms’ moving expenses plus their housing costs for two months and donate profits from the sale of the home to a charity. In return the moms declared this was an insult and they face systematic racism (they’re black). Said they: “We never thought we’d win in an unjust system. We’re up against corporations who are willing to put mothers out on the street.” And this: “Wedgewood… is desperate to avoid taking responsibility for how this company has contributed to the housing crisis that is causing families like mine to be homeless and for participating in an industry that has robbed Black and marginalized communities of land and wealth for generations.”

The Moms get support from Oakland mayor Libby Schaaf (left).

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Well, you can see where this is going. The Moms argued housing is a basic human right, and eviction would be an injustice. But in America (unlike Canada) the right to own property is enshrined in law. The courts ruled for the owner, not the downtrodden. And sometime in the next few days there’ll be a big media circus as the moms are tossed.

So chew on that. In this nation property owners have no legislated right to own property. But people without houses now have the legal right to housing. And Mr. Vaughan has a title.

How would the squatter Moms fare here? I bet we’ll know before long.

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  By Guest Blogger Doug Rowat

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Hockey used to be so easy.

Long ago, how good an NHL player was could be summed up with two data points: goals and assists. Maybe throw in penalty minutes to get a flavour for a players’ toughness and you had all you needed. In the past, the cartoons on the backs of hockey cards actually meant as much as the ‘data’. It was a simpler time.

O Captain, My Captain

Source: Google Images

Today, of course, the game has changed enormously. I now have to Google almost every advanced hockey statistic: Corsi, Fenwick, deltaSOT, DIGR, GVT, LAEGP, etc. For that last one, even Googling it—Location-Adjusted Expected-Goals Percentage—doesn’t help me.

Simply put, hockey stats have become so complex that they’re a complete mystery to most fans.

However, I despair any NHL general manager who ignores these metrics and attempts to build a team based purely on ‘gut feel’ or scouting reports. To be successful these days, general managers have to crunch numbers. And most NHL teams now employ full-time data-analytics specialists.

This data-driven approach to hockey is, of course, not dissimilar to portfolio management. For instance, it might feel like a bear market or recession is coming, but how I feel isn’t useful in terms of making an accurate forecast. The data must confirm my suspicions. Similarly with ETF selection, the numbers HAVE to support the inclusion of new positions in our portfolios, just as advanced hockey stats must justify, say, the selection of a particular draft pick.

To illustrate, let’s start with some broad, hypothetical forecasts: a bearish view of the energy sector and expectations for more overall market volatility. Therefore, we want to reflect these views with our choice of a Canadian equity ETF. Naturally, data analysis is also involved in making these broader forecasts, but let’s take the bigger-picture conclusions for granted and focus purely on the next step: the ETF selection itself. This process might be similar to a general manager who concludes that he needs a new second-line center, but must now make the correct trade or call-up from the minors.

Let’s also assume that it’s a simple swap: a Canadian equity ETF that we currently hold for another Canadian equity ETF that better reflects our new outlook. In this case, we need an ETF that fits with our overall thesis of a negative energy-sector outlook and expectations for more market volatility.

We typically begin with some simple screens in Bloomberg to narrow the enormous ETF universe—there are, for instance, more than 800 Canada-domiciled ETFs trading in the market presently. However, once we’ve refined the universe, then the more detailed one-on-one comparisons can begin. These initial comparisons might look something like this, first based on the ETFs’ energy-sector exposure and longer-term volatility:

ETF point-by-point comparison – step 1

Source: Bloomberg, Turner Investments

The point-by-point comparisons would continue until a fuller picture is realized. We look at more variables than what are shown below, but the below gives a rough example of the comparative process. The preponderance of ‘green’ for the potential replacement ETF suggests that further investigation is definitely warranted:

ETF point-by-point comparison – step 2

Source: Bloomberg, Turner Investments

Ultimately, we might end up with a short-list of 2-3 replacement candidates. The next steps would be to read more about these ETFs (websites, prospectuses, etc.) and contact each of the ETF providers to ensure that there aren’t any hidden features that we’re unaware of. It’s also useful to make all the ETF providers aware of the other options that we’re considering. This allows them the opportunity to punch holes in their competitors’ arguments, which sheds even more light on the best potential candidate.

More often than not, the ETF we select will be the correct choice, but regardless of the outcome, it’s a defensible selection, one well supported by the data and due diligence.

We also don’t lose sight of the fact that talking to real people at the various ETF companies can be just as important as the number-crunching. Getting their insight, which is largely unbiased because we’ve developed good long-term relationships, provides additional valuable information.

The data analysis itself will only take us so far. The perspectives of real people matter too.

And proof that numbers aren’t everything? I recently had a chance to meet the guy on the hockey card. And meeting one of the greatest Maple Leaf captains of all time?

Well, it’s hard to put a number on that.

Rowat meets Sitt

Source: Doug Rowat

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

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A rate cut this year? Fuggedaboutit.

Canada created over 35,000 jobs last month. The unemployment rate fell. The 2019 job creation total – despite a few months of suckiness – was the second-best in 13 years, at more than 320,000. So the central bank took a gamble last year when the Fed was chopping (three times) and held fast. It was the right call.

What did bonds do today? Yup. The yield on 5-year GoC debt popped. Bond yields have risen 30% since September – the reason mortgage rates have been inching higher. Given the latest jobs stats, expect more. And did I mention no Bank of Canada cut?

By the way, we’re creating the right kind of jobs, as opposed to self-employed embroiderers, dog walkers and freelance lepidopterologists. Last month 38,400 people found real full-time work. The private sector created 57,000 positions while 21,500 civil servants went home.

All this sounds pretty good until you look at household finances. Debt continues to rise, along with the monthly cost of servicing it. This is why consumer spending in Canada has tanked with retail sales down yielding a poor Christmas for shopkeepers. Remember that two-thirds of the entire economy comes from spending, which is why jobs (good) and debt (bad) are critical.

Given the fragility of our situation, the last thing we need are more taxes. But here they come!

We’ve already alerted you to the plan Chateau Bill and his bearded buddy have to ‘modify’ the way capital gains and perhaps dividends are treated, as well as further tighten the screws on the self-employed with professional corps. But closer to home (if you live in the GTA or the LM) is the continuing assault on real estate.

Don’t be surprised. You were warned.

In Vancouver property taxes are taking a giant leap – up about 8% or four times the rate of inflation. Some of the tax burden is being transferred from businesses to residential owners. And as the market value of high-end detached houses is constantly eroded by the NDP’s venomous  assault, more of the property tax must be shouldered by those buying ‘affordable’ real estate – like $2 million Vancouver Specials or $700,000 weensy condos. That’s what happens when you elect spendy people.

In Toronto we’re just weeks away from the announcement of an ‘empty house’ tax in the nation’s largest market, as well as a jump in the ridiculous double land transfer tax on high-end digs. Oh yeah, and property tax is rising 8% over the next few years.

As you know the vacant house thing was pioneered in YVR when advocates screamed 25,000 places were empty. That was a lie. The number of homes not inhabited full-time turned out to be about 2,000. The city has extracted about $38 million from those owners and for 2020 has increased the tax by 25%. The low rental vacancy rate – the supposed reason this levy was put in place – has not dropped. So, it was just a tax to be a tax, aimed at Hovering off additional revenue from wealthy people. The Canadian way.

Toronto also spends more than it takes in, a significant amount of that to pay for the defined benefit pensions of employees, past and present. Then there’s transit. Subway extension and the cross-town line cost billions upon billions, and are grossly over budget. The city is desperate. The anti-tax, right-wing, former-Conservative-leader mayor is now a spend-and-tax liberal. So his metamorphosis is complete. And up goes the cost of living.

The trouble is, Toronto is Canada’s commercial, corporate and financial capital. There are thousands of homes and condo units used by people who need access to the city for business reasons and for whom hotels are impractical. When all these units were bought, they were taxed. During ownership, they are taxed. When sold, taxed again. Now a 1% vacancy tax on a $700,000 one-bedroom unit used the equivalent of four or five months a year will amount to seven grand – or twice the property tax owing. Coming next month.

The impact of this tax plus the new tough Airbnb regs (there are over 21,000 units for rent) and a creep in lending rates could be palpable. Will gutting the stress test mitigate that? Or has real estate become just too juicy a target for governments – who will encourage ownership and debt, only to feast then on the hapless owners?

Alas. Harry and Meghan may have no idea what awaits them.

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Where’s real estate going this year?

As mumbled here with numbing repetition, all markets are local. Calgary is sick. Edmonton and the Peg are frozen. Vancouver is still decelerating. Victoria is stable. Toronto is tightening and troublesome. Montreal’s on a roll. Halifax is on hold. Taxes have sucked net worth out of detached houses in YVR and the GTA seems ready to follow suit (higher property tax, an empty house tax). So despite 3% mortgages, rising financial assets and a decent economy, nobody’s getting rich tossing properties. The prohibitive cost of buying and selling means in a relatively static market, the speckers and flippers are handed their butts on a platter.

But what next?

A lot depends on Chateau Bill, Canada’s billionaire finance minister, now working on a budget to be tabled in six weeks or so. The newly-returned and recently-foliaged prime minister gave CB a mandate letter some weeks ago instructing him to review the mortgage stress test and possibly modify it, to render it “more dynamic.”

Huh? Dynamic? Whazzat mean?

In a word, gut it. This is consistent with the thrust of the last election campaign, in which making housing more accessible to needy, moany moisters was a basic theme. The Libs brought in the enhanced shared-equity mortgage, new buyer credits and also seriously goosed the RRSP Home Buyer Plan. The Cons hung their hat on ‘modifying’ the stress test, which really meant defanging it.

As you know, to get a house now buyers must prove they have the income to carry a mortgage of 5%+, even if they’re offered one by a lender at half that cost. The real estate industry has cried foul since inception, arguing about a fifth of all potential purchasers were punted by the test. Of course, realtors are speaking in their own naked self-interest, but the industry has a point. By cutting the house-buying budgets of first-timers, the test pushed demand down the price spectrum and hiked competition for cheaper properties. So they’re not as cheap any more. Condos have appreciated in value at twice the rate of detacheds, for example. Affordability has declined, not improved. (Units in 416 up 8% year/year.)

This week the boss at RBC said this: “The stress test certainly delayed purchases, caused consumers in Canada to look at less expensive homes, and to adjust their desire for the cost of the home they’re purchasing, or delay. I think we have to be a little bit careful how we adjust it. But if done in the right way, and with the right objectives, (it) can be achieved.”

Hmm. Green light for the feds to diddle, it seems, from the nation’s largest bank. Ditto from the biggest real estate marketer, Royal LePage. The CEO, Phil Soper, said this in a news release today: “The federal government has signaled that changes could come to the mortgage stress test mechanism in 2020. The stress test pushed people out of real estate markets across Canada temporarily. For the most part, buyers have adjusted, yet it still represents a significant hurdle as families pursue the dream of owning their own home.”

LePage’s position, like that of the barbarian leader of AB, is the stress test needs to be regional, making it easier to buy in markets which have struggled and (ironically) seen price declines.

But that may not happen, seeing all the Mills who voted for anybody-but-Scheer are concentrated in those areas where real estate is nutso – the GTA and LM. Odds are a stress test adjustment will apply to the entire country, and nowhere will the impact be felt more than in Toronto.

Listings are down there, again. Sales up. Finding a detached house, not condemned, for under $1 million is rare. In mid-town a decent three-bedroom home with parking on a 30-foot lot often goes for $2.5 million or more. Downtown condos for $1.5 million or greater are now common. A thousand dollars a foot is a steal (you can spend two grand for 12 inches in Van these days).

In other words, imagine what unleashing more demand will do, after bottling it up for a couple of years.

By pretending real estate’s a right and everyone should be able to possess some, politicians have created a toxic mix of debt, expectations and hormones. These days the economy is okay, rates are low, credit flows freely and jobs are being minted. But this won’t always be the case. We got a taste of that two days ago, right? You should expect more. This is no time to bulk up on debt, especially when you use extreme 20x leverage to buy an inflated asset with all of your net worth that produces no income, with ridiculous closing costs and non-deductible loan interest.

But that’s not Bill’s world. All hearts and dividends. So you know what’s coming.

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– Andy Seliverstoff photo

Trump assassinates a senior official from another country on foreign soil. That nation vows revenges and attacks a US base with rockets. Concurrently a deal to eliminate new nukes falls apart. Meanwhile Trump’s impeachment trial approaches. Worried people buy gold, bonds and bitcoin. The world braces.

And Mr. Market? He goes up.

As dawn broke Wednesday morning the CBC Morning business dude was warning the nation of a ‘sea of red’ in futures markets, a scary ‘surge ‘ in oil prices and a ‘market meltdown’ coming after Iran fired a dozen missiles at American interests. He fibbed, of course. Let’s be kind. Maybe just incompetence. Another statement on the quality of news that we’re fed these days.

In any case, the futures were barley pink, before turning green. Oil had dropped (not increased) overnight and all that had spiked was hyperbole. Despite Iran, Kim, Brexit, Trump, Putin, Australia, Erdogan, Hong Kong and that funny guy running Ukraine, the reality is this: the Dow flirts with its all-time high and has gained 5,500 points, or 24%, in the last 52 weeks. Bay Street, too, has followed Wall Street. A boring, pedestrian, painfully uneventful balanced/diversified portfolio added 15% last year.  The small dip (3%) in 2018 looks utterly inconsequential beside the 8.5% return in 2017, the 10.8% growth in 2017 and last year’s 15.2%.

Despite that, the long faces continue. Too much CBC? An irrational fear of risk? Lack of faith in the future?

A new Bloomberg/Nanos poll tells it all: 55% of Canadians think a recession is likely this year. Only a third don’t. The rest are still looking for their keys. And this doomerism is not restricted to sad people who get their news from idiots. There are investment advisors who have kept their clients in cash or near-cash assets for most of the past four years (while collecting fees), in ‘super cautious mode’ because, ‘because things are just too expensive’.

Well, guess what? Things are worth a lot more than a year ago. We’re all a year older. Balanced portfolios are up 30-40% over the past 48 months. Fear has been a failed strategy. And now that Trump confirmed the obvious – Iran is a chicken and he’s got a way out – the rally continues.

But wait. What if 2020’s the year it all comes unglued? Are recession fears valid? Have markets, Icarus-like, flown too high? Is the potential of a downturn, even temporary, enough reason to stay huddled in cash?

If you want to, sure. But be prepared for substandard results. Again. Trump isn’t going to war ten months before a presidential election. He never intended it. Iran aimed its missiles at a parking lot. Intentionally. Figure it out. The market has. This is noise.

The first thing to realize is why Mr. Market is feeling so frisky. It’s a presidential election year, and that has almost always brought expansion and higher stock values. Second, inflation is low and economic growth is reasonable. Third, corporate profits have exceeded expectations and are on track for growth of maybe 5%. Just fine. Unemployment in the US is at a 50-year low. Consumer confidence and spending there are robust. Real estate is on a roll, but not in a bubble. The China trade deal is just days away. The central bank has dropped rates, adding stimulus, three times. And now if the White House and Tehran can stop being bellicose and pissy, Middle-East stability is closer. Meanwhile higher – but not extreme – oil prices help Canada without whacking consumers. And investors think the pro-growth, lower-tax, less-reg American president will be re-elected.

Oh yeah, I know – we’re pickled in debt. The Trump deficit will hit a trillion. The world is full of tribal tensions, whackjob leaders, dangerous populism, swine flu, wealth inequality, commies and incinerated koalas. There’s plenty to fret over.

But markets go up because corporations make money, economies expand and wealth’s created.  We’re in a long, long expansionary phase which coordinated central bank policies, technological advance and global trade have helped create. It’s not over yet. In the absence of a giant disaster or a completely unexpected shock, it will continue. Investors should have learned something from the 20% correction last December, instead of spending the year quivering. Trying to time this market, or this economy, has led to nothing but lost opportunity.

So here we’ve had another lesson. Trump. Soleimani. Iran. Drones. Rockets. ISIS. The Supreme Leader and the Tweetstorm guy.

Are markets valued highly? Yup. They are. As such they reflect not only current economic conditions, but what investors expect will happen. That makes corrections likely when sentiment changes. But this is exactly why smart people (a) invest for decades, not months or even years and (b) they have balanced and diversified portfolios. A 60/40 mix gives you decent growth and down side protection. For example, in 2018 the TSX shed 12% and the BD portfolio was off just 3%. Last year Bay Street made 18% and the BD gave 15%. It’s a strategy that protects against declines yet reaps advances.

Conservative yet aggressive. Works with anything.

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When the Iranian rockstar general was incinerated by a missile fired from the Reaper drone four days ago, a lot changed. Stocks fell, but hardly. Oil jumped. The traditional safe havens of gold and bonds saw an influx of worried money. All that was pretty predictable.

Less predictable was the reaction in Tehran, where the soldier was a symbol of national pride. So the assassination has galvanized the death-to-America sentiment. That was exacerbated when Trump upped the testosterone saying the US was targeting 52 sites in the country for obliteration, including cultural and historic monuments. That’s what the Taliban did. It’s a war crime. Now Iranians are even more galvanized.

Whether the US was justified in taking out a bad guy leader on foreign soil is beyond the ken of even this omniscient blog. So let’s just deal with the fallout. What’s it mean for your mortgage, TFSA, gas and the price of dog kibble?

Stocks
The year/year gain for the S&P 500 was a whopping 26% when markets opened Monday. Bay Street had added almost 18% and the Dow was up 21%. So what did the general’s demise do to investors? To your RRSP? Nothing actually. But if you owned energy issues, or gold-related stuff, you made money. Apple set a new record high on Monday, and we got word the Chinese are going to the States on January 15th to sign off on that trade deal.

The bottom line: turn off CNN, CBC news and BNN. The talking heads are trying to scare you into trades. Mr. Market digested it all before breakfast. Nothingburger.

Oil and energy
On news of the attack Brent crude spiked to seventy bucks. West Texas Intermediate (WTI) – the benchmark – jumped to almost $65 a barrel, then retreated. It’s below the level of last Spring, but still up about 30% over the past year. Cheap gas is apparently over. But you knew that.

Rates
When stuff happens and stocks are at record highs, a certain whack of money goes looking for safer places. Like bonds. The increased demand for debt pushes prices higher, meaning yields tank by a similar degree. (Bond prices and yields move in the opposite direction, like when I tell my Chow to come.) This is exactly what happened to Government of Canada 5-year paper, as you can see here:

Flight to safety: Bond prices up, yields down

If bond yields stay down then long-term, fixed-rate mortgages will follow. But this is not at all certain, given that stock markets actually gained a little after the attack and are expected to once again achieve record highs. Money will flow back into equities. Bond prices will drop. If the bank gives you a good mortgage rate, you should still lock in.

Trump
So he’s being a big bully, which distracts from the impeachment process, energizes his xenophobic and ravenous base and ensures more millions pour into his election war chest while the lefty Dems flop around. In short nothing changes. Unless the president starts blowing up priceless cultural sites, inflames anti-US passion to a boil and moves to a war footing. Is he that dumb?

Beats me. I just come here for the dog pix.

Of course if Trump does start a new war, it will be an inflation machine. Billions will be spent shipping back to the region all that military hardware that was just shipped home. Meanwhile oil prices would spike dramatically – think a hundred bucks – doubling the price of gasoline, likely prompting the Fed to hike rates so the economy doesn’t run too hot. A Middle East crisis would draw in Iran, Iraq, Yemen, Syria, Turkey, Israel, Putin and end badly. The president who won in 2016 by promising an end to endless foreign wars would just have extended the ongoing one… endlessly with a new one.

Not only would we have $100 oil, two-buck-a-litre gas, higher mortgage rates and more stress, but the November presidential election outcome would cloud fast. These days Mr. Market thinks Trump is a shoo-in. If 52 sites in Iran are bombed capriciously, well, all bets are off. History will judge him a foreign policy moron.

But that won’t happen, says Wall Street. Nothing to see here. Move along. Just Trump being Trump.

The needle barely moved for stocks on Monday. In a week traders will forget how to spell Qassem Soleimani. The focus will be on the China trade deal next Wednesday. Making dough. The street has momentum, enthusiasm, direction and speed, it seems. “As the markets have the attention span of a 10-year-old, any geopolitical risk premium is likely to fade if there is no immediate evidence of escalation,” says one equity veteran.

Assassination from the sky, throngs in the street, nukes, rockets, gloats on Twittter and higher stocks. Nothing matters. What a world.

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