Category: Accounting tips

Dorothy was the promotion manager for a big company downtown. I was the editor of a suburban newspaper chain. One day a rad thought came to me. “I can do this.” So the next few months were spent on (a) planning to start my own newspaper somewhere and (b) talking my spouse into it.

Of course, that’s back when people killed trees, made paper, covered it with words and had 10-year-olds deliver a stack of it to your door. Papers were powerful, because everyone read them. They brought news, opinion and the latest Zeller’s sale into your home. They formed public opinion, created consensus and did that through the benevolent filter of newsmen or women, and their editors. Unlike this world of blogs, social media, Internet warfare and online echo chambers, newspapers coalesced society, rather than rending it. They were clumsy, expensive, labour-sucking behemoths, too.

But I wanted one.

The target was a small city that was home to a chain-owned daily with lots of history but barely a pulse. I talked a dozen co-workers into following me, rented a greasy former fish-&-chips store, bought a bunch of horrible purple desks from a Bank of Commerce surplus sale and built a composing room of plywood tables and leased equipment.

I was 26 and after selling every single possession we had, barely escaping divorce, I raised enough money to finance this venture for eight weeks. Yeah. Two months. If cash flow didn’t flow, I was toast. Because the paper would be free distribution, blanketing thirty thousand homes, every dollar had to come from advertising. So I became a salesguy as well as publisher. I cleaned the john, too. My skeptical, bemused, sporting, indulgent, adaptable wife quit her fancy career job and learned how to paste up pages to send to the printer plus typeset and operate the big vertical camera. We badly miscalculated on the first issue, and it took all night to get it out. This sacrifice helped forge a bond between us that has never been broken.

Well, we made it. In time the paper thrived, grew, moved into new premises. Then it expanded. There were eventually five publications, some weekly, some more frequent. I talked myself into buying a press, a giant, long rumbling thing that ate massive rolls of newsprint and cost a million dollars. At a time when nice houses were $60,000, this was a leap. The staff jumped to forty. The competition faded to nothingness.

Since I was now a master of the universe, at 27, I bought a new car. It was a 1976 maroon Oldsmobile Cutlass Brougham Supreme Coupe Something, about 18 feet long. Completely gross. I loved it.

The coup de grâce was the phone. No cell service then, of course, so I had a rotary phone installed in the thing that operated like a police radio and looked like, well, a rotary phone with buttons. Every call had to go through an operator and reception was dodgy. It also required a whippy aerial mounted on the top of the vehicle which bent and whistled obscenely in the wind. But a bonus was that it made my Cutlass look like an unmarked cop car so I could come up behind anyone, flash the lights twice and make them pull over. Loved that, too.

What happened?

Newspapering was a glam business in those days so a guy came along with a pile of money and bought our company. He took the building, the staff, the publications, the press, the receivables and the debt. We got a huge deposit cheque, paid something called ‘capital gains tax’ and retired. I was 29. It didn’t take.

What’s the point of this story?

There isn’t one. It’s just a slice of my life. Occasionally I hear from someone who worked for us and relished the cowboy capitalism we practiced. Sometimes Dorothy and I will remember moments. Like the night a slew of flyers had to be inserted into tens of thousands of papers as they flew off the press. Somebody arranged for a crew of high schoolers to do it, even though it turned out to be prom night. The kids showed up after midnight, in party clothes, with boom boxes. They danced, laughed and stuffed. Us too, as the trucks were loaded. Indelible.

Okay, you may return to r/wallstreetbets now. What a world.

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  By Guest Blogger Sinan Terzioglu

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I’m a dad. And a financial guy. So I know an RESP can be a significant part of a family’s plan since post-secondary education costs are continually rising. According to the Canada Student Loans Program the tuition cost in 2035 will be over $17,000 per year, more than double the cost today.

Statistics Canada estimates nearly 50% of Canadian parents are not taking advantage of Registered Educations Savings Plans (RESPs).  So these families are not maximizing the potential and leaving money on the table – specifically the federal government’s contributions.  Ottawa supports families through the Canadian Education Savings Grants (CESG).  That adds a maximum of 20% per beneficiary up to $500 per year – $7,200 per beneficiary in total.

The lifetime RESP contribution limit per child is $50,000.  There are no annual contribution limits, but the CESG max is $500 a year.  So if you contribute $2,500 one year, the federal government will grant $500.  You can catch up on missed years but only one year at a time.  If you miss a year and contribute $5,000 the government will then grant $1,000 (two years of max contribution) – $500 for the current year and $500 for a missed year.

The best time to start contributing is as soon as you have a social insurance number for your new born. If you’re not working with an advisor it’s best to open a self-directed RESP at your bank’s discount brokerage or an independent brokerage and invest in diversified low-cost growth ETFs in the early years.  If you have more than one child or are planning to have more, open a family RESP which can be shared among your children.  If one child decides not to pursue post-secondary education, savings can be directed within the plan to the others.  Keep in mind though that the government grants cannot be shared but all other contributions can.

As with all investments, contributing early and consistently will provide the best chance of growing the money.  You get the automatic return of 20% per year from the government grant as well as the power of compound growth over time.  For example, contribute $2,500 per year for each child by putting in a little over $100 every two weeks for 14 years.  Over those years you would have contributed $36,000 and the government grants would total $7,200 – for a total of $43,200.  But with the money invested and earning an average annual rate of 6%, the account would grow to nearly $70,000.

Withdrawals are taxed in the hands of the beneficiary.  This is helpful as the child will very likely be in a low marginal tax bracket at the time of the withdrawals.  An individual or family RESP can stay open for 36 years so if your child doesn’t continue his/her education, you can keep the plan open in case they decide to resume studies later.  If your child is unlikely to pursue post-secondary education or all the funds in the plan are not required, you may be able to transfer up to $50,000 tax-free to your RRSP (if you have available contribution room) so long as the RESP has been open for at least 10 years and all beneficiaries are at least 21 and not currently pursuing higher education.

Anyone can open an RESP for a child – parents, guardians, grandparents, relatives or even friends.  The person(s) that establish an RESP are called ‘the subscribers’.  Funds invested in an RESP remain the property of the subscriber(s) until withdrawals are made for the benefit of the beneficiary.  An RESP is not a trust so if a subscriber dies the RESP will form part of his or her estate.  Therefore have a plan in place, clearly stated in a will, in case the subscriber passes away.  A subscriber can appoint someone as a ‘successor subscriber’ or can appoint a testamentary trust as successor subscriber but this is complex and expensive.  To avoid these challenges I generally recommend grandparents do not open an RESP for their grandchildren and instead gift the money to the parents and have them establish an RESP as subscribers.

In case of divorce, an RESP can be dealt with in a few different ways.  Under the Income Tax Act, RESPs are not required to be divided so both parents can continue to be joint subscribers and continue to contribute to the RESP, however, you cannot open a joint subscriber account once you are divorced.  An RESP can also be split equally and transferred from one RESP to another so long as the beneficiaries stay the same but it is more complicated than it sounds so it is likely best to keep the plan in place because if an RESP is split all future contributions will need to be coordinated.  Another important consideration is that an RESP is not protected from creditors so if you or your ex ever files for bankruptcy, creditors could demand all or part of the RESP.

There are many considerations when opening, contributing and withdrawing from an RESP.  It is a powerful investment opportunity to plan for the long term education needs of your family assisted by the government grants and ability to grow the money on a tax-deferred basis.  To avoid future complications consider many scenarios to ensure the RESP is maximized for the benefit of the kids.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

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   By Guest Blogger Ryan Lewenza

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What is happening in these markets?!

I think some people have lost their minds and are throwing caution to the wind. If some people are not careful, someone could get hurt. I’m of course talking about GameStop and AMC Entertainment, which have exploded in value due to Robinhood-horny trading junkies who are joining forces on web chatrooms, essentially pumping and dumping struggling companies to boost their stock prices and profits and cause much pain to the hedge fund companies that are short these very securities. Basically there is a Wall Street ‘David and Goliath’ story currently unfolding on Wall Street and beyond, with billions at stake. Let me explain.

For a number of years there has been a trend of ‘democratization’ of financial services, which basically means making banking and investing easier through the use of technology. This includes things like online banking, lower and more transparent fees, ETFs, roboadvisors, a greater use of technology and specifically apps and chatrooms. Robinhood was the latest iteration of this long-term trend.

Robinhood is a financial technology (fintech) company that combines commission free online trading with an investing app where investors communicate with one another. In these chatrooms, and others like Reddit, they pitch ideas and try to get everyone on board and move stock prices. Well, they’ve been quite successful lately since these renegade day traders have pushed a few struggling US companies from rags to riches in just days, shocking even this well-seasoned investor.

The company getting the most press is GameStop, which, as can be seen below, has skyrocketed from $20 a few weeks ago to $350 on January 27th. How can a struggling company rise 16 times in just a week or two?

First, these Reddit investors look for beaten down companies with large short positions. A short position is simply selling the stock first, then hoping it goes down and buying it back at a lower price. There are a number of big hedge funds that are short these struggling companies with the belief they will fall further and they aim to profit from this.

Second, once they have their short targets they start talking it up in their chatrooms, trying to induce others to start buying shares in the company and getting it moving higher. As this happens it starts to feed on itself as more and more investors rush to buy the stock and bid it up. Then the hedge funds, who are short the stock, get ‘squeezed’ where they have to put in more money as their position drops in value. It becomes a kind of negative feedback loop where more and more investors pile, pushing up prices higher and higher until it inevitably pops.

Some view this as the small retail investor getting back at the big bad hedge funds, who have no qualms over shorting stocks and trying to force companies into oblivion. Essentially, they are getting some of their own medicine.

My problem with all this is: 1) the potential impact to the broader markets and financial stability; and 2) it’s based 100% on pure speculation and market manipulation rather than based on any fundamental research or real economic value. GameStop’s market cap went from US$1 billion at the start of the year to $25 billion in a few weeks! If that’s not rampant speculation and froth then I don’t know what is!

GameStop Rallied from $20 to over $350 in Just Two Weeks

Source: Stockcharts.com

But it’s not just GameStop and AMC where I’m seeing some ‘bubbly’ conditions. Turning to the next market darling – Tesla. Yes I get it, it’s an amazing company on the cusp of a new revolution, but it’s still just a car company, who soon will have much more competition (GM just announced that it will stop selling gas powered cars by 2035). Consider this.

Tesla’s market cap has increased from US$80 billion a year ago to US$850 billion today, just shy of a trillion dollars. If we sum up General Motors and Ford Motor Co, their combined market cap sits at just US$125 billion today. So Tesla is nearly 6 times bigger than both companies combined!

And what do you get for this?

Last year Ford and GM’s revenues were a combined US$240 billion versus Tesla at US$30 billion. On total car sales, Ford and GM sold a combined 7.5 million cars to Tesla’s 500,000 cars last year.

I get that Tesla’s growth prospects are much higher, it’s the extreme valuations I have a problem with.

Tesla is Worth More than GM and Ford Combined

Source: Bloomberg, Turner Investments

I would be remiss if I didn’t bring up Bitcoin. It’s price has surged from US$7,000 a year ago to US$32,000 today or an increase of 3.5 times. I fully admit that I’m stumped about Bitcoin and where it’s heading since I believe it’s based on little actual monetary value. But at the same time, there is a lot demand for a relatively finite currency. If more money is flowing into an asset with limited supply then it could easily go higher in the short-term. But I remain steadfast in my belief that bitcoin is in a bubble and one day could pop.

Is Bitcoin in a Bubble?

Source: Bloomberg, Turner Investments

Lastly, this article (https://ca.yahoo.com/news/robinhood-traders-covid-stocks-142924970.html) gave me a good chuckle recently. It profiles this young couple on how they are making all this money from trading on Robinhood and apparently its super easy. From the article I liked this quote the most, “I see a stock going up, and I buy it. And I just watch it until it stops going up, and then I sell it. And I do that over and over, and it pays for our whole lifestyle.” So that’s what I’ve been doing wrong all these years! I have seen this mania before and it generally doesn’t end well. These traders are confusing luck for skill!

So I am seeing some areas of ‘bubbly’ conditions, but to be clear, I don’t believe this translates into an overall market bubble like that seen in 2000. As I outlined in our outlook report I see the potential for a big economic recovery this year, higher corporate earnings, and very supportive central banks. Give this we’re still bullish on the equity markets for this year, but these ‘bubbly’ conditions could lead to some short-term volatility so be prepared and as always, stick with the balanced and diversified portfolio.

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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Avaricious day traders, mostly young, often angry, definitely ageist and iconoclastic have been whacking financial markets. The combo of social media, fun trading apps, Covid quarantine boredom and a pervasive moister angst have detached many stock prices from the assets behind them. Suddenly, rules don’t matter.

Yesterday was all about GameStop. That saga continues. Plus an assault on silver, AMC, Blackberry, crypto and more. Plus Macerich.

That last company is the struggling owner of a bunch of second and third-tier US shopping centres which the pandemic has seriously bruised. The stock lost more than 80% of its value in the last few years which was understandable. Retails sucks.  It’s also been a heartache for the Ontario  Teachers Pension Fund, which owns a significant chunk of it.

Well, all that changed when the Reddit Wallstreetbets army targeted Macerich, inflating its value by 70% in a few days through a torrent of buying. Just ‘cause. The pension plan managers looked on in bemusement and wisely pressed the big shiny Sell button. Ka-ching! The schoolies just scored $500 million in unearned cash – a direct transfer of wealth from the pockets of the naïve moisters into the retirement accounts of aging, defined-benefit-pension-rich educators. In time Macerich will fade back into retail torpor. Hoodie losses will be epic. And the gods will chuckle.

By the way, did you read the comments posted here yesterday? Yup. All you need to know about how emotion and money mix badly. Apparently everybody now hates me. Finally.

Here’s what the Hoodies, the Redditers, hedges and, sadly, the steerage section of this pathetic blog have taught us. Or should.

The Robinhood/Reddit mob are not investors, of course. They’re gamblers. It’s a game. Under the guise of ‘sticking it to the man’ these folks are actually trying to make fast money without working for it. There’s nothing noble about being a pig. Taking a rabble of four or six million traders, hopped up on Internet chat, and throwing it against one security or asset to purposefully inflate its value is dangerous and irresponsible. It’s certainly not an ethical strike against boomers, market participants, brokers, investment funds or capitalism. But it is exploiting vulnerabilities in a system designed by people who never thought folks could be this stupid. Now we know.

What can go wrong?

Lots. Tons. The implications are large. Securities regulators are all over Reddit, Robinhood and the capital markets because what’s taking place sure smells like deliberate crowdfunding manipulation. The issue is simple: values purposefully detached from reality. This undermines market integrity where pricing is constantly scrutinized and adjusted (earnings reports, fundamental analysis, forward guidance, prospectuses, p/e ratios, macroeconomics, sector analysis – you know, the adult stuff). Yes, valuations get out of whack when investors make bets on the future, but this is new ground. This is inflation merely for the sake of creating notional wealth. Greed, personified. Turned into a video game.

The crowning achievement in this moronic, self-serving, narcissistic behavior is to cloak it in moral outrage. The abuse posted here yesterday because of (a) my day job and (b) my age was interesting. A whole bunch of people clearly think they’re victims, so it’s perfectly cool to slag their elders, victimize each other and screw up capital markets where most people’s family nesteggs, education funds and retirement bucks are housed. So they can be porcine.

How do you protect yourself from this gathering crapstorm of moister vitriol?

Don’t buy individual stocks, since volatility’s being fed and market turmoil guaranteed. The diversified ETF approach is vastly superior if you have these two goals: (1) not losing money, and (2) achievng a decent rate of return. Further achieve this with balance, holding fixed-income assets that will counterbalance short-term equity mayhem. And don’t day trade. In fact, don’t trade at all. Build a portfolio with the correct weightings between assets then rebalance once or twice a year. In between, live your life, love your dog and stay the hell off Reddit.

Oh, and if you came here to diss me, to say I jumped the shark, accuse me of being part of a corrupt system, claim I don’t understand investing, or shout I’m on the wrong side of history, just think of all those happy old secure teachers. They thank you. Me, too.

This blog isn’t called Greater Fool for nothing.

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What came first? The app or the attitude?

The big story is not about GameStop, Blackberry, AMC or whatever single stock gets blown up next. It’s about sentiment and technology, and how both (especially the former) just made dabbling in individual equities more suicidal. Whatever the outcome, it will be drenched in the bodily fluids of a million (at least) newbie ‘investors.’

Let’s start with the app. Then the fuel. Then the fools.

The Street calls them Hoodies – those DIY investors (overwhelmingly young) who have downloaded the Robinhood app and turned instantly into day traders. There are millions and millions of them now, attracted by an application that feels like a video game, costs nothing and allows free trades. It’s fun. It’s instant. There’s no set of weird, detailed know-your-client questions. No adults in the room. A few clicks and you’ve bought some shares. Empowering, and powerful.

There are more Hoodies now than clients of Schwab and E-Trade combined. They’re frenzied, too, trading about 40 times more shares than users of those other platforms. In many cases they own a security for just a few days. Sometimes just a few minutes. Researchers have found the Hoodies move in herds, rushing into publicized stocks with no real knowledge of the underlying business, based on ‘most popular’ or ‘trending’ lists. Two-thirds of the investors end up losing money, since the equities that are inflated inevitably plop, leaving the last ones in stranded. It’s not investing. It’s rolling the dice.

As for the fuel, these days it’s Reddit’s Wallstreetbets discussion board. That’s where the oxygen came from to push a crappy video retailer (GameStop) from nothing into orbit. Up 1,700%. It happened with BlackBerry too, now AMC, and previously it was Tesla and Doordash. Even crypto is being goosed beyond Bitcoin, with Dogecoin being pumped and inflated  77% in a few hours. But a lot of Hoodies don’t actually know much about the companies or the currencies. They focus on the ticker symbol and push the buy button. A TickTok stock-tip vid the other day featured a moister giving the secret to his success: “I just buy stocks that are going up and when they stop going up, I sell them.”

What could possibly go wrong with that depth of understanding and experience?

Well, the consequences just started. On Wednesday brokers stopped giving margin for these trades, forcing the kids to use their cash, and on Thursday the GameStop orgy can to a halt as platforms (including Robinhood) pulled the plug after it touched $500 a share – the pinnacle of absurdity. Imagine if you were one of the horde that joined the party just as the cops were pulling up outside.

This is stock market insanity on an historic scale. More to come. But it’s the attitude that’s the real toxin. On this blog yesterday we were awash in comments like, “Stick it to the man!!,” and “Bring the big boys to their knees,” and this gem: “It’s a beautiful thing Garth, watching the fortunes of lifelong money movers ruined, embrace it, just like the prostitutes at the Capitol cowering before the mob, brings a tear to the eye.”

GameStop etc. is being heralded as a white-vs-dark, David-Goliath, retail-institutional, moister-Boomer, fintech-paleo war. The kids are digging it. Regulators and capital market professionals are having a cow. When a $1 billion company with dim prospects becomes a $24 billion corporation with dim prospects, every alarm bell goes off. As stock prices detach from either profits (like the banks) or the potential for them (like Tesla), everybody knows what comes next. Slaughter. It’s not the hedge funds shorting the stocks and being swarmed by the Hoodies that we care about. It’s the integrity of the financial system which backs the economy.

Do the Mills think they’re paying back ‘the man’ for making them go to uni for 14 years in order to graduate into a jobless pandemic-addled world when nobody can afford a house while their parents’ portfolios plump? Hmmm. Well then, it’s another fail.

Look what happened yesterday to those kids who bought GME at $500 a pop overnight. The smart money bailed. The stock crashed, gyrated and shocked. It dropped $200 a share in five minutes during the afternoon. It lost 45% of its value on Thursday. The rabble at the bottom learned what a Ponzi scheme is. Redditers may end up investigated for market manipulation, especially those insiders who lit the fuse. Quelle mess.

Securities trading rules exist for a reason. To curtail fraud, cheating, criminality and unethical behaviour, of course. But also to protect complete idiots, especially the greedy ones, from themselves. What have Reddit and the Hoodies proven? Yup, that more regs are needed. The stock market is not a casino, nor can it be allowed to become one. The advent of mass trading by ingénues gassed up by a social media rabble is a fresh threat – not just to a system where corps get financed in order to expand and create jobs – but to all the naïve players tricked into thinking they’re noble.

It’s not the first time markets have been rocked by technology. Telephone trading morphed into online discount brokerages, then came high-frequency trading, algos, quants, hedgies, now fintech, trading apps, the Reddit rabble, DEFI and web3.0.

Well, the kiddos are too young to have been in the market when the dot-com euphoria turned to dust, wiping out 80% of the value of tech darlings. And they weren’t yakking on chat boards when Bre-X went to the moon before being vaporized. They weren’t in existence when people lined Toronto’s Yonge Street to buy gold as it hit the highest-ever price point – and everyone said it would go up forever.

This is not investing. It’s not a revolution. It’s not even new. It’s financially-illiterate, greedy sheep being manipulated by the unscrupulous and the irresponsible. They’ll learn the way the suckas of the past did. And ‘the man’ once again will move in and try to corral human nature. Good luck with that.

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“Never,” says Sam, “did I think this would happen.”

He’s been a car guy for 17 years. These days he serves as used car manager at a big Toyota dealership in the stormy heart of Mississauga, the city-burb of Toronto with a population of about 800,000. And lately, not much traffic.

“Normally a Corolla flies off this lot as soon as it gets here,” he told me this week. “It’s the perfect second car. But now most of our business is just taking them into inventory as people give up their extra cars. They’re not driving them. And we can’t sell ‘em. Never happened before…”

Welcome to the WFH world. Bit by bit, store by store, Corolla by Corolla, it’s an economy-killer. There are about four million folks who haven’t been in the office or at the workplace in ten or 11 months. They don’t buy gas or trade in their vehicles for new ones. They don’t shop for work clothes because they live in sweats and hoodies. Besides, the stores are shut in most places. They don’t eat lunch down in the food court. In fact, the bulk of those mom-and-pop franchises have closed or failed.

As WFH continues, we have the weird dichotomy of more savings and more debt. Consumer spending has crashed while real estate transactions have bloated. New mortgage debt is running at billions per week, while $104 billion sits in chequing accounts. The distortion is epic. And, sadly, none of it is good. On one hand almost 200,000 indie businesses are failing, we’re told. On the other hand, house prices have inflated to the point where average families can never afford the average property. Something has to give.

Benny Tal, CIBC’s urbane economist, agrees. “I believe the trend is unsustainable.” He says. (It should be noted his bank is building a gleaming new headquarters/skyscraper in downtown Toronto where the commuter trains dock, also to be the head office of Microsoft).

Tal says, yeah, WFH will carry on until the herd is vaxed, but after that many employers will become the same hard-ass, inflexible overlords they were pre-Covid, expecting workers to be around at least a few days of every week. So, two concerns: “yes, your current job allows you to work full-time from home,” Tal says. “What about your next job?”

And then there’s the big real estate question. Tal figures some people who moved to the distant burbs to get a cheap house, thinking they’d never commute again, “may also need to invest in living arrangements in the city that would provide them with a base much closer to work.”  The suburban housing market – where prices have escalated far faster than in the urban core – could be impacted. “To what extent,” the economist muses, “are prices in those remote places rising way too fast?”

Indeed. Look at the Zoom Town where the unloved Toyotas are piling up. The benchmark price for a detached house in the soulless hinterland where nobody can walk to a store and whole families have gone missing in endless cul-de-sacs is $1,123,600. That’s up 13% during the year of the virus. Last month house sales in this city were 87% above those in December of 2019 – a record.

So, families can afford $1.1 million homes, but need to trade in a five-year-old Corolla worth ten grand? Sounds scary.

And what about incomes? Government largesse will end when the virus fades. The feds are already pickled in their own spending and things like additional child pogey payments will have to end. As for employers, a survey just found more than a fifth plan (like Facebook has decided) to trim the wages paid to WFHers. The logic is this: if you’re working from a location where people make less money because living costs are lower, you shouldn’t get the same as people in high-cost urban locations.

No surprise that while 44% of workers would consider relocation, that drops to only 16% if a pay cut is included. What a shock.

Naturally, the biggest WFH whack has been to cities and those who scratch out a living in the swirl of urbanity. In Toronto, for example, a 90% drop in ridership for the TTC and GO transit is devastating. Downtown business have been shuttered, locked down, restricted or starved for customers for most of a year. Wander through the underground PATH and see for yourself – literally miles of empty storefronts. Business taxes have plunged. Cities are bleeding red.

WFH may be making Amazon and the liquor store guys rich, but the economic toll’s ugly.

Good thing it ends soon.

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In researching the latest dance moves on TikTok (did you realize Michael Jackson is back?) over the weekend, a poignant vid popped up. A twentysomething girl stared into her iPhone and asked wrinklies, paleos and half-dead Boomers to share their stories about bygone hard times.

Things seem so scary and uncertain, she said. Was it ever this bad in the past?

It’s human nature to believe you live in a unique time and you’re special because of that. The economy seems broken and hopeless. Houses have never been more out of reach. The future’s clouded. Jobs are scarce. Politics is a mess. There’s a pandemic that won’t quit. So is this, like, the worst ever?

For you Millennials, it is. Bummer. You didn’t experience 22% mortgage rates, Khrushchev’s shoe-banging, the Cold War or Black Monday. Even Nine Eleven and Y2K are zeroes. But here’s the good news. This current mess will end. In fact, it’s already in sight – if you believe what the financial markets are telling us (instead of dumbass social media).

First, dear snowflakes, there’s a reason the chart of the S&P 500 (a broad measure of American companies) looks like this:

What is the stock market telling us?

That’s over one year. You can see where the virus whacked emotions on March and the subsequent recovery. Actually it’s been more like a rocket. Up 18% in a year’s time, while other indices have bene even more aroused (the Nasdaq is ahead over 40%).

So what? Markets have responded to tons of government stimulus spending as well as central banks keeping rates low and pumping buckets of cash into the system through bond purchases. That fiscal (government) and monetary (CB) stimulus just shows how the system isn’t going to let Covid win, or the future fizzle. So have faith. But there’s more – companies are making money again, so their shares are rising. Right now S&P corps are reporting earnings, which are running 23% above expectations. Tech companies are making money (BlackBerry and GameStop are the new darlings, and recently it was DoorDash and Airbnb IPOs) but so are the boring old ‘value’ companies that make cars and bum wad. The point is simple. Investors are pumped. You should be, too.

Ditto for the bond market, which is way more boring, but thirty times bigger. This is where debt is traded, and it’s been impacted by low interest rates, low inflation, low growth, central bank policy and, yes, too much virus. So yields on bonds have beewn in the ditch, which has also brought mortgages down and sent house prices up. But things are on the move here, too. Look at this chart of where investors see rates headed over the next five years.

Why? The market thinks the virus will be clipped, the economy grow rapidly in the third quarter and inflation return. Investors therefore demand a premium on bond yields (which lower bond prices) for protection. There’s no doubt, they add, the cost of money will go up as the public heath crisis fades. So the prime at the big banks may increase for the first time this summer, commencing a slow but steady ascent.

For the young, it’s good news on several fronts. More jobs and expanding opportunity as the economy reflates. Lots more hiring. More ancient, old GenXers deciding to stay as WFHers after Covid passes, opening up positions for those who understand employers want to see, touch and breath on their employees. And, of course, higher mortgage rates to halt the real estate escalation.

What? You need more?

Okay, vaccines. There are three of them in place or coming. A couple more will be added in 2021. Yes, the government has been incompetent and deceiving during the vax roll-out, but that will end. Meanwhile surveys (even on this pathetic blog) show a big majority of people are anxious to be jabbed and herd immunity will therefore be a reality.

When? The feds say by the end of September. But well before that, lockdowns, quarantines, self-isolations and restrictions will end as new infection levels decrease (happening now). That will hasten the economic reopening which equity and bond markets have been signaling.

More? Still not convinced?

Okay, there’s Biden. First, that dogawful US presidential election is over. The Proud Boys have denounced Trump, even. The Capital insurrection and riot was the last nail in the coffin of the redneck right. The 45th president lost his creds, any respect that remained, his public voice plus his sponsors and his brand. A huge disruptive force is gone. And in its place, a career administrator is running the world’s biggest economy. His first job is to vax 100 million people in 100 days, knowing there is no other way out of the quagmire. What a contrast.

Markets liked Trump’s deregulation, expansion, low-tax and growth agenda. They like Biden even more. He’s an adult.

Conclusion, moisters?

Yeah, things suck. But there’s never been a pandemic that lasted. They’re always temporary. Nor have we ever come out of an economic crisis without a surge in growth, which usually means more jobs, inflation, better wages and opportunity. It’s coming. Soon. Chill.

Now get over here and show me how to moonwalk.

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  By Guest Blogger Doug Rowat

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When can I retire?

Never has such a simple question been weighed down by so much complication. For clients asking this question I typically respond with a couple of questions myself: 1) Do you want to leave a legacy to your family and/or friends? After all, leaving every penny to your kids, for example, means a very different retirement than having your last cheque bounce. And 2) what kind of retirement lifestyle do you want? After all, watching sunsets from the back porch involves a different set of expenses than, say, racing Porsches on the weekends.

However, in recent years I’ve taken to adding a third question: Are you willing to accept less before and during your retirement? This question shifts the focus from what one desires to what one’s willing to sacrifice. Therefore, of the three questions, this is often the most difficult to answer. Why? Because people are hesitant to give up the extravagances that allow them to present themselves to the world as “successful”. People envy the affluence of their peers and, in turn, want their own affluence to be envied—at least the outward appearance of it.

Unfortunately, appearing successful matters, and it seems to be mattering more over time.

The median US home increased from 983 sq ft in 1950 to almost 2,500 sq ft in 2018 and the average new American home has more bathrooms than occupants. According to the OECD, Canadians like their bigger houses too, perhaps even more than Americans. The average Canadian house has 2.6 rooms per person versus the US at 2.4. The average for all other OECD nations is only 1.8. Interesting as well, the lessons we (or at least Americans) initially learned about making do with less following the 2008–09 housing crisis now seems to have been completely forgotten:

Have extravagant housing desires been curbed following the housing crisis?
Number of larger US houses (in thousands)

Source: US Census Bureau; New single-family homes

But our extravagances encompass not just housing. The price of an original iPhone was about US$400—expensive for its time. Today consumers will freely spend three or four times this amount on the latest model. Even something as simple as home entertainment now involves excess. How many streaming services do you subscribe to, for example? According to the Los Angeles Times, the average US consumer has four streaming services with almost 40% subscribing to five! Necessary? Hardly. But if your neighbour tells you all about the hot new show they streamed on Crave and you don’t have Crave? Well, the jealousy’s probably already brewing.

As Morgan Housel points out in his excellent new book, The Psychology of Money, spending money to show people how much money you have is the fastest way to have less money. Further, the respect and envy that you believe displays of wealth will generate for you is, in fact, an illusion:

When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.”… People tend to want wealth to signal to others that they should be liked and admired. But in reality those other people often bypass admiring you…because they use your wealth as a benchmark for their own desire to be liked and admired…

Does this same idea apply to those living in big homes? Almost certainly.

Jewelry and clothes? Yep.

It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine.

Countless happiness studies have shown that the true value of wealth lies not in the extravagant things that it allows you to buy to show off, but rather in the freedom that it can provide, often in the form of an early retirement.

So, when it comes to planning and timing your retirement, what do you value more? The expensive trappings of “success” or your freedom?

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

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The pound poll, results posted here yesterday, had a sample size over 5,000. Rarely do surveys in Canada query that many people. Of course, none of you were randomly selected, since that would be far too frightening. But, still, it’s a mess of folks. And the numbers confirm suspicions this blog has held for a number of months…

So, yes, the wealth and income gaps are chasming out of control. No coincidence that the majority of people here are (a) professionals, (b) above-income and (c) work from home. Thus we do not represent all of the nation. Far from it. We stand on one side of the gorge. The virus will have a lasting impact on many things – public health policy, government finances, social mores, workplace cohesion and conservative politics – but the greatest will be on helping to fracture society along financial lines.

It’s not good. But it’s everywhere.

We’re not alone, either. In the last year Canadian house prices rose 17% (to $607,280) and US real estate grew in value 13% (to an average of $309,800). Interestingly, the market for cheap homes in the States slid a little while ‘luxury’ homes (over $1 million) grew 90%. And now Joe Biden has just thrown gas on the real estate fire. In his first week in office the new prez (a) froze foreclosures, (b) gave first-time homebuyers $15,000 each for downpayments, allowing the purchase of a $500,000 property, amd (c) made ultra-cheap FHA mortgages widely available.

The fifteen grand is a big deal. It can be accessed immediately and serve as a deposit on a home, although it’s technically a tax credit. It’s available to anyone who hasn’t owned in three years, and Washington wants to boost the number of buyers by almost a third. The results? Inevitable. Prices will go up as a shortage of inventory is exaggerated and once again America is on the road to the kind of excessive home ownership and speculation that led to the 2005 crash. But that was 16 years ago. Nobody remembers.

But here’s the point: everybody sees what the virus has wrought. WFH salaried professionals have done great. Over 90% of our survey responses showed net worth has increased since Covid arrived. There’s no way this wealth divide can be bridged by taxing the rich (although Mr. Socks and Chrystia will try), so the next best thing (policy-makers believe) is to ensure everyone has a house. Because real estate always goes up. Oh boy.

This may explain comments from our central bank boss, Tiff Macklem this week. When presented with the facts – more houses sold last year than ever before; December sales were the highest on record; house prices rose 15x the inflation rate in 2020; homes are being flipped for 50% and 60% annualized gains in wide swaths of the GTA – he shrugged. It’s all just because of cheap mortgages and WFH, he says. No speculation.

A speculative, FOMO frenzy that beats 2017

Source: Toronto Storeys

“Because people are working from home, they don’t need to commute. Many people feel that even after the pandemic there is going to be more flexibility in many workplaces to work from home than there was in the past. So far we are not seeing the kind of excessiveness in the housing market that would really get us worried. This doesn’t look like 2017.”

No, governor. It’s worse. And you know it. This is a frenzy.

Home prices have flown way past 2017 levels. Nationally the cost of a home is 22% higher, yet incomes have risen less than 5%. Yes, mortgage rates have declined slightly, but Covid has changed everything, including our insatiable appetite for debt. Now we’re seeing speculative prices growing at twice the pace in quaint old ’17. Worse, the FOMO disease has spread (thanks to the pathogen) from the Big Smoke to the burbs and beyond to those hinterland cities where average folks could once afford average houses. This time we’ve managed to poison, gentrify and infect markets hundreds of miles out from the core. Hell, people from the GTA are moving to Nova Scotia buying houses over FaceTime in bidding wars. Is this normal, Tiffer?

Nope. In fact another government agency – CMHC – is warning darkly if the virus roars back and we see a new recession form, unemployment could spike to 25% and real estate crash by 47.9%. Without government intervention, it adds, a few big CUs would fail along with CMHC itself – which insures over $600 billion in mortgages.

Says the agency: “As we continue to deal with the impacts of the COVID-19 pandemic, it is important to monitor the evolving financial risks facing Canadian housing markets including an uneven economic recovery impacting most vulnerable populations. Stress testing exercises like this are an essential part of effective risk management and vitally important to the long-term health and stability of Canada’s housing finance system.”

Well, who knows what lies ahead? But we do know what’s happening now.

Mortgage borrowing goes bananas on big houses

Source: Financial Post

In the last six months, Covid-fueled mortgage borrowing has been frenetic. As in the States, the greatest new debt is coming from the purchase of ever-larger, ever-more-expensive digs. Cheap mortgages, WFH, nesting and a delusional population have created a market of historic peculiarity. In the last 90 days Canadians snorfled another $29 billion. Mortgages now top $1.6 trillion. And you know what a trillion is, right?

Over 60% of Canadians, says MNP in a consumer-debt survey, “feel now is a good time to buy things they otherwise might not be able to afford.”

This doesn’t end well.

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Looks like the typical blog dog is a 40ish-something professional earning above-average income who’s pro-vax and upon whom the slimy little pathogen has showered a heap of new net worth. Students don’t come here. Retirees are relatively scarce. And a majority  scurried home when the virus arrived, then made their dogs deliriously happy by staying there.

Blog data is below. So, 5,140 responded since this time yesterday, or about 10% of the usual number of listless, bored, confused people who stumble in here daily looking for a sanitized bathroom. Of course, this is all about comparing yourself to everyone else.

Key findings: few blog dogs were punted from their jobs by the virus and three-quarters suffered no income loss, either. The WFH brigade is huge – well over half of the respondents have been in sweatpants for almost a year now, Zooming their employers and frittering away far too much time on some pathetic blog. Shame on you. Back to work.

A third of those surveyed fessed up to having received money from Mr. Socks, and doubtlessly a bunch of this was in the form of the sweetened child pogey as well as CERB. But the real kicker is what the virus has done to net worth. Up for an astonishing 90% of you. As we’ve been speculating here for a while, the bug has turned the wealth gap into a canyon. Financial markets have soared since vaccines came on the scene and real estate markets everywhere have been insane – fueled by FOMO, nesting, fear of germy cities and dodgy neighbours. Plus, of course, the weird belief that people will never commute back to the workplace allowing them to migrate to the hinterland and wreck real estate there.

Speaking of wealth, most people answering the poll are in professional jobs, and 70% have household incomes between $100,000 and $400,000. Almost 7% make in excess of $400,000, which is nine times the national average. Mostly realtors and embezzlers, likely. A third are in their 30s, and 80% are younger than 60. And check out the vaccine hesitancy, to see if it matches the number of dumbass comments that I’ve had to delete lately.

What does this tell us about the 1% of readers who light up the steerage section on a daily basis, defending MAGA, saying Covid’s just a flu, telling us Trump won the election, Alberta is going to separate, the stock market is a Ponzi scheme, the economy’s collapsing, the future’s dark and cats are okay?

Yup. Ignore ‘em. They only think we care.

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