Category: Accounting tips

Gobs of media in the last few days about mortgages at .99%.

No wonder. It’s historic. This nation of house-horny colonials has never seen such a number. It stirs loins. It turns pillow talk from cuddles to amortization. We’re smitten. Sign me up.

So let’s dig into this for a few graphs, before turning to you-know-what.

This is an offering by HSBC, the most carnivorous of lenders when it comes to market share. The extreme rate is designed to get attention (done) and attract customers to a bank which would love to also have your RRSP, TFSA and LOC. Mortgages are ‘relationship products.’ They’re the financial equivalent of push-up bras or bicep tats. Who can resist?

Well, the .99% home loan ain’t for everyone. The rate is variable, which means it can (and will certainly) increase over the next few years. Plus, it’s only for CMHC-insured mortgages on properties with financing of 80% or more (and worth less than $1 million).

If you want a five-year fixed-rate mortgage on a house with more equity (not insured), HSBC will give you a loan at 1.59%. Still ridiculously cheap. And in the last few days CIBC has moved to almost match it, with a 1.49% price on a four-year fixed borrowing.

Why are interest rates so in the ditch?

Because the economy’s in deep trouble. Central banks have pulled out all the stops to counter the effect of that slimy little pathogen. Our guys dropped rates to the lowest-ever level, and have been spending $5 billion a week buying up bonds – increasing the demand for debt, which sustains bond prices and keeps yields depressed. It’s all artificial. If market forces were in control of interest rates, you’d be paying HSBC four times as much to use its money.

The upside of low rates is people forget what a mess we’re in, become aroused and go buy a property they probably don’t need for an inflated price that they could not otherwise afford, from a vendor reaping a windfall. That’s what the central bankers want you to do. They entice borrowing. So as Covid sucks the guts out of airlines, restaurants, retailers, tourism and the service sector, this real estate activity helps mitigate the mess.

But cheap money (naturally) augments debt. Borrowing these days is increasing at the same pace as back in 2017 when a robust economy was thrusting house values higher. But in 2020 the economy has crashed, four million people are still on the dole, almost a million stopped making mortgage payments, the government is awash in red ink and our biggest metropolitan area is in lockdown with a 93% drop in commuter rail ridership. It looks increasingly like temporary job loss may become structural. Four in ten small businesses – the biggest employer – will likely not survive the virus, while widespread WFH is presaging an overall income decline.

Enticement. It’s a dangerous experiment. Now that a mortgage has dipped below 1%, it probably gets worse. Higher house prices. Way more debt. But no more productive economic activity, since we’re all just selling each other properties at ever-higher costs with increased financing. Does that sound sustainable to you?

Nah. Me neither. Every month it gets worse. We will emerge from this eventually with broken governments, higher taxes, less affordable homes, historic family debt levels and, yup, gradually increasing rates.

The way out?

It’s not more Trudeau/Chrystia handouts, even-lower rates or central bank stimulus. This is making stuff worse (even as it plumps investor portfolios). There’s only one door for society. It’s marked ‘Vax.’

Whether they erred or not, politicians turned off the economy to quell social contacts and slow the spread of the virus. Now we have a global economic crisis to go with the health disaster. Our closest neighbour is the epicentre, where millions of people still think wearing a mask is socialism and enslavement (thanks to you-know-who). The next six or eight weeks may be grim.

We will get through it. But only with the vaccines. Otherwise the virus could linger for a generation. Wait and see what a house is worth then – if you can find a buyer. Without herd immunity there’s no recovery. Conditions will worsen. Assets will decline. Income supports will drop. It’s not an option.

Ask yourself: would immunity from this disgusting bug be good for your neighbourhood? Your kids and their school? Your city and downtown? The province and nation? Of course it would. And how do we achieve this? Yup. We get vaxed. All of us. If the outcome is universally beneficial, everyone has a duty to be part of it.

Only a coward, and a selfish one, would ride on the back of this immunity. And this is why no anti-vax comments will be tolerated here.

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   By Guest Blogger Ryan Lewenza

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As Covid-19 hit taking the global economy down with it, economists were quick to define the ultimate recovery in the economy with a letter from the alphabet. The more optimistic bunch called for a V-shaped recovery, where the economy would quickly drop and then recover, looking like a V. The bears out there (and you know who you are!) were calling for the dreaded U-shaped recovery, where the recovery would be drawn out and depressed. However, neither of those scenarios played out and in fact, there’s a new letter that we can add to our vernacular – the K-shaped recovery.

A K-shaped recovery occurs when certain parts of the economy recover faster and more strongly than other parts. Basically, the recovery is uneven, with some (mainly white-collar jobs and professionals) experiencing minimal impact, while others (typically blue-collar workers and lower income earners) suffer disproportionately from the downturn. That’s exactly what we’ve seen over the last year with this terrible pandemic really weighing on certain areas like restaurants, travel and leisure and small businesses.

Below is a cool chart (is that an oxymoron?), which illustrates this concept. I plotted the total aggregate hours worked by all employees for two different groups – professionals and the information technology sector and the services sector including restaurants, leisure and entertainment. Note how the white-collar professions have seen minimal impact to their total hours worked, whereas the service-based areas like restaurants and entertainment have experienced massive drops in their total hours worked.

You don’t have to be a trained economist to deduce this. All you have to do is look around. When I walk down Toronto’s Queen Street I see it everywhere. With the Ontario government shutting down businesses again, who do you think feels it the most? While I sit in my comfortable office at home, small businesses ranging from my local drycleaner, to my local pub and our favourite restaurants, are enduring incredible economic pain and emotional stress right now and are feeling the brunt of this crappy pandemic.

What a K-Shaped Recovery Looks Like

Source: BLS, Turner Investments

Another way to illustrate this K-shaped recovery is by looking at employment rates across different income ranges. For example, those income earners in the lowest quartile (in the US is defined as those earning below US$27,000) have experienced the biggest drops in employment with this group seeing a drop of 19% in employment rates since the pandemic hit. In contrast, those higher income earners (defined as over US$60,000) have actually seen their employment rates rise by 0.2%, as of September.

Low Income Earners are Getting Hit the Most During this Downturn

Source: Opportunity Insights

So we know this is happening and why, but what is the solution to this?

In my opinion there are three critical things that need to happen to turn this around.

First, while I am a staunch fiscal hawk, I believe the government needs to pony up and continue to financially support the hard-hit service sector and small businesses. This includes the continuation of the rent and wage subsidy for businesses, providing loans to small businesses and targeted support to our bars, restaurants, travel and small businesses. Yes this is expensive and yes this will leave us with a lot of debt, but because the governments are making the decision to close businesses to slow the spread of the virus, then the governments need to pay up. As the economy begins to recover and we get control of this pandemic, then governments should create a plan to return to balanced budgets to help get control of the skyrocketing debt. I don’t have much confidence in this current Federal government and our new Finance Minister to do this sadly.

Second, we need the vaccine and we need it fast. While details of the vaccine rollout have been sketchy and unclear, it currently appears that we’ll receive 6 million doses from Pfizer and Moderna by March, which would vaccinate 3 million Canadians (requires two doses). First responders and seniors in long-term care facilities will receive priority, with a broader rollout of the vaccine by the second quarter. Come fall a good percentage of us should be vaccinated, and when this happens we’ll begin to return to normal by going out again to the bars, restaurants and movie theatres. Not sure about you, but I sure do miss hanging with my pals and having some pints, or having a nice diner with the Missus. So, I see these areas recovering strongly next year as the vaccine takes hold.

Lastly, it’s all about job growth and getting people back to work. The vaccine rollout will be critical to this.

During the downturn the Canadian economy lost 3 million jobs in March and April Since then we’ve added back 2.4 million jobs, or 80% of what was lost in the spring. We need to get back to the 19.2 million peak in Feb 2020, and I see that happening over the course of 2021. I’m expecting job growth to slow going forward, but the trend will be up and we should be back above that 19 million level over the next year. This is critical to addressing this K-shaped recovery.

Canadian Employment is Still Down 600k Jobs since Feb Peak

Source: Bloomberg, Turner Investments

Through what I see around me and my many conversations with our clients I know people are hurting from this historic pandemic. These are not just statistics, or some numbers on my spreadsheets. It’s real people with real lives. So we need continued government support, a successful vaccine rollout and job growth to get back to normal, which I believe is on the horizon and will unfold in 2021.

In my own little way I’m going to try to help the service sector and small businesses by purchasing all my holiday gifts for the family through local businesses around town. No Amazon purchases for me this holiday season! Let’s all try to support our hard-hit local businesses this holiday season, as they need us now more than ever.

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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He dead-on accurately forecast the nation’s newest, shocking, budget deficit. As such, the man (John) calling himself TANSTAAFL won the right to write, then stand naked before the steerage section as the rabble passes comment. That moment has come.

Who is he?

“I am a GenX engineer by training who has lived across this great country from Annapolis Valley to Vancouver Island before landing in Alberta.  As for the dog, I am still looking, but it will be a lab. I believe in balanced portfolios of low cost ETFs and have paid the price in the past for thinking I was smarter,” he tells me.

And how did he know exactly just how deep Chrystia’s well of ruby red ink would be?

“I could claim omniscience and shill my opinions on cable but the truth is I came to my deficit estimate by reviewing the September PBO estimate, adding a politically optimistic accounting of the promises since then, and added a decimal place to give it the air of precision and accuracy.”

So, what do you have to tell us? – Garth

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  By  Guest Blogger TANSTAAFL

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This post will most certainly prove to be more pathetic than usual and for that I offer condolences to our mighty host and his legions of fans. To those yearning for financial insights or desperately seeking permission to buy a house sure to bury them in debt and eclipse their other assets the answers, just for today, will have to wait.

TANSTAAFL – There ain’t no such thing as a free lunch!

When money falls from the sky to defeat a virus and the chaos it has wrought, someone has to pay. While pandemics are temporary, debt has a way of sticking around and comes with a real cost now and into the future. With a $381.6 billion federal deficit and combined provincial and federal debts approaching $1.8 trillion those costs are epic. Remember the quaint days just a year ago when a $28 billion deficit was staggering?

How did we get here?  Politicians, faced with hard decisions and limited evidence, shut society down to avoid overwhelming the health care system and save lives. This destroyed the ability of employees and businesses to make money and came with a moral obligation to fill the void and avoid an even larger scale destruction of the economy.  While we may disagree on the amount of money required, or to whom and how it was distributed, as a society we had no choice but to share this burden. The majority had failed to heed the advice of this blog to avoid over extending on housing and to invest for the future leaving them financially unprepared for this crisis. Governments spent more than they collected in the good times and now, here we are. Buried in debt and facing growing inequalities in our society only accelerated by our response to the pandemic.

I am not an economist or politician but as a citizen and tax payer I have to ask, what’s the plan to get us out of this financial mess? Hoping that interest rates rise more slowly than economic growth indefinitely while building ever larger structural deficits seems a questionable strategy to leave to the next generation.

What are the impacts on public services as debt servicing costs inevitably rise or job creators as the unpopular answers to those questions demand revenue? How do we support employment opportunities for those disproportionately impacted by the shutdowns or ignite growth given our questionable record of supporting innovation and R&D investment? How do we address the growing inequalities in our society that left unattended will eventually lead to social instability?

These are significant questions without clear answers and many potential policy directions. What are the insights I have to offer to the esteemed readers of this blog?

Critical thinking matters now more than ever and listening to voices that don’t simply reinforce our own opinions builds better solutions.  While everyone should be an equal participant this does not mean embracing “alternative facts” provided by your BIL after a couple of drinks as the truth.  This is something we all intuitively understand.  I have carefully considered the facts provided by a variety of experts with differing opinions on the value of rate reset preferred shares in a balanced portfolio, how safe they are in a traditional sense compared to fixed income, and their benefits in a rising rate environment. I do not provide equal weight to the evidence provided by TNL@TB or the resulting recommendations for my investments and I would be shocked if anyone else reading this blog did.

It is time to expect more from our politicians and raise the level of debate in this country.  We all have a civic responsibility to think critically, ask difficult questions, assess the quality of evidence, and remain open to changing our minds. It is going to hurt everyone but together we can find the best solutions to manage the debt.  With strong leadership and innovation we can transition to a greener future while still recognizing the importance of our fossil fuel industry and holding it up as an example for the world. We can have important debates about policy wonk issues like ranked voting, giving a real voice to the regions of this country, and the ever more evident concentration of power within the PMO.  Once we move past debates looking like shouting matches between counter-protestors we can deal with the really hard issues, like reconciliation and the impact of AI on employment.

Now, having shredded my credibility as a pessimist and realist, I have just one more offering.  I knew what the deficit was going to be and having considered the evidence I know how to keep it and the virus from getting worse;

Wash your hands, wear a mask, and when the time comes get vaccinated.  Don’t stumble on deciding which one is the best or if you really need the second dose. Decide now to stand-up and get jabbed, likely twice, it is the best path to stopping this insanity and getting this blog back to the COVID-free financial and canine insights we crave.

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  By Guest Blogger Sinan Terzioglu

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Many Canadians preparing for retirement today are house rich but cash poor as they have a significant portion of their net worth tied up in their principal residences.  Those that have been lucky enough to own a home often have a net worth that appears healthy as housing prices have appreciated significantly but as they enter retirement they quickly realize cash flow is challenged.  CPP and OAS cover only a fraction of monthly costs.  As a result more and more people are relying on reverse mortgages as a solution to their cash flow deficits in retirement.

A reverse mortgage allows you to borrow against home equity while continuing to own and live there.  You receive funds tax-free as a lump sum or as regular monthly cash flow.  The loan only becomes due if you sell the home, move or when the last surviving owner dies. On the surface this is a very appealing option to those that would like to stay put and do not have enough cash flow to comfortably cover their expenses. However, relying on a reverse mortgage for cash flow over many years is a risky plan as the total debt continually increases while home equity decreases.  Needless to say this is not a good combination in your retirement years with a few decades to fund.

To qualify for a reverse mortgage in Canada, you must be age 55 or older and live in your home for at least six months of the year. If eligible you can borrow up to 55% of the property’s value.  There are no repayments required until the mortgage is due and you don’t need an income to qualify.  Funds come tax-free and if the house value drops or interest rates rise there is no risk. At first, it sounds too good to be true. And it is.  For example, reverse mortgages are expensive to set up and the interest rate charged on the loan is normally over twice as high as a conventional mortgage rate.

The market for these mortgages reached $4 billion in 2019, up nearly 30% year/year and the growth doesn’t look like it will be slowing down anytime soon as many Canadians discover they have not saved nearly enough in liquid financial assets.  It’s a short term fix, with compounding long-term problems.

For example, assume you and your spouse live in a house valued at $750,000, with no debt and $250,000 in a defined contribution plan. You’re both 60 and recently retired.  On the surface the financial picture appears healthy.  You have a net worth of $1M and no debt.  You’re both eligible to begin collecting CPP now and OAS at 65. You figure, if need be, you can unlock the equity in your home by getting a reverse mortgage at some point. Your monthly fixed and variable expenses during retirement are projected to be $5,500 but you quickly realize CPP doesn’t even cover half of that so you withdraw the difference from savings.  However, withdrawals from your registered savings are taxable and therefore you have to take out a larger amount in order to cover your spending.  Also, costs are continually rising every year with inflation (which has averaged over 2% annually).

Over the next few years you have some unexpected house repairs and require a new car.  By the time you and your wife turn 65 your financial assets have been drained.  OAS kicks in at this point but it barely makes a difference so you trim your fixed and variable expenses down to $5,000 per month.  Your home has appreciated in value to $825,000 so you decide to unlock the equity with a reverse mortgage of $350,000.  You take the money as a monthly deposit of $3,000 tax free so when combined with your government pensions you’re able to cover monthly expenses.  It appears like you have solved the cash flow problem and all will be good.

Ten years later, the cash is gone.  The reverse mortgage debt has grown to $600,000.  You’re not able to trim monthly expenses which are now over $6,000 because of inflation and you cannot borrow against your remaining home equity – so you decide to sell.  Let’s assume you get $1M, so after paying off the loan and transaction costs the net is less than $400,000.  However, what if the house doesn’t appreciate in value much because interest rates have been rising over the years and you are only able to sell your house for $850,000? That would leave around $250,000.

You’re both now 75 and potentially have another two decades of retirement to fund.  Fifteen years ago your financial picture appeared solid but now you run the very real risk of running out of financial security when you need it most.  Had you downsized or rented and invested the equity, the long term picture would have been very different.  We’re living longer and healthcare costs are continually rising and often faster than the rate of inflation.  If you need to go to into an assisted living home in your later years your costs will rise even more.

If you are spending more than 30% of your gross monthly income on housing costs than you are spending too much. You must prepare and plan for your own pension-like income and this begins by saving and investing at least 15% of income.  If most of your net worth is in your principal residence as you prepare for retirement, you’re taking on substantially more risk than you realize and should consider downsizing or renting to ensure enough is invested in liquid financial assets to support you and your loved ones for the rest of your lives.

A reverse mortgage may work for some as a short term solution but it’s not a long term plan and should only be considered as a last resort in most circumstances.

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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Monday’s dose of Chrystianomics will be put to a confidence vote, her boss now says. Thanks for the deputy prime minister, Jag, the government will not fall. The spending will continue. And your children’s children will look at their marginal tax rates and wonder what the hell their ancestors were thinking.

More news: bank profits are back. And the economy roared ahead 40% in Q3 after being crushed 38% in Q2. The big question is what the second wave will do to Q4. And it won’t be pretty. But meanwhile Mr. Market doesn’t care. He’s hopped up on vax, so the Dow topped the 30,000 mark on Tuesday and investors just enjoyed the best November since ever.

Yup. What a mixed-up world. Stephen Harper suffered the wrath of media hell with a deficit of $56 billion during the credit crisis. When Trudeau’s red ink hit $381 billion this week, there was barely a ripple. Around the globe governments have now thrown $19 trillion at Covid. In Canada this has meant a giant spike in the household savings rate, since gobs of people have more money than they did pre-virus. It’s why Justin would actually love to lose that vote, triggering an election.

What do most little beavs care about?

Themselves, naturally. And the gifts keep coming.

Like the $400 everybody got Monday for staying home. Chrystia announced the CRA would be introducing a simplified claim to allow WFH warriors to write off up to four hundred bucks worth of staples, paper, thumb drives and wires. This will be a straight deduction from taxable income and – guess what? – nobody needs receipts. Or even a T2200 form from your employer stating that you can claim work-related costs. Nope. It’s just a freebie. Four hundred clams.

And for the homeless urban moisters comes the enhanced First Time Home Buyer Incentive. Remember that? It’s the shared-mortgage scheme whereby the government will chip in 5% or 10% of the financing, cost-free, for up to 25 years. Now the pot’s been sweetened so buyers in Van, the GTA or Victoria can buy digs worth up to $722,000, employing government money – a huge jump from the previous limit of $505,000.

Won’t this just add to absurd 1.7% five-year mortgage rates in goosing house prices beyond the means of average people? You bet. But this is Covid Canada, 2020. Everybody gets a pony. If excessive stimulus, emergency rates and historic deficits completely screw things up, just relax. ‘We’ve got your back,’ the leader said. What could possibly go wrong?

Well, the big news here on this pathetic blog is the winner of the Deficit Challenge. We asked you for an estimate of how pooched the Chrystia mini-budget would leave us, and more than 300 of you responded with wild, unsubstantiated and possibly inebriated responses. The number announced Monday was $381.6 billion. The closest guesser came in at… $381.6 billion.

That winner posted here as ‘TANSTAAFL’, whatever that means, and has earned a guest post on a topic of his choosing plus the chance to moderate comments for a day. After being notified of this massive and systemically-significant prize, this was the response from a person we now know is called John.

I initially assumed this was some sort of sad fishing attempt as I did not think my message had even posted. I had to go back and literally check the mind boggling numbers.

This is your blog sir, while I will embarrass myself if you are serious about the offer, I have no interest in moderating the comment section.  I can afford the therapist but I don’t think I can carry the cost of the single malt required to wade through that particular ocean.

Given that I am not a financial advisor, realtor, economist, or politician I will have to think about what I have to offer.  I considered turning the blog over to my friend, a micro-biologist working on COVID-19, but he likes gold too much and would likely look at the comment section and loose his last shred of hope for humanity.

If you are serious, I have no problem if you wish to edit or offer an interspersed commentary.  I do not view this as a transgression against my freedom of speech on your blog.  As a warning, my post would likely hold up politicians and experts while ending with a recommendation to get vaccinated to save the economy.

Who is John? What does he do and where’s he live? How’d he possibly know – to the fraction of a billion – what our flashy new finance minister was going to do? And why would somebody who’s intelligent, articulate and prescient visit such a trashy site?

Stay tuned. You’ll soon have the chance to punish him badly.

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Three months and two weeks ago the finance minister resigned.

“Since I expect that we will have a long and challenging recovery, I think it’s important that the prime minister has by his side a finance minister who has that longer term vision,” Bill Morneau said, politely. “That’s what led me to conclude during this time period that it’s appropriate for me to step down.”

It was a shock. In the midst of scandal. And it occurred after Morneau had a blow-out with Justin Trudeau. One man wanted prudence. The other, glory.

As we know, both were tainted by the WE debacle, now blurred by the ongoing Covid crisis and its  troublesome second wave. Trudeau allowed his family members (including his mom) to become paid shills for a dodgy charity with a penchant for buying commercial real estate in the name of its founders. Morneau carelessly accepted gifts and travel. It was an embarrassment he won’t live down.

But that’s wallpaper. The real story here is the course of the nation which today again lurches left. Morneau in July was devastated to announce Canada would have the worst deficit on record, $342 billion, as a result of T2’s virus spending and the CERB tsunami. He then argued for restraint, telling the prime minister of the need for a long-term strategy to restore fiscal health. Trudeau rebuffed him. This crisis, he argued, was an opportunity to remake society, expand the role of government, promoting social and climate justice. The spending would continue.

Bill quit. Chrystia Freeland was instantly thrust into his chair.

So let’s consider this a moment.

Bill Morneau is Old Money. If you’ve ever spent much time around OM people you know they live by a code. No wonder. The system’s been good to these folks. Capitalism works. Things are as they are for a reason. Change should be incremental. Reputation matters.

Before losing his mind and running for Parliament, Morneau headed a billion-dollar executive benefits company and earned over a million annually. He lives on a two-acre estate in the middle of Toronto and married one of the wealthiest women in Canada. Nancy McCain is an heir to the food empire of the same name. Her brother is chairman of McCain Foods. Her cousin runs Maple Leaf Foods. Her sister lives in a little castle across the street. There are two family yachts, large enough to cruise to the Galapagos, normally anchored off the family’s summer compound in New Brunswick or its holdings in Florida. There is also a chateau in Provence, in the south of France

In short, there’s nothing to prove. Being in public office is not about personal gain, advancement or brand-building. It’s service. It finished badly. But it also ended on principle.

Chrystia ain’t OM.

Both parents were lawyers with her mother running as a federal NDP candidate in native Alberta. Her BA is in Russian lit and history. Her MA is in Slavonic studies. She worked as a journalist stringer in Ukraine, and afterwards in London and Moscow. Then to the Globe and Mail and Reuters. Her major publication was a book called “Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else”, a 2013 bestseller. Then she ran for Parliament. She’s married to Graham Bowley, a former NY Times reporter. Three kids. Normal house.

An accomplished, ambitious woman. Now the second most powerful person in Ottawa. In interviews over the past few days she’s indicated a willingness to ‘spend whatever it takes’ for the Trudeau agenda of worker support and economic rebuilding to occur.

Privilege, business success, family, wealth and marriage made Bill Morneau. Justin Trudeau made Chrystia Freeland. She may well be more in sync with a nation where Millennials outnumber Boomers and social justice/climate issues trump balanced budgets. He may be the dinosaur, the last hulking carcass of fiscal restraint standing at the vault door.

   But we are now the spendiest country in the industrialized world. In a single year our deficit, as a share of the economy, has grown by a factor of 18. “No major economy,” says Scotiabank, “will show a bigger fiscal swing in 2020, according to estimates from the International Monetary Fund.”

And it’s only started, apparently.

$     $     $

Well, here it is. The shiny new (so far) Chrystia deficit number: $381.6 billion (by March). And this does not include another $100 billion in stimulus spending coming after the second wave…

Now, let’s see who in the steerage section came closest with their estimate, and will be our Guest Blogger! May God help the winner.

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Mars and Venus. Do men and women really think so differently when it comes to money and financial security?

Are you kidding? Of course they do. At least according to the leading financial dudettes. Famous women money bloggers like Gail Alphabet, the jar lady, put the repayment, elimination and annihilation of debt at the very tippy-top of their strategy list. Females worry about debt more than males, who spend more time dwelling on facial hair and oil changes.

But while we’re a hideously-indebted and essentially pooched society, there are times when managing debt – not trashing it – can make some sense.

This brings us to an email I received on the weekend:

Drained our two TFSAs, added to savings and paid the $307k remaining in the mortgage. Emotional, not logical. Sweet relief.

Let’s parse this. Does it make sense? Is there enough emotional tingling here to compensate for throwing savings into more real estate equity? What is the actual cost of this mortgage-hating mentality?

Well, five-year, fixed-rate home loans are now available for about 1.7%, so let’s use that number to run some simple calcs. A mortgage of $307,000 would then require monthly payments of $1,255. Over five years they total $75,359, not a small amount of cash flow.

But because rates are so incredibly low, a goodly chunk of every payment erases amortized principal. In this case the repayment portion of sixty monthly cheques adds up to $51,470. Huge. So at the end of five years the debt would be reduced to $255,529.

Now, what if the $307,000 this person possesses in liquid wealth were invested, instead of thrown at debt reduction?

If stuck into a balanced & globally diversified portfolio of ETFs for five years there’s a healthy chance the average annual return would be 6%, judging by the last few decades. (Although I’d wager in a post-Covid recovery period the gains would be outsized.) Sheltering half of this inside TFSAs would also make some gains tax-free.

So after sixty months it’s reasonable to believe the $307,000 would have swollen to become $414,200, of which more than $107,000 would be growth. Here’s a summary of what that means:

Paying off the remaining mortgage balance from investment proceeds after five years would leave a balance of $158,700. Yup, have your cake (paid-off house) and eat it too ($158,700 in assets). But the homeowner paid $75,300 in monthlies over that period, so this should be deducted from the balance, leaving a surplus of $83,400. In other words, paying the mortgage off – as Venus so desired – was a costly move when mortgages are so cheap. Eighty grand, or about $1,400 a month for five years.

Lessons?

Inflation is currently 0.7% in Canada, which is crazy low. But it also means a 1.7% mortgage is actually costing just 1%, which is even wilder. We all know that by this time next year, as the vaccine chases the virus, the economy will be recovering, prices and wages rising and inflation plumping. Mortgage money will be essentially free. Milk it. With an amortized mortgage and blended payments, a big piece of debt disappears every month.

Also be wary of concentrating all your net worth in one thing. Even your house. The less diversification in your life, the more risk. Real estate is not immune from big fluctuations caused by property taxes, employment levels, inflation, rates, zoning or a pandemic. Putting all your eggs in one basket is a poor strategy. So stuff your TFSA and keep it that way.

Is it such a bad idea to have some low-cost leverage on residential real estate which has (because of public mania) been rising in value? Of course not. Why hasten to pay it off?

Finally, remember when you get old you can always rent a roof. You can’t rent income. It’s a complete myth that you’ll be secure in a home you own when you lack the cash to heat it or to finance a happy life. Especially if you’re a long-lived woman. Get invested. Stay invested. Be diversified. Be smart about debt. But not obsessed by it.

And stop reading sexist advice.

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  By Guest Blogger Doug Rowat

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Growth versus value. It’s a rivalry as old as time. It’s the investment industry’s equivalent of the Red Sox versus Yankees.

And like the Red Sox versus Yankees, the Bronx-Bombing growth stocks over the long term have generally trounced the underdog value-stock Beantowners:

S&P 500 Growth Index (blue line) vs S&P 500 Value Index (white line – long term

Source: S&P, total return performance

Growth stocks have, in fact, returned an incredible 16% annually over the past decade versus 11% for value stocks. The value-stock rate of return is still impressive, but somehow it’s always overshadowed by its pinstriped growth-stock rivals. However, every once in a while, value stocks shrug off the demons of Bill Buckner, throw a bleeding Curt Schilling onto the mound and pull off an impressive victory. We may be witnessing such a value-stock win as we speak.

First off, what are value stocks? Value stocks, as the name implies, are underpriced equities, and because they’re underpriced, they’re often out of favour. Following the 2008-09 financial crisis, for instance, a lot of “value” could be found in US banking stocks or US homebuilder stocks. Similarly, the Covid-19 crisis, has created pockets of deep value as well.

An excellent example of a Covid-19 value stock would be Walt Disney, which is heavily weighted in most value indices and value ETFs. Fairly or not, Disney was punished at the outset of Covid because many of its businesses were seen as susceptible to lockdowns: theme parks, cruise ships and film production studios, for example. With sports also shuttered, ESPN, a smaller Disney enterprise, was also viewed as a liability. The end result was a more than 40% drop in its share price from its pre-Covid peak to its March 2020 lows.

Two main factors, however, have driven a recent rally in value stocks: 1) the perceived unsustainability of growth’s outperformance and 2) the positive developments surrounding vaccines.

First, growth’s overextension. Growth stocks usually experience free-reigning momentum and are allowed by investors to become expensive because investors are willing to pay extra for the growth potential. However, growth stocks are being viewed now as excessively overpriced. The chart below, for example, shows the rolling 12-month price return between the S&P 500 Growth and S&P 500 Value indices. As the chart indicates, growth stocks recently hit a relative performance extreme. In fact, the highest in history, eclipsing the highs seen during the tech bubble of the late 1990s. Given the run in growth stocks, the compelling value, so to speak, that value stocks are offering hasn’t been lost on investors.

Growth’s relative performance extreme: the highest in history!

Source: CFRA

Secondly, vaccine news. Using Walt Disney again as an example, the emergence of effective treatments for Covid-19 from Moderna, Pfizer and AstraZeneca in just the past month has allowed investors to picture a more normalized world in 2021, one where consumers return to theme parks and cruise ships, for example. Whether this will play out as smoothly as investors hope is, of course, the risk, but for now, the vaccines offer the possibility of beaten-down value stocks returning to higher levels of profitability next year. As a result, value stocks have begun to more strongly outperform, with the outperformance coinciding almost exactly with the vaccine news:

S&P 500 Growth Index (blue line) vs S&P 500 Value Index (white line) – q-t-d

Source: S&P, total return performance

Whether the outperformance can continue remains to be seen, but as markets and economies emerge from a crisis is often when value stocks realize their best sustained outperformance. An overextended growth sector and vaccine developments are also likely to serve as additional catalysts for the value sector. Therefore, it’s worth having a portion of your portfolio in value stocks (within a well-diversified value ETF, of course).

As the market emerged from the financial crisis beginning in March 2009, value stocks outperformed growth stocks consistently over the next two years, and did particularly well during the first year of the market rally.

The same thing may happen as we emerge from the Covid crisis.

Growth is great, but not even the Yankees can win every year.

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Finally, I came across this nifty chart recently from Invesco. You might hate Biden and his economic policies or you might have hated Trump and his economic policies back in 2016, but this chart shows why it’s important to never let your personal antipathy towards a politician or a political party interfere with your investment decisions.

Democrat or Republican, never bet against America:

Growth of $10,000 in the Dow Jones Industrial Index since 1896

Source: Invesco

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

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Three more sleeps till Chrystia rocks your world. On Monday the shiny new finance minister will give an update. Not a budget (like all the adult countries have received during the pandemic). Just a back-of-the-envelope kinda thing to keep tab of Justin’s spending (another $532 million on Friday for indigenous folks).

Remember the last deficit number? Right, $342 billion. The most ever by a margin of almost three hundred billion. (By the way, one billion is 1,000 times a million.) This blog asked its sketchy readers for estimates on what the latest shortfall would be, since there have been many, many spending announcements of late.

Over 300 of you responded. The reader who comes closest to the announced number on Monday will be granted a guest post here – and the freedom to embarrass yourself on the topic of your choosing. It will be an epic moment.

Meanwhile RBC is guesstimating the deficit will be $370 billion for the year. In 2021, even with the pandemic ending, the bank says Canada will almost double the worst-ever Conservative shortfall, with the Liberal red ink amounting to another $90 billion as more spending programs (child care, pharmacare, green infrastructure) click in. All this will push the accumulated national debt well over $1 trillion, becoming the momma of all problems down the road when interest rates snake higher. Yes, Millennials have no idea what lies ahead…

So, how do we afford this?

In the short term, the Bank of Canada prints the money, sends it to Trudeau and he spends it. This is backed by the issuance of government debt (bonds) which investors, mostly institutional, buy. The debt is considered ‘risk-free’ by financial markets, paying peanuts – currently just under half a per cent annually on five-year money. Over time this will change as the economy rebounds, inflation returns and investors demand more.

So the feds also need to raise more revenues to help cover spending. Promises made in the September Throne Speech alone (like looking after your kids and paying for your prescriptions) will cost between $19 billion and $44 billion a year. Extra. Forever. This stuff can’t happen without more taxes, since the bond-flogging thing will get extreme.

Warns the scary CD Howe Institute: “Taxpayers and policymakers should not underestimate the scale of tax increases needed if Ottawa increases spending as much as envisioned in the Speech from the Throne.” Its conclusion was that the only way to Hoover more billions from citizens without hurting the economy too much is through the GST. Yes, back up to 7%. So when added to the provincial sales tax, that means HST of 15% in Ontario and 17% in the Maritimes.

Meh. This would raise about $15 billion, not even enough to cover the latest Trudeau promises, let alone any Covid stuff (vaccinating everyone will cost $2 billion). So it’s likely there’ll be more changes coming in the Spring budget (not Monday’s update). A candidate for that is a higher capital gains inclusion rate.

Yeah, again. The anxiety over this ebbs and flows, but it looks increasingly like Mr. Socks will go postal on ‘the wealthy’ now that the virus has emboldened him to give silly speeches about a ‘great reset’ and a re-engineering of society. (Sheesh, we just want our shot…)

My pal, tax expert Jamie Golombek, points out that 90% of Canadians never report a capital gain. And of those who do, three-quarters of the total was declared by just 10% of that group, with incomes over a hundred grand. In fact 55% of all the taxable capital gains in Canada were reported by people earning in excess of $250,000. That’s only 160,000 folks – and they’re already in the 50%+ top tax bracket.

So, yup, this change would affect a relatively small number who already pay a disproportional amount, but it would affect them strongly. So it’s a good thing the tax system has little to do with fairness, and much more with punishment.

How would it work? Well, raising the inclusion rate to 75% (the direction we’re headed in) would mean three-quarters of a gain added to taxable income for a year, then subject to the marginal rate. Since the most affected people are in the 52% bracket, the capital gains tax goes up 50%.

So what, the masses cry? Should we shed tears for the 1%ers?

Nope. But higher taxes on the money people make from risking their capital means they may risk it less. That hurts expanding companies, new start-ups, financial markets, commercial real estate and ultimately pension funds, while it encourages investors to hang on to gains instead of selling assets and triggering tax. The move would also make it wise for people to focus on keeping assets inside RRSPs and especially TFSAs, where gains remain tax-free.

Well, whatever happens, something will happen. Current spending is unsustainable. Yet the prime minister wants to spend more. Since over 40% of voters pay no net tax with the burden heaped atop the shoulders of a few, you can smell what’s coming. Chrystia wrote a landmark book on rich people, “and the fall of everyone else.” In her world, there would be no powerful wealthy folks. Just powerful political ones. And she plans on succeeding Trudeau.

Gulp.

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Selena’s got a problem. It’s about life. “How safe is too safe,” she asks me. “Do we need to live a little?”

No, this is not about getting a new Harley, doing missionary work in China or volunteering as a virus vax volunteer. Alas, it’s about a condo. When you’re 35, living in a 640-square-foot apartment in house-horny Canada, what else is there to obsess about?

Here’s the back story. S is an engineer earning ninety thousand. Hubs makes $102k. Two cats. One dog. Five-year-old car. Net worth just over four hundred thousand. Big savers. But she’s not sure about her career. “I’m burnt out and might want to make a career change which could involve a paycut.”

The rent is $800 a month, two bedrooms, big shared back yard, great hood, iffy LL – even though he hasn’t increased the monthly in ten years. “Yes we save a ton, but the neighbors are hell and the landlord is completely uninvolved. Kitchen is falling apart. We do minor repairs ourselves. We are the only ones who clean the entrance and do some landscaping to make it nice, and it’s getting old.”

Well, they did what a lot of tenants do when they crave space and control. They went shopping. On Wednesday they visited a ground floor condo in a duplex listed for$740,000 – bigger, but an unrenovated basement and only one bedroom. “On Thursday, our agent calls us to tell us there is an offer that expires at midnight, and that there is a second one coming in. So we offered $752K with 20% down, wrote a nice letter, and somehow got chosen.”

“After an all-nighter drafting some preliminary drawings + costing to convert the layout to get another bedroom, bathroom and office (total 30K), and dig the basement (5-year horizon, around 90K), I got cold feet. The co-ownership agreement stated that you couldn’t rent out the place on “tourist” platforms, and since both my husband and I travel quite a bit for work under normal circumstances, it would have been nice to have that option. So we passed. Of course now I have regrets and feel like we could have done it. Can you tell me if we were fools for letting that place go?”

What about the costs?

Selena tells me the monthly overhead (financing, taxes, utilities) would be $3,600. The down payment would equal $150,000, plus another fifty grand in closing and immediate reno costs. Now she’s anguished at not moving ahead and has turned to a pathetic blog for reassurance, or a spanking. “Are we being too cautious? Do we need to live a little? WWCAGD? (What would chiseled-abs-Garth do?).”

Well, let’s be realistic. S and her hubs are doing well compared to their cohort. Good incomes. No debt. Four hundred saved. The current rent (in Montreal) is cheap. They save gobs of money. This financial cushion allows her to even consider getting out of a career she no longer enjoys. That’s huge.

Buying this unit would change everything. Yes, they’d get more space, but albeit after a period of costly and disruptive renos. The tab, however, is large. Added to the $3,600 monthly nut for basic ownership costs would be the lost opportunity cost of not investing $200,000 needed for closing, down payment and renos. That’s a thousand a month, for a total true cost of $4,600. Yikes – a $3,800 monthly increase over their existing rent, or a 475% bump in living costs.

Now let’s imagine they took that $3,800 and invested it over the next 20 years and earned a reasonable 6%. That would amount to an additional $2.38 million by age 55. Add in their existing savings and meagre pensions and this would create a lifetime retirement income of somewhere between $180,000 and $220,000. At age 55 – with thirty years to enjoy it.

Or they could buy the condo with the raw basement for $750,000 and $600,000 in debt.

Hmmm. But the choice does not need to be this stark. It’s not about spending twenty years in a 600-foot apartment (although it would be far more spacious without the cats). S and her husband could easily double their rent budget (or triple it) and land a townhouse or even a little detached place, and still save big. They could take the closing money for the failed deal (which would be flushed away in fees and taxes) and reno the kitchen in their rented apartment in exchange for a promise of no rent hike for a few more years. Or they could decide that the freedom to choose a new career, to have personal flexibility or possibly retire years earlier with lifelong financial security might outweigh owning anything.

So, Selena, have no regrets. ‘Living a little’ does not mean a six hundred thousand dollar mortgage and a hobbled future. It is the polar opposite.

Now, have you considered a motorcycle?

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