Category: Accounting tips

Like some of you, my name’s been on a few ballots. I’ve won and lost. The experiences were thrilling and crushing. The journey from citizen to an elected politician is, in my experience, long, harrowing, expensive and fraught with danger. Once as a candidate I spent an entire year canvassing a riding, every day knocking on doors to meet whatever lurked within. There were 26,000 of them. I ground through two perfectly good pair of cowboy boots.

Increasingly, people are just appointed to be candidates by parties who want a certain demographic. Being a gnarly privileged white male, this was never my experience. For me it was always a street fight – brawling for a nomination, then in a general election, then to retain my seat.

Of course, winning the most votes is just the start. Then there are the politics of a caucus and a party to navigate. Newly elected people may think they go to the legislature to represent the voters, but leaders have a different idea. Parties and those in charge of them expect blind fealty. Every caucus member must think the same way, vote as instructed and speak when permitted. It is a muzzle that chafes. At least for me.

Thus, I sucked at being an MP. My nine years in the House of Commons (two bouts of insanity, 13 years apart) ended badly. Of course I was defeated in the end, but that was preceded by being thrown out of my party by a prime minister who had warned me to stay silent, stop canvassing Canadians for ideas, to cease blogging from Parliament, posting interviews with opposition politicians or voting my conscience. It was a disaster.

Sadly, not much has changed. All party leaders are the same. Look what happened to Jody Wilson-Raybould and Jane Philpott. Remember them?

It’s election day in America. The Trump-Biden battle has been epic, stressing the entire world in the middle of a pandemic that was already too much to cope with. Soon we will know the outcome, but meanwhile it’s worth noting a couple of differences.

First, Americans can vote directly for a president. You cannot choose a prime minister. You have but one ballot, supposed to suffice for picking a party and platform, a local representative, a leader and potential PM. You might like Trudeau or Singh, but dislike the local Lib or Dipper candidate. Tough. One choice.

This is why we tend to have caucuses full of sheep since the majority of people vote for parties and leaders, not MPs. Unlike me, most of those elected folks understand this. They listen. They shut up.

In the US, where folks can pick a Congressman/woman as well as a senator and the president – all independently – there’s far more diversity of opinion, less constraint, enhanced debate and constant constructive compromise. The executive branch (White House) can be thwarted by the legislative one (Congress) or the judiciary (Supreme Court). But in Canada whatever the PMO decides pretty much becomes law. We are far closer to a dictatorship than most realize or understand.

Meanwhile our first-past-the-post electoral system can bring skewed results. In the last election the Liberals formed government after receiving the support of 33% of voters – but that was less than the party which came second. Huh?

Covid has made this all worse. Most provincial governments just declared states of emergency, assumed special powers and shut down the opposition. In Ottawa the prime minister prorogued Parliament, kneecapping an all-party committee probing how his family had personally benefitted from the WE charity and its burger-brothers. The virus essentially placed all governments in Canada above the scrutiny of citizens.

This was not the case in America. Congress has debated virus-assistance packages hotly and intensely, passing some and delaying others. It might have been messy and ineffectual at times, partisan and myopic, but it was nonetheless democratic. And today millions of people will render their judgment on this and every other major topic.

Who will win?

No idea. The polls may have been correct. Or in error once again. Voters are elusive creatures. They even change their minds

But one thing is for sure. Americans were allowed to vote for their leader. Envy them.

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When the 68-storey office tower where I have a fancy, embarrassingly opulent, 1%er corner office overlooking Lake Ontario closed in late March it was a stunning development. TPTB suggested the closure would last until the end of May. That seemed excessive. “What a pack of wusses,” I may have muttered to the dog.

Well, still shut. Going into the eighth month now. There are no plans to repopulate that giant structure until the spring. The second wave of Covid is creating a thousand new cases a day in Ontario (and Quebec), mostly in the GTA. Subway traffic is still down over 80%. The 30-km-long PATH retail complex beneath the downtown streets is essentially empty. Soon the raccoons will take over.

This is a once-in-a-generation episode. The virus has taken a toll that in the spring could not be imagined. Toronto’s unemployment rate is close to 13%, for example. Mortgages are in the 1% range. The throngs of community college students who used to clog King Street are no more. Restaurants are shut again. The coming few months, it seems, will be worse.

All this adds to anxiety. Toronto is not alone. Winnipeg has a Covid crisis right now. So does Montreal. In the States there were over 100,000 infections in a day. The election has been complete stress for everyone. People are not acting normally. Retailers are boarding windows. Law enforcement agencies are on alert. Social media is on fire. Stock markets have been gyrating widely. Volatility’s up. Consumer confidence in Canada has sagged. A third of people say the virus has whacked their retirement plans. Halloween was sad.

In Toronto the condo has become a symbol of pandemic angst. Listings are up, while sales and rents are down. The virus killed tourism, which erased hospitality, restaurant, travel and entertainment jobs. Tenants lost employment and vanished. Airbnb was crushed. Immigration dried up. Students went home when the uni closed. And the big office towers emptied. The perfect storm.

Now more than 20,000 new condo units – bought mostly by investors three or four years ago from plans – are coming on stream. Another twenty thousand next year, too. Owners are trying to bail through a tsunami of assignment listings (the kind BC foolishly banned). This is added to the thousands of existing units that amateur landlords, specuvestors and failing Airbnb hosts are flogging. The storm continues.

The question being asked is simple: will the apparent condo collapse extend to residential real estate in general if this virus stays put for another six months? Or a year? If the jobless rate remains at double digits?

As we all know, and as this pathetic blog has documented, Covid caused the most unconventional real estate boomlet in history. The flight from people, germs, congestion, offices and big buildings fed an exodus to the burbs. Working from home led people to crave space, once they had nowhere else to go all day. Cheap emergency interest rates suddenly made it possible for huger amounts of debt to be financed, pushing house prices skyward. Houses plumped as condos shrank.

But in an integrated, complex market everything eventually impacts everything else. Negative sentiment is as infectious as FOMO. A winter of crappy weather, partial lockdowns and more infections won’t help. And what if the US goes off the rails after this election, ensuring Covid runs rampant there and the border stays shut for a long, long time?

Huh. The thicker the dust grows in my swishy Bay Street office the more it becomes clear ‘normal’ remains distant. As detailed here yesterday, the two legs upon which recent real estate mania has been built – cheap rates and government largesse – cannot and will not last. Mortgages taken out at 1.8% in 2020 will not be renewing at this level in 2025. Not even close.

By the way, you may be comforted to know almost nobody believes this blog.

The latest Nik Nanos poll (published Monday) shows a whopping 45% of respondents think the value of real estate on their street will be higher in six months. That’s the biggest dollop of optimism since the virus arrived. A mere 13% feel prices will decline, and they’re all constipated or have brooding marital issues as a result of WFH.

Housing optimism has turned into real estate dopamine. Higher demand, a shortage of listings, cheapo mortgage rates and rising prices have made people forget Covid and party like it’s 2017 again. Lower consumer confidence, job insecurity, Trump fever and a public health crisis have all been crushed by house horniness.

Of course, as detailed here recently, this is also increasing the wealth divide (the virus has hurt lower-income earners the most), making home ownership essentially unaffordable to the average family and piling up unheard-of levels of personal debt during the worst recession in 90 years. That is indefensible social policy.

Maybe this is part of what that sad, empty, 400-square-foot condo on the 55th floor is trying to tell us. We live in a world that will not last.

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Let’s connect some dots, as we await tomorrow night’s apocalyptic whatever.

First: interest rates are insane. There’s now a 1.29% variable-rate mortgage available in Ontario. In just a matter of months the inflation rate will be higher. So it’s free money, Bubba.

Second: cheap cash greases house prices. People can borrow more on the same income, inflating the cost of real estate, as no other single factor can. Household debt goes up, property values swell while the monthly mortgage burden can actually go down. Look at this RBC chart – home loan financing costs have fallen even as people pay 15-20% more for a house.

Third: the virus has been wicked awful, of course, but perhaps government overreacted. It’s why we now have the biggest federal deficit on the planet and the last finance minister slunk, moaning, back to Toronto.

Check out this conclusion reached by bank economists on Bay Street: Ottawa gave families affected by the virus more than twice the amount of money the bug cost them. “Overall, Canadian households received more money ($56 billion) from government aid programs such as CERB and other transfers in the second quarter than they lost in wages and salaries due to the pandemic ($23 billion).”

Wow. In the middle of a pandemic recession, household income actually rose – by a huge 11% – because of government largess. That made making mortgage payments a whole lot better. It helped create what’s being called a “boom in the gloom.”

Here’s some evidence you might find interesting. The site Numbeo tracks house prices around the world, measuring affordability against local incomes. Below are the Top 10 cities in North America, ranked by their price-to-income ratios. Not good.

By way of comparison, the price-to-income ratio for Miami is 5.7, while it’s just 3.8 for Chicago and 2.98 for Los Vegas. If you really want a deal, go to Dallas (2.1), Buffalo (1.97) or Detroit (1.26). The point is Canadians are paying some of the highest real estate prices in the world thanks in large part to two things that will not last – excessive government spending and crashed interest rates.

Bond yields started to rise in recent days. Canada’s five-year government bond yield is the stiffest in several months. Ditto with US Treasuries. Our federal government is spending so much money the central bank will have to issue endless bonds to cover it and at the same time buy up existing debt to dampen market forces and keep rates depressed. Since March the Bank of Canada has snapped up 80%, so things are getting extreme. The situation cannot and will not last.

Second, a Biden win on Tuesday (or whenever a winner emerges) will mean less US economic activity as Covid is attacked, and more government spending to compensate. The deficit goes up. More bonds are issued. Higher rates. Our bank follows suit (no choice).

Now, what about more subsidies to Canadian households?

We’ll get the first numbers from Chrystia at the end of this month. Included in the economic statement will be a package of measures made necessary by the second wave of the virus. After that there’s word $20 billion in permanent spending will be added to finance pharmacare and a national child care plan.

But wait. Don’t we have a $340 billion annual shortfall already? Isn’t this, like, seven times the huge hole Harper had to dig to get us out of the 2008 crisis? Aren’t there consequences?

You bet. And connecting to this dot should make it clear excessive, structural spending will inevitably be inflationary so when the virus starts to fade in 2021 interest rates will rise regardless of what the central bank does. Inflation, after all, makes bonds worth less – so the market adjusts prices to reflect that, forcing yields higher.

So, yes, real estate has been on a tear since the virus came. Yup, it’s nuts since we’ve been in a recession and a public health crisis with double-digit unemployment. Almost 13% in Toronto right now. Over 11% in Vancouver. And apparently nobody in Alberta works any more. In fact real estate, like bonds, stocks, fine art and other assets are in bubble territory because of central banks actions in the age of Covid.

None of this is normal. Or permanent. Asset price inflation is dangerous, and once recovery comes The Authorities will bring the hammer down.

This would be a swell time to get out of debt. Unlike everyone else on your street.

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  By Guest Blogger Doug Rowat

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It looks like Billy Beane may be finished with the Oakland A’s.

Reports earlier this month suggest that Beane, famously credited with the low-cost, value-based Moneyball approach to Major League Baseball team-building, may be forced to resign from the A’s due to conflicting business interests with his investment firm, RedBall. If he does indeed resign, he’ll leave an impressive legacy.

Since Beane joined the A’s full-time as general manager in 1998, the A’s have won seven division titles, played in 13 postseason playoff series including wildcard games and produced the sixth most wins in baseball and did it all, as per the Moneyball method, at very low cost. The one criticism of Beane has always been the A’s lack of playoff success and World Series titles, but as Beane has bluntly put it: “My sh-t doesn’t work in the playoffs. My job is to get us to the playoffs. What happens after that is f-cking luck.”

According to FiveThirtyEight, Beane’s teams actually should have had, statistically speaking, a bit more success in the playoffs than they did; however, his point is well taken. A large sample size is what truly reveals a strategy’s success. What happens in the short term is basically a coin toss. As Beane has also said, a full 162-game baseball season tends to eliminate randomness.

Naturally, the same holds true with investing. Short-term market timers are almost as likely to lose as to win on any given trading day while long-term investors have a much higher likelihood of profiting. Simply put, the long-term investor also largely eliminates randomness:

S&P 500: the shorter your holding period the more you rely on luck

Source: Bloomberg, Turner Investments. S&P 500 pricing data from January 1928 to present

Keep in mind also that the above table doesn’t include dividends, so when these are factored in, the likelihood of a long-term investor earning a profit rises even more. An S&P 500 investor with a 10-year time horizon, for example, should actually expect to profit more than 90% of the time.

Appropriately enough, given this week’s topic of Billy Beane and his low-cost Moneyball approach, the latest SPIVA Scorecard was also released this month and, once again, it proved overwhelmingly that paying more doesn’t necessarily mean better results.

SPIVA stands for S&P Indices Versus Active and its Scorecard measures the performance of actively managed funds against their relevant benchmark indices. What makes SPIVA great is that it corrects for survivorship bias, so if a fund closes due to poor performance, which happens constantly in our business, SPIVA makes sure that this performance is accounted for and not just quietly swept under the rug thus skewing the fund industry’s overall performance data. Here’s what the latest (released mid-October) SPIVA report had to say about Canadian mutual funds:

Although this volatile period offered ample opportunity for stock-pickers to shine, 88% of Canadian equity funds underperformed their benchmarks over the past year, in line with the 90% that did so over the past decade….

Canadian Equity funds were particularly notable for their level of underperformance. On an asset-weighted basis, Canadian Equity funds returned a dismal 7.9% below the S&P/TSX Composite over the past year, the worst relative performance of any fund category.

The story, of course, is much the same with US equity mutual funds, with the main cause of any mutual fund’s underperformance being its high cost. Whether you’re building a baseball team or building a portfolio, the one lesson we can learn from Billy Beane is to never overpay. And with mutual funds, generally speaking, that’s all investors are ever doing.

Stick with low-cost ETFs.

Smart investing’s no different than smart baseball: never pay more for a worse result.

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

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A few scant days before the US election and volatility’s spiked again. See the chart below – the VIX – which measures how many Tums, per trader, are popped on the world’s major stock exchanges, divided by quarts of gin consumed. It’s wicked accurate.

The VIX has spiked the most since mid-summer and will likely stretch higher in the next 72 hours. You know why. The virus is somewhat out of control in Europe and the States. Ninety thousand new cases in America yesterday. Wow. We may still hit a hundred grand by Tuesday, lousy news for a certain president who must remain nameless on this blog (lest we trigger the deplorables).

That vote looks astonishing. More ballots have been cast in Texas before election day, for example, than all the votes (in total) counted in 2016. The fact that 75 or 80 million people will have decided prior to November the 3rd is outrageously historic. But what does it mean? Good to the incumbent? Or the challenger? In any case, it’s got Mr. Market’s attention.

Will the second wave of the virus be as consequential for investors as the first? Recall that stocks plunged more than 30% in just a few weeks back in March before staging a massive comeback. Anyone who had the courage to go equity shopping on March 23rd soon looked like a genius. Could we be headed for that kind of correction again? If so, would it be as temporary?

October – always notoriously volatile – has delivered the worst showing since March. Investors worry about new infections, the fact squabbling US politicians have failed to deliver that new stimulus package, economic slowdown and the election. Actually the aftermath of the election – that’s the firecracker.

The virus hurts the presidency. Uncertainty reigns. Markets hate not knowing what’s next. Will there be a contested, disputed outcome next week? Trump (oops, sorry) has cancelled his election night party in his Washington hotel. Does that mean anything? He has trashed absentee and mail-in balloting. The betting now is that he may win a mirage victory Tuesday night – based on in-person votes – with that thrown into question as the advance polls and mailed votes are tallied and added. But, who knows? It’s all conjecture. And that’s the problem.

First, the nightmare scenario. Then what to do about it.

Says US economist Daniel Ahn: “If there is a constitutional crisis, we believe that the loss of political credibility and standing of the United States as a stable country could threaten its status as a safe haven with unfathomable consequences for the economy and for markets.” That crisis would come as the sitting president refuses to accept the results of the popular vote by alleging fraud, proven or not. A legal battle ensues. Perhaps it even goes to the Supreme Court. Or the floor of Congress.

Meanwhile there is no stimulus package and the year ends with a declining American economy as millions of consumers shut their depleted wallets. Should this happen, Bank of America strategists forecast that US stocks could slide 20%. Bond yields would tumble even lower. Bond prices would spike. The US dollar would be impacted. The Fed would probably go negative.

So what would benefit in this scenario?

Bond prices move in the opposite direction to rates, so investors with balanced portfolios would feel some love. Also with stocks in a post-election funk, lots of money would be looking for a safer place to land. More impetus for bonds to pop. And as the US dollar takes a hit, commodities priced in it would benefit. So cue the gold bugs.

Now, the most important points to remember are these: (a) the US election will get fixed. There will be a swearing-in on Wednesday January 20th. When the outcome is known, markets will restore. And, (b) the virus will fade. The pandemic will pass. The curve will go flat. A vaccine will come and therapies develop. The world will be a much brighter place six months hence. Plus (c) there will be a multi-trillion-dollar stimulus bill passed once the voting crisis (if it materializes) is over. Bank it.

This means if you have cash sitting around, deploy it. Monday, if you’re confident on a firm outcome on Tuesday. The week after, if you’re not. But if you’re invested now in a balanced and diversified portfolio, do nothing. The storm will come, blow down a bunch of trees and power poles, then pass. There’s no point trying to time both the sale and purchase of the same assets. Odds are you’ll get one of those wrong. So, relax. Watch the show.

Tums and gin, by the way, pretty damn awesome.

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– chantallevesquephoto.com

My, my. A third of Canadians tell pollsters they’ll “never” recover from the Covid crisis. Four in ten say they can’t withstand a second wave. As many state their financial lives have totally sucked since March. Worst hit? Those in their forties and fifties. Half say recovery is impossible and they’re already depleting savings to get by.

Are these people just being drama queens? Hasn’t residential real estate and a cheap mortgage made everybody rich?

Nah. TD economists say 97% of us haven’t bought, sold or moved since the pandemic began. All this added wealth is illusory at the moment. More important are jobs and cash flow.

So where’s the bug at this week?

Not good. Over 81,500 new infections and a thousand fresh deaths in the US yesterday. New peaks are being hit. Can a hundred thousand daily cases be far off? By election day maybe? In Europe, it’s a big mess. France, Germany and the UK are being whacked. New lockdowns. Economic activity curtailed. As a result, (a) stocks are taking a beating, especially in the absence of a US stimulus package (they’re still arguing) and (b) poor Alberta. Oil plunged another 6% on Thursday because the virus is taking cars and trucks off the road, destroying demand.

Cases are way up lately in most of Canada, too. But relatively speaking we’re a paradise. Still, the defeatist attitude is telling. And here’s what it says: most people have more debt than assets, savings and investments are inadequate, they live paycheque-to-paycheque, the bulk of net worth is in one asset meaning their ability to survive for a few months in a changed world is, well, close to zero.

Real estate did that. You know it. We’re a one-trick-pony nation now. Hell, a quarter of the entire GDP might as well have “MLS” stamped on it.

Sadly, our central bank is bent on rendering the situation worse.

This week the Bank of Canada was very careful to make three things clear: rates will not be going up until 2023; it’ll spend billions a week buying long bonds so mortgage rates stay artificially low; and dig this statement –  “It means that if you’re a household considering making a major purchase you can be confident that interest rates will be low for a long time.” Yup, the Tiffer actually said that. He might as well have suggested he send over his realtor brother-in-law to see you and have a brewski.

And just to reinforce this, the BoC’s latest report states: “More than a quarter of respondents to the Canadian Survey of Consumer Expectations in the third quarter of 2020 reported they would like to move to a larger or single-family home because of the pandemic.”

Okay, here’s the deal. The Big Plan for Canada to get out of this virus mess and rekindle the economy is obviously for you to by a house. Any house. Hopefully a giant mudda with a bloated mortgage. The government and our central bankers are counting on residential real estate to stay hot, thanks to cheap money and lots of FOMO, in order to achieve the very ambitious 4% annual growth rate (2021) spelled out earlier this week.

Figure it out. Oil is crazy in trouble. There are four million people on the pogey. Our biggest trading partner is out of control. Whole sectors of the economy won’t be coming back for a few years. The CB is out of bullets. And Ottawa has already spent more money than God. So they want you to do the heavy lifting by running off to buy a property at an inflated price with a massive amount of financing.

Okay, got it. But don’t we already know this is financial folly?

Of course. Look at those poll results. Half of middle-aged folk say they’re pooched. And 70% have real estate. In fact, 20% of all those folks were part of the can’t-pay-the-mortgage crowd for the last eight months. Increasing home ownership rates and household debt – already off the charts – is not a clear path to financial security. In fact if the virus gets worse, lasts longer or results in regional lockdowns, many will suffer.

Meanwhile pumping up real estate values further will only increase the wealth divide by making it more unaffordable for many. How does that square with the Liberal-leftie pledge to sock it to the rich?

In short, the plan The Authorities have for us is manipulative, cheap and tawdry.  I’m shocked.

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What do we make of a few ugly days on the markets?

Well, speculation grows a certain American president that this blog cannot name (until after  Wednesday) may not cede power if he loses the vote on November 3rd. You might wish to read this. Could it lead to conflict in the streets, while the virus – despite politics – continues to infect 75,000 people a day?

And, wait, could that guy (you know who) actually be ascending again? This is so confusing. Here’s how crusty old Street vet Ed Pennock saw it today…

The market looks like it’s selling on news. In our view, Trump is surging again. He’s got a big hill to climb. But that makes the election now very difficult to call. Markets hate uncertainty. Biden has the numbers but will they hold? A record 67 million people have already voted. We are heading for a record turnout. Probably outside the statistical parameters that they have been using to make forecasts. The news about CVD is anything but good.

Yeah, the bug. Europe’s got it bad. Italy, France, the UK, Spain, Poland – lots of places are seeing bigger case numbers and more hospitalizations than in the spring. Mr. Market is not happy with these developments. A US regional lockdown could be coming. It means economic disruption, people buying fewer pickups and designer sweats (big these day) at a time when vacations, air travel and fancy restaurant meals are already kaput. GDP down. Blood pressure up. More layoffs. Closures. People stress and vex, then do silly things like sell perfectly good assets into a storm.

On Tuesday our prime minister said all of this “sucks” and you probably should expect Christmas to be cancelled. And now we have the latest from the Bank of Canada, which has been spending billions each week keeping your mortgage rate low. The highlights from Tiff:

• No rate change. In fact the cost of money will stay low until inflation (now 0.5%) hits two per cent
• When’s that? “Not until into 2023.”
• US growth is fading considerably. In Canada it will “slow markedly.” Virus.
• Our economy will shrink more than 5% this year then grow 4% for the next two. “Considering the likely long-lasting effects of the pandemic, the Bank has revised down its estimate of Canada’s potential growth over the projection horizon.”
• The bankers will continue to depress mortgages by spending “at least $4 billion a week” buying long-term bonds… “which have more direct influence on the borrowing rates that are most important for households and businesses.”

Hmmm. Is this good? Green light to buy a house? Or stuff your TFSA with cheaper ETFs?

Well, here’s what we know.

First, yes, mortgages will stay cheap. The central bank says rates will remain low for at least two years until the economy recovers enough to throw off inflation. If this is not the bottom for home loans, we’re close. And without a doubt, cheap money fuels real estate – so long as enough people have jobs.

Reality check: five-year fixed-rate money has never cost less than it does now.  In other words, why would you pay off a 1.8% loan? So, don’t. Take the cash you’re not spending on a monthly payment and invest it, especially when neat things like equity ETFs are on sale.

Second, never, ever, ever (ever) forget this will pass. Pandemics are temporary, not permanent. Even if a vaccine never arrives, the virus would burn out in time. The race now is to save as many people as possible from infection and death and thereby shorten the episode, through medicine and public health measures. (This is why the herd immunity theory is nuts. Worse, it’s mass murder.) Wear your damn mask.

Third, government stimulus will flow like Bandit’s drool over a liver treat, which is a sight you won’t easily forget. There’s a 100% certainty a multi-trillion-dollar package will pass the US Congress, whether it’s before or after the vote. CBs will continue to do what our guys pledged today – keep rates crashed and hold the taps open with billions in quantitative easing (QE). The combo of this fiscal and monetary stimulus will keep the lights on and markets supported until the bug departs.

So, fourth, when assets fall in value, pay attention. It’s why this blog has pointed out (for example) that some DT Toronto condos selling for $700,000 seven months ago are now less than $500,000. Or why a day when the equity market loses 3% of its value is a great time to do a little fund shopping. Of course, there could be a bunch more volatility over the coming days and weeks (mostly depending on the virus and the, ah, other thing), but you get the point. If the world’s destined to look a helluva lot better in 12 or 20 months, then go vultch.

There. See how much better you feel about complete mayhem?

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This is Fred.

Dave took the picture thirty years ago and sent me this scan from an old 35mm slide. “If you care to use it,” he said. I do.

After yesterday’s post and comments, the tearing-apart and shredding of each other, the online unreality of our lives, the bickering, insults, conspiracies, pathetic polarization and geriatric swaggering, I was calmed to read his note. So shut up and do the same:

Many years ago we had a dairy farm, and as all good cow-men should, we owned a Border Collie. For whatever whimsical reasons, he started out life as “Fred”. This dog had a penchant for posing whenever I had a camera with me.

Almost from the first day on the job as a pup, and with very little training, he had an inbred knack of being able to round up the herd of cows at milking time.  After a few weeks, I could stand at the barn door, tell Fred to “Go Get ‘Em!”, and wait patiently till he had herded the bovines back to the barn from one pasture or another.

It was uncanny watching him work the cows, quickly slipping to and fro, or giving forth with a menacing growl or bark every now and then to keep a reluctant stray in line.  Early on, when attempting to nip a wayward cow to prove his mastery over her, he suffered a swift kick to the chops….and that was the end of the cattle-nipping forever!

(Although the mud flaps on the milk truck acted as a surrogate and took one HELL of a beating….He would latch onto them and get himself dragged down the lane-way, snarling and chewing all the way…He did this for years, and more than once we bought a pair of replacement flaps for the truck driver!)

Fred, the cows and the farm are now decades-gone…. all sorely missed, but I still treasure the memories.

The cow-man also said he hopes the blog will help find “a bit of common ground between the radicals, both right and left.”

Cows. A barn. A faithful farm dog and family. The basics. Instead it’s a world of QAnon, BIPOCs, hydroxychloroquine, CERB, tweets, coronavirus and chaos. Social media could have connected everyone, but now divides us into smaller, angrier chunks. All it takes is a talented demagogue with a Twitter account to start the fire. People don’t know what’s real or truthful anymore when media filters have been labeled ‘fake news’ and Google dishes up whatever facts you fancy. The result is inevitable. Suspicion. Division. The arguments grow extreme and the labels worse. Socialists. Racists. Settlers. Supremacists.

Could things come off the rails next week? That would hardly be a surprise. If there’s no immediately clear outcome in America, the whole world will be impacted. The mess will be temporary since Covid will dissipate and growth resume, no matter who the leader ends up being. But a lot of mud flaps will die in the meantime.

Unless absolutely compelled by events, this blog will not talking again in the next six days about you-know-who or the other guy. Please join me. Hey, maybe we could buy some cattle. Who’s in?

$     $     $

So we now know just a titch under 800,000 families stopped making mortgage payments when the virus came. This was historic. Nothing in the past ever came close to the revenue hit the banks took from lost cash flow on $180 billion in loans. They will not soon forget.

Here are some consequences:

A poll by Forum Research finds that one in eight borrowers won’t be able to resume payments in the next 12 months. They’ll have to ask for a further deferral. Banks can grant that, but must record the loan as non-performing – with bookkeeping implications.

Meanwhile RBC figures up to 20% of all the deferrers are still unemployed. That suggests a deferral cliff continues to loom, and you should expect a little storm of listings in the coming months. Following that disruption, bond yields will start to rise and downtowns repopulate when the virus recedes in earnest a year from now. You may wish you’d bought a condo when they were cheap and regret purchasing in the boonies. (Unless you have cows, of course. And a collie.)

Finally, as deferrals end and jobs stay scarce, many people will want to refinance their homes in order to take equity out. “Unfortunately, there could also be more resistance from lenders to approve COVID-impacted applicants,” says Rates.ca. “That’s especially true for those with a mortgage deferral on their credit report.”

Most whacked will be folks with jobs in “vulnerable” industries, like food service, entertainment or travel plus those whose total debt costs equal more than 40% of gross monthly income and, of course, the self-employed or anyone on commission.

Wait. Not paying your debt has consequences? Sounds fake.

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One week before the US elections and many investors (despite Monday’s plop) have decided it’s over. She’s done. Trump is toast.

Now, let’s be clear: there could be a big momma of a surprise. 45 might pull this out of the bag by taking Florida. Or if the results are close on election night he could claim victory, opening a protracted legal quagmire. Maybe the Proud Boys will start a war in prime time with NFAC, livestreamed on FB. Dunno. It is, after all, one messed-up country these days.

But here’s the betting seven days out: Biden sweeps.

The polls say this. Massive advance voting supports it. The virus suggests it. The infections over the weekend of Mike Pence’s inner circle were a coup de grace, coming atop record daily spread levels at the end of last week. Just when the president wanted to shift the focus onto the economy (“a Trump recovery or a Biden depression”) the bug took centre stage again.

Since the first presidential debate another 25,000 Americans have died. The world’s most advanced country, with the best health care, has suffered the greatest death toll and infection rate. It’s a leadership disaster. Symbolic of that is Trump’s maskless bravado and now Pence’s insistence he keep campaigning when his closest aides are stricken. It’s the very definition of reckless.

Of course, polls could be wrong. But if not, America may lurch left because that’s the only path this president has left for voters. More government and higher taxes, as the pendulum swings.

Okay, so what does this mean for your portfolio? Biden bad? Or Biden good?

The first conclusion is that markets will respond with relief to any outcome so long as it’s decisive. If we all wake up on the 4th and there’s no clear winner – but with Trump claiming the high ground – stocks will not be happy.

But wait. Won’t a Biden win mean higher taxes and an economic drag, just when America can least afford it?

Yup, rolling back some of the Trump tax cuts on corporations will be negative. So will be the proposal to treat capital gains and dividends as regular income. Ditto his plan to increase the marginal rate on people earning over $400,000. But none of those moves are likely to take place until economic recovery is underway. More important, the market sees a Democratic win as clearing the way for another massive stimulus package in late January, now that relief before election day is impossible (which helped caused Monday’s funk).

What would a clear Trump victory mean?

More of the same. Tax cuts. China-bashing. Deregulation. Promotion of the O&G industry, financials and defence. Compare that with sectors that would do well under Biden – like infrastructure and clean energy. Biden would bring in a $15 minimum wage to try and even the wealth gap a little while whacking high income-earners. Both moves are costly. Trump policies would continue the current course, in which the wealth divide will widen further. Biden might lock down the economy for a while to eradicate the virus. Ouch. Trump seems inclined to let it rip through an open society. Many more would die.

Inevitably, the pandemic will end whatever the body count ends up being. When it does, the US economy will erupt. Commodity prices will rebound with global growth Canada will do well. So will financials and industrials, then consumer goods. The best strategy is to ensure you have a properly weighted, balanced and globally diversified portfolio of low-cost ETFs in place now and stop worrying about what happens next Tuesday night.

But what bloodied Mr. Market on Monday?

First, the virus seems uncontained and the White House said on the weekend that the current administration can’t control it. Second, it appears squabbling in Washington means no stimulus package is near – something investors were counting on. So, more disease. Less money. And a big sell-off. Besides, if there’s a Biden win and capital gains taxes are to increase next year, why not cash out now?

Well, just to clarify; this blog is making no prediction. The polls might fail miserably, as in 2016. Trump could scuttle out of this campaign’s rubble like an unkillable beetle. But it’s equally clear the virus could take him down.

Let’s just hope for one outcome above all. That somebody gets squished.

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V, K or just Limp? What’s the economy doing? Where’s it going? When will this dogawful nightmare be over?

Apparently this all depends on you.

Rockstar bank economist Benny Tal told a private Toronto audience a few days ago that two-thirds of the economy is in a V-shaped recovery. Things were good for investors in February, in other words, then turned to crap, and now they’re great again. These are the folks taking advantage of cheap money to buy houses and vultch distressed properties.

Yes, this group also contains all the lucky souls with B&D portfolios. Stocks crashed in March as Covid came to town. They recovered fast when government and CB money spigots opened. Today markets are floating around record highs, looking forward to a vaccine and global recovery to power higher.

But another third of the economy is stuck in an L, limping badly, existing on CERB and other government pogey in a personal recession that could last for a year. Overwhelmingly they’re in low-paying occupations, which account for 80% of the jobs the bug ate. Restaurants, entertainment, hospitality, travel, admin support, property maintenance – all decimated.

And this brings us to the K (for Korona) reality – a K-shaped world in which people with assets, jobs and borrowing power are feeding off the virus, while others are just infected and falling. As this blog told you would happen when the mess started, the ‘rona has exacerbated our wealth divide. Financial portfolios have repelled the recession. Real estate values have inflated. Jeff Bezos, Zuck and all the Google, Netflix, TikTok dudes have added to their billions.

Wealthy people can access capital which these days is virtually free (1% mortgages, bond yields collapsed). They’ve been throwing a lot of that at the real estate market, responsible for jacking prices by 25-40% in less than a year in most markets.

Worse, they’re spreading it around. From Burlington to Halifax, Kamloops to Nanaimo, Barrie, Moncton and Guelph, secondary and tertiary housing markets are as nutso as the GTA or YVR (now bright orange again). The WFH, nesting, anti-germ phenom has removed one more option aspiring homebuyers had by making the boonies just as unaffordable as urban dirt.

Our central bank printed hundreds of billions and gave it to the government to hand out. Meanwhile it spent $5 billion a week buying up bonds, creating artificial demand to jack prices and suppress rates. The result was predictable. The price of assets – stocks, houses, bonds – has been swollen higher, enriching those who own them, while others sink.

That’s the K.

Listen to Pierre, a screwed Mill in Quebec City. “The people are going crazy,” he moans.

I am a 29 years old typical millenial and I would like to buy a house. We don’t buy to make money, but because we want a long-term place to live. However, I don’t think this will be possible with COVID19. I’m one of those lucky people that still have a job. WFH. I thought this would be a good moment during the crisis to buy as price should get lower… They are telling us that the economy is sick and that everyone is sick and that they don’t have money.

I don’t think this is true. We called to visit this house on Saturday, which is on the market since 3 days. The realtor told me, ‘we had 8 offers so if you don’t come visit in the next 2 minutes and push the price there is not a chance you get it.’

HOW IS IT EVEN POSSIBLE ??? 3 days in the market, 8 offers!!! We are in quebec city which basically has had no tourists since March, no restaurants, no gyms and people are capable of doing bid wars on a house?? I just can’t believe what they told me. I also can’t believe that people can buy houses that fast and go to bidding wars during the biggest crisis since 2008. Quebec is only about 700 000 souls…

I hope you have some good words for me so I can find the courage to continue to search for a house… How am I supposed to compete with this?

Pauvre Pierre. C’est dommage.

The best advice, whether it’s in Quebec or Kelowna or Kits, is to wait. Ditch the FOMO. People are insane, gorged out on cheap cash, swallowing Herculean dollops of debt, gambling that this world will reward the risk. But it’s unwise. The last eight months were not normal. Nor do they frame what’s coming.

Only a third or so of the 800,000 little beavs who stopped making home loan payments when the virus hit have resumed payments. That mortgage deferral cliff still looms. Some giant corporations (a certain airline comes to mind) are wobbling on brink of insolvency. The virus has roared back worse than in the Spring – globally. It’s entirely possible a President Biden might lock down the US economy for a spell in January if daily infections top 100,000 (now at 80,000). Central banks and deficit-addled governments will be called upon to push even more moolah into staggering societies going into 2021. Assets values will inflate further. Why would you want to compete in an environment like this?

Reality, of course, will return. It always does. Debts taken on when rates are low and emotions are high have a way of turning into regrets. When central banks remove punch bowl, it all changes. We get an S economy. Yes, full of suckers.

$     $     $

Speaking of letters, WFH is now part of the lexicon. But as blog dogess Carol warns, this work-from-home thing can have a nasty bite…

I work for a global chemical company. Just heard from one of my coworkers that the company is planning to move most of the WFH jobs to a shared service centre in Uruguay. If the work can be done from home why bother paying larger salaries. There are educated resources in countries that are paid a lot less. I made a trip down there in 2017 when we moved finance positions there. Lots of large corporations are doing this.

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