Category: Accounting tips

Has the bug changed everything?

Yesterday my fancy portfolio-manager buddy Doug described the ‘grand experiment.’ Without a doubt, WFH is a thing. For many people, seems like the new normal. They won’t be going back to an office again, trapped in their guest bedrooms with Zoomed colleagues and kiddies battling for bandwidth.

Now in the sixth month of our Covid captivity, work-from-home, serious doubts about school reopenings, online shopping and mandatory masks have profoundly changed the way people think, and also some of the economic realities facing society. Look at this…

• Despite millions on the dole and the worst recession since ever, real estate sales were insane last month as the cocooning continues. The most monthly sales ever. Up 49% in Toronto, almost as much in Van, 40% in Montreal and the Fraser Valley, nearly 30% in Ottawa, Burlington and raging in the 905.
• But wait. Condo rental listings in the biggest city surged 80% in the last three months while the number of leases signed dropped 14%. Rental rates have fallen as much as 24%. Former Airbnb units are being listed for sale or long-term lease. New projects are streaming to market. It’s a mess.
• Writes Toronto realtor Brynn Lackie: “In the midst of what appears to be a mass exodus to the suburbs, I have clients I would have described as die-hard Torontonians who exclusively drink Jimmy’s Coffee sending me listings they have flagged in Barrie, Burlington and Aurora.”
• And because the bug killed the GDP, interest rates have been crushed. We’ve just hit a new milestone. Wow. Five-year insured mortgages for 1.59%, or half what they were going for less than two years ago. Even home loans not insured by CMHC are cheapo at under 2%. Variable rates are now 1.5%. In just a few months, all of these rates will be below the annual cost of living increase. That’s called free money.
• Finally, CERB will end at the beginning of October and three or four million people will become EI folks. Officially unemployed. Plus the mortgage deferrals cease for a few hundred thousand families who have not made a payment since March.

As you can surmise, these are monumental developments. Home work. Suburban rush. Condo crush. Plus a buying binge in the midst of crisis. What are we to make of it all?

Well, real estate is on a sugar high at the moment. These crazy mortgage rates have buyers buzzing around, making offers on properties they (at best) have only FaceTimed, borrowing boodles, migrating to the boonies and assuming what’s just happened, thanks to Covid, will remain. Poor souls. Recency bias hits again.

In 2021 the virus will dissipate. Therapies, maybe a vaccine, will emerge. Trump will be gone. Corporate profits will return. Unemployment will slowly fade. The recession will linger for a few quarters before robust US growth moves north. Bond yields will slowly swell. Mortgages for 1.5% will suddenly become a memory. WFH will have been proven a productivity-murdering concept. Zoom refugees will crave getting back into the office. The clubs, conventions, concerts and games will start to come back. And a whole mess of people will wonder what they were smoking when they moved to Barrie or Kamloops, borrowed their brains out to do so at the top of the market and discovered what a pain in the butt lawns and pool chemicals can be.

As this pathetic blog spelled out some days ago, urbanity ain’t dead yet. Cities flourished for a reason. The virus reaction – suburban flight, pool lust and neighbours with camo quads – is kneejerk and myopic. In time parents will still crave good schools. People will want to commute on public transit, not in gridlock. Demand hoods will be in even greater demand. The downtown towers will be repopulated and the hip urban lifestyle even more desired after months of Netflix and walking your dog on a cul-de-sac of zombies.

In crisis there’s always opportunity. Some significant ones are coming. More on that soon.

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  By Guest Blogger Doug Rowat

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“How much longer will work from home be a thing?”In a year that’s featured a global pandemic, a global recession and the ensuing onset of massive market volatility and the fastest bear market in history, you would think that the questions from our clients would only revolve around their finances and portfolios. Indeed, such questions are frequent, but surprisingly, what I’m most often asked is simply: when will work from home finally end?

There is, of course, no certain answer to this question and the asking of it is usually based on entirely different motivations—one client may ask because they can’t stand the daily grind of their kids invading their makeshift home office like the zombies scaling the walled city in World War Z, while other clients ask because they simply love sitting in their pajamas at 3 pm not having showered for days. But either way, the desire for an opinion on the future of work from home remains strong.

First, it’s important to be aware of who’s actually able to work from home. According to StatsCan, only about four in 10 Canadian workers have this flexibility. As you would expect, labour-intensive industries such as mining, manufacturing or construction have limited work-from-home opportunities. Similarly, industries that require plenty of face-to-face interaction such as health care or food services face similar work-from-home difficulties. Workers in all of these industries, sadly, face a dire choice: suffer financially or endanger their health.

So, when we speak of working from home, we’re mainly talking about knowledge workers with computer-based jobs. Generally speaking, the more your job strays from this model (a job that requires physical labour, frequent travel or close social contact, for instance) the more the opportunity to work from home diminishes:

Telework* capacity by province and industry

Click to enlarge Source StatsCan; Telework and work from home are used interchangeably by StatsCan

Incidentally, you could reasonably invert this chart if you were ranking worker fortitude and bravery, meaning that the milquetoast finance guys, such as myself, who presently reside at the top of the chart and work away on their laptops from the safety of their back decks are, admittedly, wimps. Labourers and frontline workers put us to shame.

However, in estimating how long work from home may last, it’s the knowledge-based industries that we’re mainly addressing. For financial-service workers in particular, there’s a sense across Bay Street that we’re not returning to the office until the spring of 2021 at the earliest. Anecdotal evidence, along with the official announcements thus far from the big banks, support this:

Canadian banks are saying your home is your workplace until 2021

Source: Bloomberg

At the moment, the primary factors driving the work-from-home decisions at the big banks (I sincerely hope) are worker safety and a responsible desire to prevent the spread of Covid-19. However, the longer this goes on, estimating a return to the office may not be based simply on the probability of an infection, but rather on pure economics.

Working from home has been a grand experiment. And the main unknown for employers has been whether productivity would suffer. However, early results seem to indicate that employers have been reasonably satisfied with remote-worker productivity and the majority of these workers themselves also report being more productive. Will this last? Who knows, but what’s not in dispute is the immediate cost savings that this work-from-home arrangement is providing corporations.

According to Global Workplace Analytics, a research firm that studies the future of our working world, work-from-home initiatives during the Covid-19 crisis are saving US employers more than US$30 billion per day. Global Workplace notes that corporations may save more than US$500 billion per year in real estate, electricity, absenteeism and turnover costs alone. This doesn’t even include money saved on utilities, janitorial services, security, maintenance, office equipment and furniture, office supplies, parking spaces and travel subsidies.

The absolute cost-saving numbers would be smaller in Canada, of course, but the source of the savings would be identical. And don’t think for one second that companies, including our big banks, aren’t crunching these numbers. Web-conferencing, cloud technologies, secure laptops, WiFi and so on are allowing our working world to be reshaped in unexpected ways during this crisis. And when technology changes our world, the first to figure out how to save a few bucks are always the corporations. When was the last time, for instance, that you didn’t speak to a bot when you called your bank?

So, you may be perfectly happy sitting in your Ikea home-office, half-dressed and struggling with your Zoom connection, but there’s a good chance that your employer is perfectly happy to have you sitting there too.

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

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At 19 I asked her to marry me. Apparently owning a used 1962 Ford Falcon was an insufficient net worth. She refused. At 22 she relented. We moved into an appalling hovel together. It was magical. Thus the journey began.

Over forty-nine years there’ve been moments of triumph and several big fails. Like most people, most marriages. Finding one true friend in life is a gift. Getting a pal who lets you try almost anything, and forgives the utterly stupid ideas, is even better. And I got one of those.

It’s all been together. Starting a half-dozen businesses, rescuing dead buildings, schmoozing careers, having employees, getting elected, meeting payrolls, moving too often, licking wounds and now aging. Our marriage took place during a time we both realize was favoured. No wars. No depression. No pandemic or angry climate, until now. The economy grew. We rolled along on it. Confidence in the future allowed risk and adventure. As a result my career has been anything but linear and, looking back, I would not have wanted it otherwise.

She was there when I lost my mind and said I wanted to sit in the House of Commons. Twice, 13 years apart. (I’m a slow learner.) She picked me up when defeats came or a prime minister finished me off. She was in the front row every night for eight years when I hit the road doing financial lecture gigs. She laughed sixteen hundred times at the same jokes. That takes grit.

She’s shouldered big loans, endured legal storms, survived my shaming and fought in my defence. She’s shared my stage when there was applause, and stood closer still when there was none. Private by nature, she was dragged by me into a public life. For her that was an uncomfortable sacrifice, and my gratitude is endless.

This morning we awoke and exchanged gifts. Then the dog threw up. Seemed fitting.

“The journey continues,” she said with a smile as I headed out. In time love swells into loyalty and trust. This endures. All else is noise.

Thank you Dorothy.

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More Chrystia. More tax. After yesterday, it’s apparent they mesh. So, prepare.

The prime minister, in suspending Parliament, said the Covid crisis has created the opportunity for a big reset. ‘We can’t let it pass,’ he added. ‘This window will close.’

And this:

“We need to get through this pandemic in a way that gives everyone a real and fair chance at success, not just the wealthiest 1%. In other words, we need a long-term plan for recovery. A plan that addresses head-on the fundamental gaps this pandemic has unmasked.”

The plot grew murkier on Wednesday with news Trudeau plans sweeping changes to the social welfare system combined with his climate agenda. “The prime minister wants to go big,” a source told Reuters. “The taps are really going to be turned on,” said another. “That’s the biggest risk…”

On Bay Street, where they worry about money, debts, cash flow, growth and the GDP, the eyebrows went up. How did we go from running up an emergency, seat-of-the-pants deficit of $350 billion just to keep the lights on, to trying to close the wealth gap and heal the planet? “The direction he is taking casts aside… how to eventually exit from pandemic policies in the quarters and years ahead more in favour of pivoting toward layering on an expansionist strategy,” said Scotia economist Derek Holt.

Exactly. And if the government’s already overdrawn on its debt credit card by $1 trillion, where’s the dough coming from?

As for Chrystia, her ascension to finance minister – the only Cabinet job that actually matters – comes with oodles of baggage. Her last book was sub-titled “The New Global Super-Rich and the Fall of Everyone Else.” Before being elected she was giving speeches with this message:

“Today, we are living through an era of economic transformation, comparable in its scale and its scope to the Industrial Revolution. To be sure that this new economy benefits us all and not just the plutocrats, we need to embark on an era of comparably ambitious social and political change. We need a new New Deal.”

That’s the kind of language we’ve heard most recently from US ‘progressives’ like Bernie Sanders and AOC, which drives Republicans and Trumpers into a frenzy. It becomes clearer, quickly, that the departure of boring, pedantic, non-revolutionary Bill Morneau is a turning point in Ottawa. “We expect new Finance Minister Freeland will be more aligned with Trudeau’s longer-term objectives and thus are less doubtful over further federal spending,” says Citibank. The taps, in other words, will stay open. The goal is not to restore the economy, rebuild commerce and foster jobs and growth. It’s to enact a new deal, transforming the distribution of wealth – “addressing head-on the fundamental gaps this pandemic has unmasked.”

And what are those?

Simple. Average folks who spend what they earn, borrow big, save and invest little and could not survive a single month of Covid-created job loss will be supported. Those whose incomes, savings, investments, resources, assets, businesses or lack of debt have let them survive 2020, will be taxed. More.

Look no further than the financial markets. Asset values are back to pre-bug highs and investors have done just fine. Meanwhile the cost of debt has plunged, plumping the value of property and cutting the overhead on corporate loans, LOCs or investment borrowings. As this pathetic blog prophesized months ago, the virus would make the wealth gap expand – not because rich people are exploitive, but because not-rich people are pooched. When you spend what you make and borrow the rest, you’re vulnerable to shocks. And Covid was the mother of all jolts.

Okay, what now?

The maiden (can I say that?) budget of Chrystia will likely be in October. Even before Bill left for his trip under the bus economists and accountants, two of the funnest groups around, were expecting these changes to occur:

• A new tax bracket, above the one Trudeau created in 2016, targeting your neighbourhood anaesthesiologist, lawyer and CEO. Currently the top 0.6% of taxpayers (median income $477,000) pay about 22% of all taxes. That’s only 236,000 people. Blood. Stone. Figure it out.
• An increase in the capital gains inclusion tax, which is now 50%. Pushing that to 75% – a huge jump – would raise about $8 billion a year (until investors started changing their habits). By the way, eight billion is 2% of this year’s budget shortfall in Ottawa. Looks good. Does diddly.

What else might occur?

A hike in the GST makes sense form a revenue-generating standpoint, but that’s essentially a tax on middle-class spending. An end, partially or fully, to the tax-free status of residential real estate profits also has logic, since the exemption has made homes unaffordable. But that’s political suicide, too. Also being considered is a financial transaction tax, which sounds benign until you understand it would apply to every RRSP, TFSA and company pension deposit or withdrawal. That would also wound the Canadian equity market where, for example, the Canada Pension Plan keeps a few hundred billion dollars tied up. There could be an inheritance tax levied, beyond the taxable nature of all assets upon death. Dead people apparently don’t vote a lot.

Well, here’s another candidate: a special Covid tax. It could be on income. It might be on wealth. It would be labelled ‘temporary’ as income tax was in 1919. Ha.

Some of these we could have ruled out immediately with Bill running Finance. But now we have an advocate of “ambitious change” at the controls. Says a Lib who’s worked with Freeland: “She is a social interventionist activist.”

Whatever that is, it sounds painful.

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An ominous buff-coloured envelope sat on my desk that morning. Never a good sign. Only the publisher had stationary like that. And you never wanted to hear from him.

“The prime minister has requested that you cease referring to the finance minister as ‘Mikey’”, it said. “It is the position of this newspaper that you treat the minister with respect.”

My crime? Michael Wilson, then federal minister of finance, was presiding over a scary descent in deficits. The forecast for the 1985 shortfall was clocking in far higher than expected, at $33 billion. So every chance I found as a daily newspaper columnist and middle-class crusader I took, and chipped away at the guy.

Ironically, three years later I was sitting in the Conservative caucus three feet from Wilson. Our journey together began. By the time it was over five years later Mike and I had worked together on a deficit-busting strategy which we also knew was political suicide. The GST. In fact, it helped bring the country back into the black from an eventual $42 billion hole, and cost me my seat.

Minister Wilson quit in advance of that election. He knew.

Thirteen years later, elected again, I was having breakfast in a landmark Toronto hotel on the edge of the 401 with the new minister of finance. Jim Flaherty seemed everything the towering, grey, somber and steady Wilson was not. He was short, rotund, emotional, partisan and ate his eggs with his fingers. I asked him what he wanted to do with his new job, recorded it on my phone and later published it here. None of it came true. In 2008 the economy fell apart.

The Harper deficit plumbed new depths, at $56 billion as the credit crisis swept across the world. Tax revenues dropped and spending swelled. It took F until 2014 to dig Ottawa’s way out of that mess. Then he died. Tragically. In October of 2015 Justin Trudeau became the prime minister. Once again I lost my seat, and devoted more time to my fabulously profitable free blog. The deficit had been wrestled down to about $5 billion by the Harper Cons from $18 billion the year before. Canada was on the correct path. Trudeau promised two years of modest red ink to get the economy rolling. Then the wheels came off.

Last night the finance minister, Bill Morneau, quit in disgrace or disgust. Time will tell if Trudeau fired him or he fired himself. But the legacy of this man is historic. This year’s deficit will be about $450 billion. Economists have described it as ‘eye-watering.’ The grandchildren of current taxpayers will still be paying for what happened in 2020.

The new FN is Chrystia Freeland, as forecast here last month. (Interestingly, her Wiki profile was updated as ‘Minister of Finance’ slightly before the announcement was made. Bill’s demise was apparently no accident.) She has no financial experience or business background. She’s an author, academic, former journalist and Trudeau loyalist. Freeland assumes this job at the most crucial moment in history – the country’s public finances circling the drain, double-digit unemployment, millions on government emergency benefits, hundreds of thousands of families unable to pay their mortgages, a minority government, a leader under an ethics cloud, and a new opposition boss about to be named.

What could possibly go wrong for a financial neophyte who’s learning on the job while the nation sinks $1.26 billion more each day? Weekends and stat holidays included.

So here’s the T2 plan:

• Trash Bill, all used up with deficits and misdeeds, and replace him with a shiny new thing. First woman finance minister. Media click bait.
• Suspend Parliament and effectively shutter the democratic process. (By the way MPs – a few of them – have met only three times since March. Nobody seems to care.)
• Bring in a Throne Speech, new agenda (green) and a budget in October, sucking all the attention from the new Con leader.
• UBI
• Spring election.

What new risks have emerged?

Plenty. Morneau was a complete idiot and ingénue to get tainted with Trudeau’s WE obsession. But he’s a businessman, professional money guy and corporate executive with financial prudence and boardroom skills. He and Trudeau fought over the spending. Bill lost. There is now no stopper on the bottle. If this government lasts another four or five years, the debt could double to $2 trillion, or 100% of GDP. This will bring currency devaluation, inflation, tax pressure and central bank tightening. Trust me, none of that you want.

Could Mark Carney, floating around the anterooms of the PMO, slow down the hurtling Justin-Chrystia spending bus? Or, like Morneau, end up underneath it?

Let’s see. Clearly the prime minister wanted Morneau out – to erase WE and pave the way for a universal income – so he’s unlikely to yield. In his mind he survived Lavalin, he survived India and Jody, he survived blackface and Scheer, he skated through Covid by throwing out cash, so he can certainly weather Bill. As it turned out, he is his father’s son.

‘Just watch me.’

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Breaking: Bill Morneau quits after Trudeau spat

Lots of people, many of them young, think like Dave.

“Maybe the pandemic just brought what was coming down the road to our front doors now,” he says, musing on where cities are headed.” He sends me this article about a New Yorker who gave up on NYC.

“Do you think NYC is a model that could be repeated in other cities; Chicago, SF, LA, Toronto, Vancouver, etc.? It’s no secret many sectors discovered by the pandemic shutdown that work tasks could and are being done well remotely, aka home. And both employer and employee like it. Large shopping malls have been like the walking dead. Just no one told them to fall down.”

The core-is-dead, flee-the city meme has legs these days, after almost six months of Covid, social distancing, Zooming, shuttered offices and now universal masks. Real estate investment trust values have been whacked (unfairly), cottage-area and rural property sales have exploded, urban rents are declining and condo listings have been stacking up fast, especially as Airbnb operators give up and bail out.

The latest numbers paint quite a story: rental listings in Toronto, for example, grew 82% last month year/year, pushing rental rates down. In fact there were almost twice as many vacant apartments/condos hitting the market (8,346) as there were people singing leases (4,400). This is a big departure from years past.

And, yes, you can blame Covid. Students are staying home from uni. Tourism has tanked so short-term vacation rentals are being dumped. Immigration’s been curtailed. And thousands and thousands of units are being occupied by people who stopped paying rent months ago. They’ll soon be punted, adding to the rental supply.

As for condo sales, more tough news. The number changing hands in Toronto in the second quarter of the year tumbled 51%. “The condominium apartment market experienced a dip in sales and new listings,” says the real estate board, “as many potential buyers moved to the sidelines as a result of public health measures taken to combat COVID-19 and the resulting economic downturn.” In the last three weeks, realtors report, listings have jumped, big time. As of today, buyers have more than 5,500 choices

Meanwhile the bejesus big Bay Street office tower housing my Toronto office is still essentially shut. All 68 stories. Ditto for the miles of stores, eateries and services in the underground city which lies beneath Toronto’s downtown streets. The major banks have said staff won’t be returning to the financial core until some time in 2021. Up the street major stores and the Eaton Centre are open, but you can drive a herd of F-150s through and not hit anyone. The subway is running at 20% passenger capacity and at the airport traffic is down 92%. The last reported unemployment rate for the country’s biggest metro area was 13.6%.

So is the city pooched? Will malls never open again? Transit lines be abandoned? Condos and offices stay vacant? Will dramatically higher taxes and user fees – required by a bankrupt city – be the death blow to real estate in a place where crappy houses trade for $1.6 million?

Recency bias says yes. This explains some of the above. What people see now is what they expect will always be the case. It’s why we always buy high and sell low. Vision never was a strong suit of the masses. As you age, you learn this. Normal is normal for a reason.

So time for a reality check.

While this blog correctly forecast this urban mini-exodus and falling per-foot condo valuations, thanks to the way the virus has infected our brains, this is not a permanent thing. People flock to cities for a reason. The best jobs are there. The highest incomes. Culture’s concentrated in urban settings. Art galleries. Clubs. Live music. Public institutions like museums, the Zoo and Drake’s ridiculous house. Sports arenas. Convention centres. And urban infrastructure – public transit, airports, expressways, parks – none of that will ever be replicated elsewhere.

People want to live with other people, in proximity to work, shopping, entertainment, schools, universities, medical services and in an environment where they can expect to see a cop, a paramedic or a firefighter in mere minutes. Many eschew cars and the huge costs associated with them. They want bicycle commuting, or the ability to summon a cab or Uber. Families need daycare services. Oldies need social services. Lots of folks still go to banks, or grocery stores, coffee shops and want a vet within a few blocks of home.

Cities developed for reasons. For thousands of years they’ve been humanity’s preference and the absolute cradles of civilized society. A virus which so far has infected less than 1% of the population and from which 95% recover, lasting six months (and counting) is not going to change any of the above. Sure, a bunch of people will flee to Huntsville, Hope or Ladysmith, but there is no mass exodus underway. This is a social media fling, picked up by the lazy MSM and propelled by blogs which (unlike this ethically pure and virginally transparent, selfless site) are written by people justifying their own myopic actions.

So why not take advantage of this meme as it barrels along, gaining traction? More on that soon.

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Did you catch the rate news on the weekend? Yup, this is getting ridiculous. Money is next to free. Competition among lenders desperate for market share has produced some numbers that a year ago would have seemed like fiction.

For example, the micro-aggressive dudes at HSBC have dropped a few more basis points, and now offer a high-ratio, five-year fixed-rate home loan for just 1.76%. Scotia’s weird eHome mortgage is available at just 1.73% (also for insured loans) while BeeMo  has the lowest advertised rate among the big banks at 2.07%. Tangerine’s fixed-five is at 1.99%, and some brokers are beating all of this by a few points.

Conclusion: if you’re borrowing, lock in. The space between variable and fixed is gone. The central bank has indicated rates have bottomed. This damn pandemic will eventually pass, growth will resume, absurd government spending will help breed inflation and rates will have to edge up to deal with that. By the time 2025 comes you will wonder how 2020 ever happened. And why you did not act.

About the picture: Bandit at repose in the lobby of the King Edward Hotel, downtown Toronto. What? Go to the country and break a nail?

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  By Guest Blogger Sinan Terzioglu

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After dropping over 35% in 3 weeks the S&P 500 has rebounded over 54% and sits slightly below February’s all-time high. However fear still persists as many believe there’s another storm coming around the corner. So they sit in cash.

It’s incredibly unproductive to your long-term investment results when you think only of the things that can go wrong.  It keeps you looking backwards instead of forward. You miss the big picture and what actually drives the equity markets up over the long term. While the economy is still very challenged, it is improving. Vaccines and better treatments are coming and we will adapt as we always have.  Corporate profits are recovering and expected to grow again in 2021. Interest rates will remain low for a prolonged period making equities even more attractive.

Recently I spoke to someone who said they cashed out of the market two months ago. His excuse:

“None of this makes any sense.  There is a second wave coming and the markets are overvalued.  It feels like the technology bubble again with Apple, Amazon, Microsoft, Facebook and Alphabet now making up over 22% of the S&P 500.  I clearly remember how the tech bubble ended and I don’t want to go through that again”

During that bubble 20 years ago the valuations of tech companies were absurd.  Many were not even profitable.  Today the FAANG stocks are comparatively well-priced.  Given their incredible and long runways of growth it can be easily argued that they’re undervalued.  Four out of the five just grew revenues by a double digit pace in the last quarter – remarkable given their size and since all were impacted by the virus.  Sure, they benefitted from millions staying at home but their growth during the pandemic was incredible.

Free cash flow for Amazon, Apple, Microsoft, Facebook and Alphabet is expected to swell by 20% in 2021.  The cash flow they collectively generate now accounts for 20% of the entire free cash flow thrown off by the 500 companies in the S&P index. Astonishing would be an understatement.   The FCF yield of the group is ~3.5% vs. a yield of ~0.60% for the 10-year US Treasury.  These are by far the most incredible and most profitable corporations ever.  They earn very high returns on their invested capital and are able to borrow money for essentially nothing.  The can very easiyly continue to move the market higher over time.

There will certainly be lots of volatility, but sitting in cash and waiting for another blow-out like we had in March is a risky strategy.  Don’t be your own worst enemy.  Investing in a high quality ETFs that hold the world’s most profitable corporations is one of your best chances of growing your money over the long term and staying ahead of inflation.

Gold – at your peril

Since the price of gold recently rose above US$2,000 an ounce I’ve been getting questions such as:

“Should I buy some gold for my portfolio? Isn’t gold a good store of value and a good hedge against all the uncertainty right now?”

Gold is not a productive asset. There’s no internal rate of return as it produces nothing and therefore is impossible to value. It costs money to store and insure it. A buyer is betting someone will pay more for it at some point in the future, so it’s a speculative asset rather that an investment based on expected cash flows. If you are a trader go ahead and buy, but if you’re investing towards a pension-like income stream in the future, I’d recommend steering clear.

Over the very long term the real (inflation adjusted) return of gold has been substantially less than equities. When gold hit its previous all-time high in 2011 an ETF of senior golf producers (GDX) was trading above US$60 and fell below $20 over the following 5 years. GDX is now trading in the low $40’s. So if you bought a basket of senior gold equities in 2011 based on the same investment thesis as today then you’d be down ~35% vs the S&P 500 which is up well over 150% during the same period.

Technically gold looks strong but always keep in mind how easy it is to blow money in resources.  If you lose 25% on an investment it requires a 33% return to get back to even. So if you insist on making gold part of your holdings, ensure it makes up only a very small portion and only if you only have a large portfolio. Buy a diversified ETF of gold producers and place it in a non-registered account so if losses come you can at least apply future gains against them.

REITs – don’t believe all you hear

As malls have been empty and offices closed over the last few months there’s been a lot of pessimism about REITs, particularly retail and office REITs.  Over the last few months I have gotten many questions such as:

“Is it not very risky to buy REITs right now?  It looks like the work from home trend is here to stay so office properties are going to sit empty and likely never recover.”

There will certainly be some changes in the way we work and shop but we believe the concerns are overblown and more than priced into the sector.  In fact, the risk is much lower now as many retail and office REITs are trading for substantially less than their net asset values, and even their replacement cost.  Real estate is a tangible asset so there will always be value in the building and the land.  Properties can be converted to mixed use. For example, when I lived in New York one of my first apartments was in a building that used to be a Goldman Sachs office tower.

Many of the largest office property managers have been seeing an uptick in demand as businesses plan to return and prepare for more space between employees.  One of the largest property managers in the world, Brookfield Property Partners, announced last week that their office portfolio is 92% leased on a long-term basis with a remaining average lease term of almost 9 years. The CEO wrote:

“While there has been some discussion over the last several months as it relates to the ‘future of the office’, it is our belief that a corporate office represents much more than a place for employees to sit every day; companies utilize their offices as incubators of culture and as an important tool to recruit and train younger talent. Collaboration and innovation cannot take place remotely or over conference calls and some companies are already observing a decline in these areas amongst their employees. As time goes on, we think the loss of innovation and collaboration will become even more apparent and companies will shift emphasis back to having employees in the office. However, until a vaccine is discovered and widely available, it is likely that companies will need to have portions of their employees working remotely as they simply don’t have enough space currently to accommodate them all. In the long run however, we do not think remote working represents a threat to the office as we know it. In fact, concerns around social distancing and density ratios are very likely to drive additional office demand in the future and may prove to reverse the trend of increased densification we have witnessed over the past 20 years.”

Risk can be kept in check so long as you position size your exposure accordingly and hold a well-diversified REIT with exposure to residential, retail, industrial, office, healthcare and diversified properties.  The dividends yields are attractive and paid monthly.  You get the benefit of being a landlord and having experienced management teams allocate and recycle capital for you all the while you don’t have to lift a finger or fix a toilet.  It sure beats buying a single overvalued condo and being cash flow negative.

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

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   By Guest Blogger Ryan Lewenza

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Contrary to what Green Party leader, Elizabeth May recently said, oil is not dead! Mrs. May was quite frank in her outlook for oil and the Canadian energy sector, recently stating, “My heart bleeds for people who believe the sector is going to come back. It’s not.” And in her view, “Oil is dead.”

This flippant and in my opinion, silly thing to say, shows little compassion and support to the nearly 300,000 Canadians directly employed within the sector and the countless more indirectly benefitting. Nor does it recognize that oil and gas (O&G) represents our largest export at $132 billion (2018), that it contributes 10% to our total GDP and the $14 billion in annual revenues to the Canadian government. May’s comments really struck a chord with me, so today I provide my rebuttal to this doomsday view of oil and why Canada should continue to develop our estimated 170 billion barrels of oil reserves rather than letting the sector wither and die as May proposes.

Let me preface today’s blog post by stating that I am believer in climate change, that human activity through the consumption of fossil fuels is contributing to global warming, and that we should try to minimize the impacts of O&G exploration on our environment and planet through government regulations and new technologies. While this may seem incongruent with my earlier statements, at the end of the day I’m a pragmatist and realist, so I believe there should be a balance to both energy production and the environment. Let me explain.

First, I believe May and other environmentalists focus too much on supply (i.e., production) and not enough on demand. The simple fact is the world consumes roughly 95 million barrels per day (bls/day) of oil alone and this is forecasted to rise to 105 mln bls/day by 2030, according to the IEA. Yes the IEA then expects oil consumption to plateau around that time and then decline, but it will be gradual, likely taking decades.

Whether we like it or not, oil and other petroleum products are an integral part of our lives and economy. This includes transportation fuels like gasoline and jet fuel, heating oil and electricity generation, the petrochemical industry where petroleum is used as a raw material for thousands of different household products like clothing, electronics, and agricultural products. To get off oil quickly would have devastating impacts on our economy, our standard of living and overall way of life.

Not sure about you but I like traveling, the freedom from driving my car (Note: not a Porsche!), ripping golf balls down the fairway, buying some new duds and upgrading to the latest iPhone so I can more quickly respond to blog comments. Well, the last part’s a lie but you get my drift.

Oil and petroleum products are ubiquitous and an absolute necessity in our daily lives. This is critically why the death of oil has been greatly exaggerated by May and other environmentalists.

Global Oil Demand Continues to Rise

Source: Bloomberg, Turner Investments

Second, May and others believe that oil and fossil fuels will be replaced by renewables like solar, wind and geo-thermal. While these areas will continue to see robust growth and over time will play a bigger role in our energy consumption, it will likely take decades before oil is largely replaced by these new energy sources.

British Petroleum (BP) publishes an annual report on world energy trends and it’s clear from this report how prominent fossil fuels are in meeting our global energy needs. Currently, fossil fuels (oil, natural gas and coal) make up 85% of our total energy consumption, with nuclear, hydroelectric and renewables making up 4%, 6.5%, and 5%, respectively. So renewables make up only 11% of our total energy consumption. Looking at just wind and solar, they represent a paltry 2% and 0.7%, respectively.

I’m from Windsor, ON and when I drive home to see the folks I see hundreds of wind turbines across Essex County, which personally I think is a great thing (despite the way it was handled by our previous Ontario governments). But it’s clear from these statistics that renewable sources make up a small percentage of our energy consumption and while these areas will see the highest growth, it will still take decades before these sources replace fossil fuels.

World Energy Consumption by Fuel Type

Source: BP 2018 Statistical Review of World Energy 2018

What about electric vehicles (EV)?

While Tesla shares continue to rally to new dizzying heights, electric vehicles currently make up a minuscule amount of global car sales. Last year global electric vehicle sales rose to 2.1 million units, which represents just 2.6% of global auto sales. There are a number of different forecasts for EV sales but even the most aggressive ones have EV sales at 20% of global auto sales by 2030. Sure the growth is phenomenal, but EV sales will continue to represent a small fraction of global sales in large part due to their higher upfront costs (EVs average selling price is $55,000 versus $36,000 for a regular gas powered car).

The other huge obstacle to EVs and them getting a wider adoption are the batteries, which requires massive mining of nickel, cobalt and lithium. While EVs cut carbon emissions, they are not without other environmental consequences. For example, it is estimated that for every ton of lithium produced, an equivalent ton of carbon dioxide is created. And nickel is ranked as the eight worst metal to mine in terms of pollution and global warming.

Lastly, a huge reason why we’ve become a fossil fueled planet, which will likely continue for some years to come, is the high energy density of oil and natural gas relative to other energy sources. Energy density measures the amount of energy that can be stored in a given mass or volume, and is one way to compare different energy sources output.

Below is an interesting table that puts different energy sources like oil, natural gas, solar and wind on a comparable scale and it shows how much more energy you get from oil or natural gas compared to solar or wind. Essentially, oil and natural gas provide a “bigger bang for your buck” versus other renewable sources at present.

Energy Density

Source: Bradley Layton, A Comparison of Energy Densities

When you put it all together – future oil demand, a low percentage of renewables and electric vehicles, the higher energy density of oil and gas – I fail to see how oil and other fossil fuels will quickly be replaced by renewables and most certainly that oil is far from dead, as May recently proclaimed.

If Canada tomorrow where to put a moratorium on oil production to help combat climate change, the US, OPEC or Russia would just step in and replace those 4 to 5 million barrels. In this case, nothing would change for oil demand and consumption and all we would do is destroy Alberta and our overall economy while doing nothing for addressing climate change. Given all this we should continue to treat that resource as the crown jewel that it is.

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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Covid diary for 14.8.20. Have you noticed how the pandemic has come to define every single aspect of life? This is now a virus blog, despite its waggy tail and wet nose. Oh well. Here’s some recent stuff you should know…

Over the hurdle

TD is the latest bank to drop its key 5-year, super-duper, clients-only five-year fixed mortgage rate yesterday. Down to 2.24%. But if you make eyes at TNL@TB, or bow slightly and ask sweetly, you can get the cash for less than two points. As we’ve been telling you lately, the cost of money has gone totally, seriously insane. Fivers are widely available at 1.97%, or even a few basis points lower. Depends on your smile (behind the mask).

Realities: this is unlikely to happen again in your lifetime, unless the virus completely eats Texas, Trump declares martial law and we fall into a continental depression. Second, you should lock in. Going variable to save three dollars a month when the cost of money is essentially free (given inflation’s progress) is hubris. Bad idea. In fact there’s logic – as was spelled out here a few days ago – in securing a decade-long loan at 2.5%, so long as you don’t move within the first five. Half a decade from now the virus will be a memory and CBs will be doing all they can to gently hike rates as they ready for the next disaster.

Another reality: cascading rates at the banks have made the federal mortgage stress test a little less stressful. It used to be at 5.19%, now eroded to 4.79%. This is the number at which borrowers must qualify in order to get their insured money, regardless of what crazy-low rate the bank is offering. The latest drop is twenty bps, which means buyers with a hundred grand income and 10% down can carry about $8,000 more debt. Not a lot, for sure. But every little bit helps fuel the FOMO now smouldering through the burbs.

By the way, the difference between the stress test rate and the on-the-street cost of a home loan is now about 2.8%. That’s huge. It means, essentially, borrowers have to prove the can carry the financing at more than twice its actual cost. The real estate cartel says this is absurd. And yet sales/prices keep going up, even in a pandemic. Just imagine if there was no test at all. Realtors would move from Audis to Lambos and be even more insufferable.

Did the virus just infect your RRSP?

So Covid threw a lot of people out of work, resulting in more than eight million taking the CERB pogey. For most, this was not their fault since politicians turned off the economy and therefore had a responsibility to cushion the blow. But it did underscore the fact families in the bottom half of the income/net worth scale have almost no financial reserves. They panic over one missed paycheque, so six months of virus unemployment is catastrophic. Many carry gobs of debt. This is why almost a million families stopped making mortgage payments. Soon both the CERB and loan deferrals will end. Pow.

But what about the years to come? Does it still make sense, despite the bug, to be squirreling money away for retirement? In your RRSP?

Maybe not.

Writing in the Financial Post this week, money guy Dale Jackson raises valid points. First, understand how RRSP tax breaks happen. This plan favours the well-to-do. The more you earn, the bigger the prize. The size of the tax break increases with income and marginal tax rate.

So, if Covid stole your income for most of 2020 to date, putting money into a retirement plan may give you a much smaller deduction than waiting until 2021 or thereafter when your job is restored. Also remember earned RRSP room never goes away. It accumulates – so a basic strategy has always been to save it up for higher-income years, to offset the capital gains on investments, or cancel out some of the tax when you take a commuted pension, for example.

If the virus hit your household, take some of that CERB cash and stick it into your TFSA in nice growthy ETFs . No tax deduction, of course, but no tax payable either when you withdraw income in retirement impacting benefits like OAS.

By the way, remember that virus payments are taxable. So you could save some, put it into an RRSP next spring when the world is less nuts, using the tax break to offset the money owing on your CERB. Or transfer some from the tax-free account to the retirement account, getting a tax break for contributing money you already owned, to pay the bill. Thanks, Justin.

Condos: going down with the CERB

Months ago when the bug arrived we told you condos would take the hit along with Westjet. And here we are. Listings are rising, sales faltering and per-foot pricing dropping. The fear (often irrational) is that communal living in a single building is germy and dangerous.

Besides, with office towers empty and millions working remotely, the meme spreads that downtowns will be hollowed-out shells for decades, while the condos clustered around them turn into swanky pigeon roosts. This is typically extreme. By this time next year those offices will be populated and streets busy. People will still want the convenience, location and uncomplicated life condos provide – but pay a premium for low-rise (where elevators are optional) while the spires go cheap.

Here are some interesting words on the Van scene from local analyst Dane Eitel, who is boldly forecasting a 30% price plop in 2022 from the high set two years ago. As in Toronto, inventory is growing faster than sales, and a buyer’s market is quickly forming – the opposite to what’s going on with suburban single-family homes.

“Still to come,” he says, “is monstrous amounts inventory to be introduced to the market from the presales. Worth mentioning is the end to the evictions ban will likely be occurring in September. While the CERB is also seemingly coming to an end, and those whose are still without work who qualify for EI will be getting less money and some simply will not qualify. None of this bodes well for the demand sector of the Condo market.”

The biggest hit, however, isn’t a threat to condos only. All real estate will be challenged when the following occur in sequence: CERB payments end. The mortgage deferral era is over. Bond yields and mortgage rates creep higher. Taxes rise to help cover massive Covid spending. The US election turns into crisis. Unemployment lingers. And remember, “The economic impact of the first shut down is still in its infancy, imagine a second shutdown and the long term effects that would hold.”

Of course, nobody listens to him. Or me. So the next hundred days will be Biblical. You know, the brimstone part.

About the picture: Toby the one-year-old poodle hurtles towards the “Garth Street” exit on the LINC – what owner Scott (in the back seat) and other locals in Hamilton call the Lincoln Alexander Expressway. “He is very smart,” says Scott. But can he signal?

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Buy a house off the Internet? That you never walked through? Based on a creative realtor’s description of ‘a chef’s kitchen… 10+++ spa-like master retreat bathroom… meticulous attention to detail… on a coveted street..’? And with photos that can make a beater property look like Martha Stewart just moved out?

Well a year ago few (if any) would fall for that. No wonder. MLS property write-ups often enter the category of steamy fiction and wide-angle, filtered photography can turn a 12-foot-wide hovel into a commodious estate. But that was then. Before Covid came. This is now. After FOMO hit.

Off-the-Net sales have become common in a lot of places since travelling is a hassle, yet many want to flee urban centres for a safer, virus-free bucolic life elsewhere. FaceTime walk-throughs with a masked, gloved, Lysol-swabbed agent are a bonus. Home inspections have once again turned rare. Buyers are buying with scant protection, often in multiple-bid scenarios, and continuing low inventory levels in many places have jacked prices skyward.

On the surface, this makes no sense. We’re in recession. Unemployment’s 13%. There’s a global pandemic. The government’s broke. Whole industries are decimated. Immigration curtailed. There may be another virus wave coming. Everybody has stuff on their faces and fear in their veins. Where did all this house-buying-at-any-price bravado come from, combined with the stunning risk of securing property you’ve never actually seen?

  Former Royal Bank CEO Gord Nixon was doing some media yesterday and attributed this insanity to just two things: people aren’t traveling anymore. They’re cocooning. Everybody wants a safe house to hide in. And, second, condos are going down. The flight to SFHs is a direct result of the virus, which he says has ‘encouraged this behaviour.’

Others disagree.

Yesterday we featured rebel Evan Siddall on this pathetic blog. The head of CMHC accused other mortgage insurers of pandering to high-risk households, fomenting excessive debt and setting up Canadian real estate for a painful fall. Prices, he said, could be 20% lower by the end of the year because of joblessness, recession, Covid, the end of CERB and the coming deferral cliff. Siddall described the ‘dark underbelly’ of the market, and did so in a stark, historic, three-page letter to his competitors, the industry and the nation at large. The stir was palpable.

So we have a real dichotomy here. Eager, almost panicked, buyers snorfling new levels of debt and paying whatever it takes to get homes they often have not visited, and a grizzled industry pro warning that the sheep have no idea what awaits them at the bottom of the chute.

Yesterday the mortgage brokerage business was agog at CMHC’s brash berating. Leading the resistance was veteran broker Rob McLister who detailed seven reasons he thinks Siddall sucks and the letter was “divisive… never should have been sent…”

The criticisms are stinging, deep, bitter, even hostile. “Industry leaders confiding in me today,” says McLister, “were united on two fronts: that Mr. Siddall has lost their trust with such reckless assertions, and by virtue of that, has now officially overstayed his welcome in the Canadian mortgage market.” Ouch.

The mortgage dudes argue CMHC dropped the ball for consumers by not helping create more inventory to shelter middle-class buyers, by coming up with a stress test imposing too-high a bar on borrowers and restricted economic activity and by forcing more people into the rental market, goosing costs. It’s CMHC’s own fault, the industry says, if the agency’s market share has fallen from 90% a few years ago to 40% now and more and more borrowers are forced into the arms of private, more lenient insurers. Finally, Siddall and his bearish view of real estate is undermining confidence in our financial system, driving off investors and their capital.

And this: “Siddall’s constant unfounded charges that the industry facilitates “excessive borrowing” paints lenders and insurers as profit-hungry robber barons who couldn’t care less about doing the right thing for the country. That’s not the most endearing or effective management style.”

Well, not everybody can be on the winning side of this dust-up.

Either residential real estate is partying like it’s 2017 for valid reasons (pent-up demand, cheap money, low listings) or we’re headed for a come-to-Jesus reckoning (pandemic, recession, job loss). Sales have literally exploded, from Vancouver Island, to the Lower Mainland, through the Okanagan, in southern Ontario, the GTA, Ottawa, Montreal, Halifax and even sleepy little Lunenburg where listings that sat for a year now sell in a day to people who viewed them online. The current trends are obvious. Dirt, not condos. Space and privacy. Social distance. Doors that open onto streets. Small over big. And lower-priced places to live since you can now Zoom anywhere.

In the midst of the worst times since the 1930s, the buying seems bottomless. Intuitive. Evan Siddall cannot understand. But then, he is a rational man.

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