Category: Accounting tips

Friday of a long weekend. Yahoo! In the middle of a pandemic. Yuck!

These are weird days, as this pathetic blog chronicles. In the last 24 hours, for example, more evidence some industries are in deep poop (technically speaking) while others are feeding off Covid. Air Canada’s revenues have collapsed 89% and its stock is seventy per cent lower than it was in January. These guys are going down without a bailout. It will, of course, materialize. Maybe the Kielburgers can finance it.

“I hope they keep the US border closed a long., long time,” Brenda said to Bandit and I while on our morning walk. Most people are repeating that. And the airline is being crushed as a result.

But here’s Apple. Stock up 80% in a year, earning over $59 billion in the last three months with revenues smashing analysts’ predictions. It’s all that CERB cash flying around (and the US equivalent, which ends today) allowing people to snap up new iPhones and iPads as the stay-at-home economy blossoms.

The revolution is in full swing. Physical retailers are being squished, while online sellers blossom. The stay-at-home stocks, companies and enterprises – from Zoom to Apple, Netflix, Etsy, Shopify and Amazon – are exploding higher. Government fiscal stimulus (all those cheques flying around) and central bank monetary stimulus (2% mortgages and bond purchases) have helped propel markets higher. And it’s not stopping

Said Fed boss Jerome Powell this week: “The path forward for the economy is extraordinarily uncertain, and will depend in large part on our success in keeping the virus in check. We’re not even thinking about thinking about raising rates and it will take continued support for both monetary and fiscal policy.”

On balance things are w-a-y better than most people believe. There are solid reasons the S&P 500 is up 48% since March and has a year/year gain of 11%. The Nasdaq, with all those SAH companies in it, has climbed 60% since the virus hit, and has given investors a 31% one-year gain. Bonds prices are higher. Preferreds have revived recently and kick out a solid 5% return. Balanced portfolios have pretty much erased the Covid collapse of 2020, which means investors get to keep all of the 15% (or more) they made last year. And 2021 will probably blow the doors off.

Did you see the latest stats for Canada?

The economy gained about 4.5% in May and it looks like a 5% advance in June. In two months we gained back half the ground lost during the virus disaster in March and April. In short it means the country’s total output is running at about 90% of what it was back in February, when everybody was commuting to work instead of wearing sweatpants all day and drinking gin at breakfast.

The swoon Covid caused here was about the same as the damage inflicted in the US. No big surprise. But now it’s our turn to shine, and there are many who think the Canadian market could outperform in the rest of 2020. First, we may have an ethically-challenged PM but there won’t be a general election in Canada this year causing deep polarization and social unrest. Not so in the States. The November 3rd contest, whether it happens through physical or mail-in balloting, will be a disaster. Whoever wins. Mr. Market may recoil somewhat as that unseemly spectacle unfolds.

Second, the virus. In parts of Canada there is none. Zero. Nada. Nary a single active case. Deaths have diminished. Long-term care homes have been largely restored to safety. No ICU anywhere is overwhelmed. Nobody talks about ventilators. The kids are going back to school. The percentage of the population that was infected, required medical attention, or perished was tiny. The projections made in March by scaremongering politicians (like our health minister – heard from her lately?) that 40% of the country would get Covid now look extreme.

Meanwhile the US has seen 4.5 million cases with 152,000 deaths (about 17 times the number here, with 9 times the population). The virus is still ripping through many areas and it seems reopening the economy was done in haste (politics over science). Says a Bay Street bank economist, correctly: “The good news is that the cautiousness has kept virus cases under control north of the border, suggesting Canada’s economy is in a position to outperform that of the US in Q3.”

You bet.

Third, as a result of bad choices about the virus, the US economic recovery seems to have stalled. Initial jobless claims this week were 1.43 million, over seven figures for the 19th week running . Not good. Congress adjourned yesterday with the Dems and Republicans reaching a deal on extending supplementary benefits to the unemployed. So those cheques end today. Also not good.

Fourth, Trump. The man used to be a firecracker for markets, with tax cuts, infrastructure spending, regulation expunging and job-fueling protectionism. No more. Covid has hobbled and discredited him in the eyes of many who believe the pandemic was waved off instead of seriously addressed (as here). Now he’s a president with 25 million unemployed, a bottomless deficit, a recession, widespread civil unrest and a tone-deaf wife who just announced she’s revamping the Rose Garden while the president attacks TikTok. This week Trump Instagrammed a picture of himself golfing, smiling, and was savaged for it. Then he suggested delaying the election (the polls say he’s losing) and even his own party bosses laughed. Once again, this presidency will not end well.

So, yes, we have problems. Doesn’t everyone? But the facts remain. Markets have plumped. Investors are unscathed. The economy’s rebounding. The panic’s fading. There’s no solid evidence of a second wave or that assets will tumble again.

We should also have learned to ignore politicians. Leaders used to lead. Now they manipulate. So odd what a wee virus can teach.

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Just another day on the farm. Ninety thousand more bank workers told to stay home. Trump suggests the election (that will likely defeat him) be delayed. The American economy contracts the most in, oh, 200 years. You don’t need to pay your income taxes now until the end of September. And a ten-year mortgage costs the same as a one-year term used to.

Nope, not even close to normal. And not changing soon.

On the surface, there’s lots to scare people. And scared, they are. Surveys show a majority don’t want the Canada-US border opened. They embrace masks, even where there is no virus. They won’t fly. Most are avoiding restaurants and jumping off the sidewalk when another human approaches. Small businesses are dying on the vine (a new survey shows one in seven will go bust soon – that’s 160,000 enterprises in Canada.)

Of course, the gloom is overdone. That’s what financial markets have been saying for a while now, and investors with decent portfolios have skated through this whole Covid mess. In fact the virus-induced plop back in March now looks (in hindsight) like a generational opportunity. Since then the S&P 500 has gained almost 50%, the Nasdaq has exploded higher and even laggard Bay Street is ahead more than 40%. Year/year the US markets has gained 9%, which would be a crackerjack annual return even without the worst global pandemic/crisis/mess/crapstorm in modern history.

And look at oil. Forty bucks now, compared with negative thirty-seven in April. WCS (the Alberta stuff) is worth thirty, and three months ago you couldn’t give it away. For people who don’t panic easily, with the serene confidence that pandemics are temporary and most folks are flaky, this has been a good year. Plus you got to stay home and play with the dog for the last four months. She’s happy, too.

Through this mess, the balanced and diversified portfolio approach has worked again. When stocks plunged by 30%, the portfolio declined by less than half that amount, and regained ground steadily thereafter. As stock values fell, bond prices rose. REITs kept pumping out distributions. Preferreds kept on paying a 5-6% return. As equity markets rebounded, so did the global component of the B&D accounts. So volatility was smoothed, income was maintained and the recovery time shortened. This is why people who have the twin goals of capital preservation and steady returns should invest this way. Not all stocks. Not GICs. It worked in 2020, just as in 2008-9. And Nine Eleven. The dot-com bust. Y2K. The US debt ceiling crisis. And every other storm we’ve gone through. Sixty/forty rocks. But ensure the weightings are correct.

Invest it. Set it. Fuggedaboutit.

Now, as stated, we’re not out of this weirdness yet. TD Bank just told 89,600 employees they won’t be going back to their offices until sometime next year and those who are working (in branches that remain open, for example) must be masked and pass a daily app health test. Such a thing would have been unthinkable twelve months ago.  (RBC just joined in.) The American economy contracted 32.9% in the April-June period, which sure beat both 2008 and 1932 by a long shot. But it was better than anticipated (the consensus estimate had been a drop of 35%), and the next quarter’s expected to show a dramatic reversal.

President Trump is praying this is so, but already playing defense. He promised 3% annual growth, but the virus has changed the green arrows into red and thrown 25 million people out of work. No wondered that moments after the GDP stats were released Thursday he was suggesting the election in November be delayed, mail-in balloting would give a fraudulent result and that America needs to wait until physical voting is safe. In a year, maybe? (But only Congress can change an election date, thus it ain’t happening.)

So things you can count on include economic, market and political upheaval. Structural unemployment, more scared people leaping out of your way, especially if you have a naked nose, and more opportunity.

Like cheap money. So long as Covid hangs around, central banks will keep interest rates in the ditch. The Fed said as much this week, and the Bank of Canada’s already hinted the next rate move up might not be for three years. Wow.

So here are two thoughts. First, lock in this rate foolishness since it’s unlikely mortgages this low will come again in your lifetime. Do not choose variable, and think long. Five-year money is available for 2% or a little less from the major banks (if you’re very nice to TNL@TB and compliment her mask choice), which is basically free. All this government spending will deliver more inflation in the future. Borrow at this level and you will look like a genius in 2025. Even moreso, in 2030.

Ten-year loans are now down to the 2.5% range, posing an historic opportunity to stabilize your loan costs for an entire decade. It’s a certainty rates then will be substantially higher, Covid will be a memory and you will be a lot older. Just make sure you don’t try to get out of a 10-year during the first half of its life, since the prepayment penalty will be gross.

By the way, if you borrow cheap money for investment purposes, the interest is all tax-deductible. Plus no CRA payment until the autumn. Thanks, bug.

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Did you think it would take this long? Me neither.

The hammer came down mid-March. Now it’s August, almost. Yesterday Scotiabank says it  decided few, if any, workers would return to its gleaming, 68-storey Toronto head office tower at King & Bay Streets in 2020. In the spring. Perhaps. Google announced a few days ago its people are gone until next summer. It’s a long list of companies gathering.

Schools may or may not reopen in September, depending on where you are. Some will be in shifts. There’s big doubt it can even work, with kids in masks, six feet apart. A few sniffles and the place will be an evac zone.

Well, the economic implications cannot be overstated. Social distancing and employers running from risk mean we’re staring at uncertainty, unemployment and financial stress for months to come. Maybe two years, until that mythical vax hits your arm. To date about $60 billion in income loss has been made up in CERB payments while employers flow through even more in payroll subsidies. Monthly obligations have been waived through large-scale payment deferrals.

The question: how long can this last?

When it comes to mortgages the answer seems to be another 120 days. As of now about 800,000 households have stopped making payments. Those who quit in March are set to resume in September. Many will. Many won’t. Many can’t. Canada is a nation of debtors with families carrying $1.6 trillion in mortgage loans, more than $180 billion worth not currently being serviced. Debt has spiked in the past year, mostly because all the missed mortgage payments are being added to the amount owing. Folks wo think this is a ‘mortgage holiday’ were not paying attention.

So what comes next?

Australia may give us a clue. That, too, is a land of unfettered real estate lust and widespread house horniness. Property speculation is a national pastime, and politicians have shamelessly pandered to it. As a result, big Aussie cities have (like Toronto and Vancouver) insane housing prices and an economy way, way, way too dependent on citizens flogging houses to each other. (The Australian GDP is just a little smaller than ours and 15% of it is real estate-driven. Yeah, like us.)

We have 37 million people. They have 25 million. We both have 800,000 people not paying their home loans. And everybody’s worried.

Like ours, the Aussie government facilitated a six-month mortgage deferral period, and in recent days this has been extended by another four. But it is not automatic. The extension will be granted only to those who are in financial difficulty, find it impossible to make mortgage payments, and can prove it. Those who cannot establish hardship will be expected to resume payments, or to sell their real estate. As for the others: “Customers will be expected to work with their bank, during this extra time, to find the best solution for them,” says the Australian Banking Association. “It is in their interest to repay debt sooner.”

You betcha. Because every missed payment means borrowers owe more. Real estate equity is diminished. Financial positions are weakened. Net worth affected. Credit tarnished.

(By the way in the UK, where almost two million people deferred mortgage payments, there are media reports banks have been given the green light to deny renewals or new financings to people who took the loan holiday. A survey of brokers found 59% have had clients rejected due to a loan deferral or the fact they’ve been receiving a support cheque – like the CERB. It is folly to think lenders in Canada aren’t keeping the same records, nor that consequences won’t flow.)

So, what next here?

Soon, in the next week or two, CMHC will tell the mortgage deadbeats what their options are. Yes, an extension will be offered and, yup, probably four months – no payments until January of 2021. But this time will not be like last time, when everybody and his cat got approved for a deferral. As this pathetic blog reported then, lenders were absolutely besieged with requests (many from people perfectly able to pay but who didn’t want to, or were scared) and rejected nobody.

The missed payments are being capitalized – added to the principal, then amortized. Borrowers owe more. Monthly payments will rise. But the no-pay party will still come to an end for a boatload of people come the autumn. Only those folks who might quickly slide into default will be thrown a new lifeline.

That will come in the form of more months of deferral, but only when the lender (not the government) determines the homeowner doesn’t have the resources to pay; an extended amortization of the outstanding loan, reducing future payments but increasing accrued interest;  a negotiated restructuring; or further capitalization of future payments. In all of these instances, be aware that your credit will be impacted – whatever codswallop you might have read about deferrals being risk-free.

And what happens if tens or hundreds of thousands of people with mortgages still can’t pay when the winter comes?

Well, let’s see what Finance Minister Chrystia has to say then.

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If you’re a wuss, these are tough days.

Not only do you need to fret about being infected while shopping for prunes at Loblaws, but the whole financial world seems, well, nuts. The stock market might have jumped 48% since the end of March, rewarding risk, but savers and equity scaredycats have been seriously whacked by Covid.

In fact the decline in returns on guaranteed assets has been breathtaking. Especially at the banks.

Since the virus came to town and CBs responded with emergency rates, savers have seen their investments sink into negative territory. GIC rates have collapsed by about half – from levels that were already punishing to the prudent.

For example, the banks now pay roughly 1% to lock up money for five long years in a non-cashable GIC. There are a couple of outliers, like Tangerine, which still pay a little over 2%, but that’s unlikely to last. One-year rates have sunk to between 0.5% and 0.6% at the banks, while a cashable GIC (if you can find one) is down at 0.45% for a one-year term and 0.6% for three years. Ouch.

This is a disaster for the no-risk folks. The inflation rate, even in a pandemic with eight million people on the dole, is 0.7%. As the economy reopens and spending picks up, this will rise again – likely to the central bank’s target rate of 2%, then beyond. So anything paying less is underwater. Plus, if the GIC is not in a registered account like a TFSA or RSP (and what a tragic misallocation that is) the piteous dribble of interest is also fully taxable at your marginal rate. Even worse, on a multi-year GIC you must pay tax on interest you have not yet received. More ouch.

How long will this last?

Ages. The next central bank rate increase is widely expected in the first quarter or two of 2023, and that’s if we get a vaccine in 2021 with much of herd dosed within the following twelve months. This will allow the economy to more fully reopen, the airplanes to fly full, concerts, pro games, cruises, business meetings and conventions to resume, hotels to fill, malls to populate and the tourism industry to revive. Growth, along with higher rates and better yields, will return – but so will inflation. In fact, with governments spending bazillions of bucks now, you can be assured the cost of living will expand.

For savers this means a neverendum exercise in tail-chasing. Savings rates will eventually, slowly increase, but so will living costs (and likely taxes). Even if a GIC ends up returning a glorious 5% in 2025, the CPI will probably match it. The real return could be zero – which is an improvement over the negative yield savers are now receiving.

So, unless you have a few million to nibble your way through during two or three decades of retirement, you need to change. Stop fearing everything. Understand that by absolutely eschewing risk you’re also waiving off growth, opportunity and a more secure financial life. Don’t underestimate the amount of income you will need after you retire (never, ever believe this myth that retirees can exist on CPP, OAS and unbridled sex), or the number of years you’ll live. Retirement calculators abound, so use one. If you save little during your working years, you’ll probably need to replace almost all your income when you stop. From that deduct the government pogey and whatever corporate pension you might have (most people have none) to establish the shortfall that investment income must cover.

Now run the numbers. A nestegg in GICs paying less than inflation means your capital is exhausted even before your libido is. But a portfolio with a long-term return of 6% or 7% (the average for a balanced and diversified one over the past half century) could mean a forever income stream, a richer life, and some dough left for your ungrateful offspring.

There are lots of good alternatives to brain-dead guaranteed investment certificates. Shares in the big banks are sometimes clobbered by events (like Covid) but they always recover, pay a juicy dividend four times higher than a 5-year GIC, with lower taxes. By the way, our big six banks have never missed a payment. Preferred share values have also been whacked by lower interest rates, but they keep on turning out a 5-6% income stream for investors – and as rates rise in the future (they will – this is the bottom) so will capital values. Best to access these through a diversified pref ETF. Plus you pay less tax than with interest.

Over the past decade we’ve experienced everything but asteroid attacks and locust plagues (actually there are several infestations at the moment). A US debt ceiling crisis. Two oil price collapses. Trade wars. Brexit. Trump. Adele. Hong Kong. Impeachment. Extreme weather. Drake. And a global pandemic. Through it all, a B&D portfolio has returned just over 7%. Incredibly, there are lot of people who – freaked out by the 2008-9 market turmoil – have been in cash or near-cash assets for the past eleven years. They basically have the same money now that they did in 2010, while the guy with a balanced portfolio has doubled his.

Yesterday we talked about the bullion-lickers who buy gold because they believe the world’s ending, we’ll turn into Argentina, or markets are rigged. Many are blinded by their distorted world view. Ditto for the savers, the GIC-afflicted, the insanely risk-averse and those traumatized by headlines.

Don’t stay on the margins. Never let fear be your guide. Act to achieve a goal, not to avoid a threat. Don’t gamble. Do not recoil. Trust what’s coming.

In other words, live like your dog.

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There was a time I believed in gold.

I saw it as a noble defender against inflation which steals the worth of paper money. Anonymous currency you can covet, hide in the back garden and use when the zombie apocalypse arrives. Portable insurance against war, pestilence, insurgence, revolution, chaos, social disintegration, asset confiscation, mayhem or market collapse. A storehouse of wealth that’s eternal. The only sane defence for when sanity’s restored and money is again backed by something real. A last resort and shield from fiat madness and the blind, misplaced trust of sheeple who have no idea what pain will ensue when the debt hammer falls or governance fails.

Then I grew up.

Experience is a powerful teacher. None of that stuff has happened in my lifetime. Odds are overwhelmingly that none of it will. The lesson on precious metals was simple: they’re volatile, emotional rocks which sometimes thrill and more often suck away net worth.

But here we are. The kids have switched from gobbling Tesla to Hoovering gold. The lesson of buy high will have to be learned once again, it seems. An ounce of gold is now worth a little more (in US$) than it was nine years ago, Back then in 2001 there was a debt crisis debate going on in the US, the American dollar fell and PMs advanced. The advice of this blog was stark: sell and take your profits. The response was as expected: you’re nuts. This baby is going to the moon. It didn’t.

Déjà vu. All of the old golden juices are flowing again. And the outcome will be the same.

Now, before proceeding, there’s a reason gold (and its poor cousin, silver) are seldom topics of discussion here. This asset is just as tainted and distorted by emotion as is residential real estate, except it’s basically useless. You can’t live in it. Bullion pays no dividends or interest. Outside of urban centres it’s essentially illiquid. It’s hugely volatile and vulnerable to currency fluctuations. This is not an asset most people should own.  If you need exposure, the best way is through a fund that contains stock in producers. The dumbest way is to hold the rocks themselves. And, no, gold is not money. You cannot exchange it for food at the supermarket or fuel at Petro-Canada. And you never will.

Mostly, however, PMs are not a topic here because of the delusion of those who own some. They are smitten, blinded and myopic. They buy and never sell. They turtle during those long periods when the metals do nothing, or decline, then rush to proselytize when it revives. They trot out 50- and 100-year charts to prove their obsession and acumen, yet almost never do any of the devotees cash in on those temporary gains adding to their net worth. So, no, gold is not a practical investment asset, either.

It’s the stuff you fashion into an altar in the furnace room, then slip downstairs to be quietly, secretly thrilled. Until you grow up.

So what’s going on now that gold has achieved the price of $2,000 an ounce (significantly below its 2011 level when inflation is considered)?

Is this because the world economy will collapse during an unprecedented pandemic? Because of Trump and the increased likelihood he will abrogate or ignore the coming election? Civil unrest and street rioting in America? Climate collapse? The demise of Europe or the growing odds of a US-Sino armed conflict? No economic recovery coming? Pas de V?

Nah. It’s all about the greenback. When the American dollar goes down, commodity prices go up. And gold is the poster child for that.

This from Scotiabank chief economist Derek Holt, who’s a good egg. Smart, too.

Why is gold rallying? Purely because the USD isn’t. Be wary regarding other potential explanations as many of them offer up internally inconsistent narratives. Almost to the day that the US went into shutdown, the USD began to depreciate starting over the latter part of March. The FX market looked at the shutdowns and immediately began pricing a recovery. The USD has depreciated as part of a smoothed risk-on bias across asset classes that has embraced higher-risk alternative currencies. As the has dollar fallen, it’s now the case that 1,900 greenbacks have to be given up in order to buy an ounce of gold versus just 1,500 toward the start of the year.

But is gold also rallying because of a feared pandemic blow-out? Because of concern that the global economy is stumbling or will stumble again? Because of concern that excess stimulus is being tossed onto the economy with inflation around the corner and the Fed might have to turn around sooner than generally believed? These scenarios would generally be cause for the USD to appreciate, not depreciate. In short, don’t take gold’s rally as a sign that something awful lurks ahead when it quite arguably represents the opposite despite a confused narrative that seeks to throw all possible explanations at the wall hoping they can all stick when in reality they lack internal consistency with one another.

In other words, this is probably another golden head fake. Just like all the others. Given the collapse in interest rates, including bond yields, and a 50% jump in stock prices, a bunch of money is looking for something else to hunker down in for a while. It moved into PMs. It will move out again. This is not the big reset. Don’t buy into it thinking you’ve just outsmarted the central banks.

And if you own PMs that have popped in value, you know what to do.

But you probably won’t.

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So a quarter million people received double CERB payments, amounting to $442 million. They applied twice, once through the CRA and again through Service Canada. We also know over $11 billion in virus payments of $2,000 a month are going to children living at home who worked part-time in the last year.

Ottawa will send at least $60 billion to people receiving these Covid benefits, which have been extended by two months. Small businesses complain a lot of workers don’t want to return to the job because of the relatively lucrative payments. BMO economists say the CERB is a “key risk” to economic recovery. Manitoba premier Brian Pallister, my old buddy from Parliament, says, “I think it’s common sense and long overdue that we remove these impediments to people going back and taking another shift.” And the longer the virus pogey goes on, the more dependent people become upon it and the louder are calls for a permanent replacement – a universal basic income (UBI).

But beyond the fact the government’s paying people not to work, beyond the mismanagement of public funds through overpayments, beyond giving children two grand a month all summer and the grinding reality the country doesn’t have this money on hand, is another reality: billions is gassing stock market gambling.

The evidence seems overwhelming in both Canada and the US. Online brokers like Schwab, Ameritrade, Etrade and especially the Millennial fav, Robinhood, have been swamped with new accounts. About six million of them in the last few months. Robinhood alone has opened three million. In Canada over a half-million new accounts have been added to Questrade, Wealthsimple, BMO Investorline and RBC Direct. This is the most action since weed stocks first went on sale, and harkens back to the day-trading frenzy of the dot-com era twenty years ago.

It looks like this is having an effect on markets, since most of the newbie ‘investors’ are flipping individual stocks instead of choosing more diversified ETFs holding a broad index or a specific sector. Look at Tesla, for example. Robinhooders have been making up to 10,000 trades per hour in that company’s stock, helping propel the profitless outfit to whimsical levels and making its founder, Elon Musk, the richest human. But he’s still weird.

The kids have also created what’s been called the ‘bankruptcy bubble’ on Bay Street. Companies like Hertz or JC Penny that collapsed into a steaming pile of debt and whose stock values cratered along with them have been wildly traded in a speculative frenzy. “It’s a head-scratcher because people are getting involved in volatile penny stocks but the underlying fundamentals of these companies are horrific,” one Bay Streeter is reported stating. “These are companies that are for all intents and purposes bankrupt; they have too much debt and the stocks are going up 50 to 100 per cent a day. You’re not investing, you’re gambling.”

There’s another problem. Algos.

Up to 90% of all activity on markets is done by computers in a blaze of HFT (high-frequency trading). Algorithms are programmed to sniff out things like mispriced stocks, arbitrage opps and spurts in trading volume. So when thousands of moisters start slamming a stock they just read about on Twitter, the algos can pile on, propelling that issue even higher. And then there is the complete madness of crowds in a world when information is wide but comprehension shallow. That’s how Zoom Technologies jumped 240% – because it was mistaken for Zoom Video – and Chinese real estate pipsqueak Fangdd became a $4 billion stock play when the kids mistook it for an amalgam of the FAANG darlings (Facebook, Apple, Amazon, Netflix & Google).

Some day traders have made a pile of money, especially those buccaneers who embraced risk when the virus crashed stocks in late March. But many have bought turkeys or foolishly taken positions in ghost companies plus seriously inflated endeavours like that of Mr. Musk.

By grasping individual equities it’s a safe bet most of these new accounts lack any kind of diversification or have a balance between growth assets and safer fixed income stuff. So if markets retrace in a second Covid wave or tank for a while because America’s screwed up and the November elections go off the rails, there will be tears. As this pathetic blog has shown in stark stats, there’s infinitely more risk in buying into one or two companies (especially those feeding off fads) than in owning an ETF which holds the 500 biggest companies in America.

But, wait. Whose money is actually at risk here?

In North America governments have now pumped trillions of virus dollars into the hands of citizens. A lot of them desperately needed help since Covid stole their incomes amid quarantines, lockdowns and the collapse of whole industries. But others have chosen to gamble their pogey cheques as well as the cash saved from deferred mortgage payments, with stocks being the game of choice.

Besides seeing money magically appear in their bank accounts through direct deposit from Ottawa, a lot of people are bored. No work routine. No pro sports in stadia or on TV. No concerts or festivals. No bars or clubs. But anybody can open an online brokerage account with a few clicks, and start being a Master of the Universe of a Wall Street wolf.

Is this a step up from lusting for a condo and taking on 20x leverage to get one?

Yup. It is. But there’s no way you can call it investing.

Without doubt, billions will eventually be lost. But many of the losers will care not. Just a game. And the money was free. At least to them.

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  By Guest Blogger Doug Rowat

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Check out the latest commentary from financial author and journalist Michael Lewis:

Just before a panic, all is well—usually more than well. Then the panic strikes, chaos ensues, and a dramatic status upheaval commences. People who were on top of the financial order plummet to the bottom. People whose opinion was most valued are now ridiculed. Others who were on the sidelines race onto the field of play. The guy out in the wilderness who had been saying for the past four years that the good times were an illusion and a sham is wheeled in to take a bow and then hustled off stage, so that everyone else can regroup, and the whole process can start over again.

Lewis has perfectly outlined the recurring characteristics of any market panic. But, in truth, it’s not actually his latest commentary. The passage above was written in 2009 following the financial crisis. But his observations of market crises, as we sit in one presently, are timeless. The specifics change each time, of course, but the main features remain identical.

Has Covid-19 followed a different pattern from other crises? Not really.

First, was all “well” or even “more than well” prior to Covid-19? You bet. The S&P 500 had advanced 29% in 2019, its second best calendar-year performance of the last two decades, and was up a whopping 400% overall from its 2009 lows. Meanwhile, the labour market was basking in a miniscule 3.5% unemployment rate and the US economic expansion had reached a new record in terms of duration. In short, things were fantastic.

Secondly, are people with the “most valued” opinions now facing embarrassment and ridicule? Yes sir. Here’s a sample of some of the 2020 outlook reports that I reviewed prior to the onset of Covid-19.

Fiera Capital, a respected asset manager with billions in assets worldwide, predicted we’d see “a revitalization of global growth” in 2020 and had this to say about equities:

Equities should continue to thrive on the back of both multiple expansion (ample liquidity/improved sentiment) AND earnings growth (stemming from a reinvigorated growth backdrop). Despite trading near all-time highs, multiples are not extended by historical standards, while unnerved investors have positioned defensively through 2019, which offers the opportunity to redeploy elevated cash and bond positions back towards equities that offer a compelling value proposition.

And here’s what the esteemed BMO Global Asset Management team had to say at the start of the year:

[We] expect continued global expansion underpinned by three economic drivers:
* Labor market strength
* Accommodative monetary and fiscal policy
* Stabilization in the manufacturing sector
A fourth driver of markets, and perhaps the least predictable, will be political developments in 2020.

Well, so much for labour market strength and a stable manufacturing sector (ISM Manufacturing at one point this year dropped into the low 40s). And BMO also entirely missed 2020’s fifth, and really only, market driver—a global pandemic. At least BMO was right about the accommodative monetary and fiscal policies, but I doubt that they had any clue that “accommodative” would mean interest rates at zero and US$8 trillion worth of stimulus.

And, finally, Credit Suisse, which globally manages a massive US$1.4 trillion in assets, bullishly raised its S&P 500 target to start 2020 and then fired out this rosy strategy report:

Credit Suisse: the wrong forecast that (accidentally) may be correct…

Source: Credit Suisse

Now, I don’t pick on these asset managers and strategists in particular—almost everyone had bullish outlooks at the start of 2020 and no one cited ‘global pandemic’ as a risk. Our own Turner Investments outlook report was also optimistic and made no reference to viruses of any kind. However, I actually wrote about the dangers of trusting year-ahead outlooks a few years ago on this blog. I cited New York Times columnist Jeff Sommer who highlighted the following:

Since the start of 2000, The Standard & Poor’s 500-stock index has ended in negative territory in five calendar years (2000, 2001, 2002, 2008 and 2015) and has been virtually flat once (in 2011). But while a handful of individual forecasts have, from time to time, predicted mildly negative years for stocks, the Wall Street consensus in every single year since 2000 has predicted a rising market.

Consider the calamity of 2008. … The S.&P 500 fell 38.5% in the course of those 12 months…the forecast for 2008 was unusually bullish, calling for a rise of 11.1 per cent. Wall Street missed the mark by 49 percentage points that year.

In other words, Wall Street forecasts for this year, or really any year, are deserving of ridicule.

Next up in the Michael Lewis market-crisis playbook: the appearance of the perma-bears.

Naturally, there’s been no shortage of pessimists patting themselves on the back in 2020. Some, such as Nouriel Roubini (aka, Dr. Doom) are even doubling down. Roubini is now warning of a 10-year depression. While such predictions stoke fear, the vast majority of the time these doomsayers are actually contrary market indicators. And, naturally, as the market has roared back over the past three or four months, Michael Lewis’s other observation—that the pessimists will be quickly “hustled off the stage”—is also proving accurate. But don’t worry about Mr. Roubini, he’ll survive.

Dr. Doom’s fun side

Source: Google Images

So what does all of this mean? It means that every market panic, though unique in its own way, follows a familiar pattern. Things will be good, often very good, and then suddenly they won’t be. And almost no one will have accurately predicted the transition. The perma-bears will then take a victory lap, usually stoking more fear as they do so, and soon disappear. Finally, the market itself will “regroup” and rally. And every five or 10 years, we’ll do the same thing all over again. Bon Jovi said it best: it’s all the same, only the names will change.

However, through each market panic what’s most important is 1) having a balanced and diversified portfolio to begin with (remember: you’ll never anticipate the next crisis—if the investment behemoth Credit Suisse can’t do it, you definitely can’t) and 2) remaining invested once the crisis is underway. Why? Because trying to time your way around a panicking market is futile. Either your exit point or your re-entry point will be incorrect, likely both.

Further, be conscious of investment horizons: if you can be disciplined in the face of a crisis and play the long game, making a profit eventually becomes almost a certainty (see chart below).

So, once you recognize that the basic characteristics of market panics repeat themselves each time, you’ll deal with the next one like Bill Murray dealt with “Ned!” in Groundhog Day—you’ll (metaphorically speaking) punch it right in the face and keep on walking.

S&P 500: probability of a positive return

Source: First Trust; data range: end-1936 to end-2017

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

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The realtors are at it again. Listing low. Holding off on accepting offers. Stoking bidding wars and blind auctions in which the vendor (and her agent) hold every single card. And those CCs are back. That’s code on a listing cut for certified cheques which must accompany offers. The standard amount in Toronto is currently $100,000.

In other words, a house comes to market. You’re interested. You have to muster a hundred grand, pay for a certified cheque made out to the listing brokerage (and hope it doesn’t get lost), then staple it to an offer which is certainly for a greater amount than the sellers are asking. The offer goes on a pile with others, then the vendors go through them, in private.

You have no idea how many people you’re bidding against. You don’t know what money’s on the table. You can’t risk making an offer conditional upon anything, like an inspection or financing – since this is a competitive game. And if you’re really lucky your bid may be selected to be ‘sweetened’. Then you pony up every dollar you can and hope you squeak through as the ‘winner’ of a property which probably just set a record for the street. The next day you call the mortgage broker and pray to Dog you didn’t just commit to pay more than the appraised value. If you did, crisis.

That’s situation now. It’s insane. This is 2017 all over again. Briefly. Do not fall victim to it.

The reasons for FOMO during a pandemic – as weird as that sounds – have been documented here. Pent-up demand (there was no spring market) clashing with low inventory in an age of cheapo 2% mortgages. So sales have risen and prices plumped. And once again Canadians are demonstrating they have (a) no fear of debt and (b) no concept of risk. Plus, we’re a nation of financial illiterates. And the finance minister is a cheat. Oy.

Anyway, here’s some of what should keep house-lusty folks up at night.

Covid’s not done. Statistically, you probably won’t get sick. But your income might. The economy of North America took bold first steps to reopen after the pandemic hit in March, but much of that progress is now in doubt. Canada has an enviable virus scorecard, but the US is blowing it. Infections are rising – 70,000 more again yesterday, plus yet another day with over 1,100 people dying. About 40 states are affected. Trump had to call off his big party convention in Florida. Now 22% of Americans say they can’t make the next rent or mortgage payment. Over 12 million face eviction within four months. Fully a third did not make their July payments.

“You’d have to go back to the Great Depression to find the kind of numbers we’re looking at right now,” reported Bloomberg on Friday. “There’s almost no precedent for this, which is why it’s so scary.”

Yes, this is America, not Canada. But if Trump continues to blow the handling of the pandemic, thinking the world’s biggest economy can reopen before infections are found, traced and halted, the consequences will be global. The New York Times this week called on Congress to do a very un-American thing: impose a national moratorium on evictions and foreclosures, “and then to give people who have lost their jobs the money required for rent or mortgage payments.” Wow. Infections in the US took 100 days to hit a million, but just 16 days to rise from three to four million. Now UK prime minister says Covid will still be a pandemic 12 months from now, with a winter wave expected.

So what does this mean to someone bidding for a Toronto house in a blind auction, and paying an historic price?

Well, just everything. That’s all.

The CERB cash will run out. Ottawa does not have the financial capacity to finance eight million people through another wave of the virus. Our credit rate would be hit, forcing interest rates higher at the worst possible time, impacting bond yields and mortgage rates. Ouch. All those loan deferrals will also end. Maybe this autumn. Maybe Christmas. But an end is nigh as the banks cannot forego the interest on $180 billion in debt much longer. That means three-quarters of a million households will once again have to find monthly cash – not an easy thing if unemployment stays elevated all year. So, listings go up. A lot. This is a virtual certainty.

Did you hear the jobless numbers in the US have started to spike again? It’s the worst possible news for a president fighting a national health crisis, an economic decline and widespread social unrest. So, yes, count on a mess of volatility – with negative financial implications – between now and the end of 2020.

Finally, do people buying $2 million properties (the new entry point for ‘middle-class’ digs in Toronto or Vancouver) realize how small the universe of potential buyers may be in the future? Every year that ticks by, and every increase in housing costs, erodes it.

Toronto insolvency experts Fong & Partners estimate an income of between $168,000 and $195,000 is now required for a couple to afford one child, a car, a $1 million house (good luck finding that) and put enough away for a retirement income of $40,000 (which is quasi-poverty).

If this is the new ‘middle class’, it’s beyond the means of 90% of the Canadian population. The median family income in Toronto, StatsCan says, was $83,000 in 2017. CMHC estimates the average was $109,480, pre-Covid. Sure, there will always be wealthy folk. But enough of them to sustain an average detached house price of $1.4 million in Toronto or $1.5 million in Vancouver? Seems a stretch.

If you love risk, get your financial advice from mom or work for Re/Max, go ahead. Join a bidding war during a pandemic. Otherwise bide your time. We’re not there yet.

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Sales of detached houses in Toronto fell double-digits last month. But deals for properties in the burbs – even the faraway ones – rose by just as much. Toronto condo listings are growing like mushrooms in the humidity, Rents and prices are under pressure. Meanwhile in Muskoka and the Kawartha locals say the market’s on fire. In Vancouver the month/month price drop for a foot of condo space was the most in years, at thirty-four bucks. In Halifax, where new listings sell in hours, there are bidding wars. In BC, the Fraser Valley is steamy with aroused buyers and vaulting sales.

Whoa. Whazzup?

It’s Covid, of course. The impact of this virus is everywhere these days, now having a profound impact on real estate preferences. Says a headline this week in The Examiner (where I used to be City Editor decades ago when pages were made out of lead): “Hipsters who want to get away from big city fueling Peterborough housing boom.”

Why are housing tastes changing? It was not so long ago that a detached in 416 was the gold standard, that people would kill and maim to own in Kits and condos everywhere were hot properties.

Well, first, germs and space. Masks, social distancing and fear. Condo life is pure stress for many people who’ve been convinced living a few inches or feet from others is life-threatening. Elevators, mail rooms, corridors, door handles, garbage chutes – the potential virus transmission points seem everywhere.  Now that Covid has moved from offing octogenarians to disabling Millennials condos look like a seriously poor choice. So after a few years of ridiculous price inflation, the party’s over. Mix in the collapse of Airbnb and it’s a perfect storm.

Says Van housing analyst and bear Dane Eitel: “As the market progresses to feel the effects of the Covid-19 the mortgage deferrals will eventually come to an end. The tenants that haven’t paid will be asked to leave. Not to mention all the presold properties that will flood the market as the completions continue  – which is a whole beast on its own. The inventory has no choice but to skyrocket.”

Second, remote work. When your office closes, trying to stay employed while living with a kid and spouse in a two-bedroom apartment is the new definition of hell. And if you paid $2 million to have digs just a short train or tram or bike ride from your job – and the workplace shutters (maybe forever) – how dumb was that? Suddenly the sacrifices demanded by urban living seem extreme. Tight spaces. High costs. Congestion and compromise.

Third, budgets. Cash flow. The virus, Zoom and remote working has brought a new economic reality for millions of us. No commuting. No new suits. No heels. Maybe no daycare. Combine that cash with rent now being paid and you may well have enough for a house with some actual dirt in the boonies. Meanwhile mortgages have plunged to the 2% range for a five-year fixed, which means a couple of grand a month can now finance at least $450,000. So you can buy a 400-foot shoebox in the city or something like this, 110 km from DT Toronto:

Or look further afield. There are whole regions of the country where houses are affordable, services abundant and the geography stunning. If you can work from home in Collingwood or Hope, then you can do it in Nova Scotia, too. Like this house an hour east of Halifax on two acres (and it’s a B&B):

So while there’s sure been price inflation in the hinterland around major cities, affordability is dramatically better the further your drive. With this new Covid working-in-your-jammies reality and a strong Internet connection, distance is irrelevant. It allows real estate ownership without penury. You can actually consider having property and still feed your TFSA, chunk money into the kid’s RESP and make your group retirement plan contributions.

“All we have seen and heard in the past few months,” says a realtor in Peterborough (140 km from downtown Toronto), “are more people becoming keen on places like this that allow for a sense of community, a little safer, more space, walkable, with all those kind of things people have slowly been moving to over time.”

GTA realtor John Pasalis (who apparently hates me, but I forgive him) estimated the current boonie boom is focused on areas which average 86 km from the urban core.

Nor is this just a Canadian phenom. For months now there have been reports of a big move of folks out of NYC, Boston, Chicago and other places where life is tight, costs high and freedom curtailed. When there’s space, social distancing is a quaint notion. Masks are mostly unnecessary. Stress melts away for those whose minds have been forever bent by the fear of infection. The longer the pandemic dominates headlines and daily life, the more profound this shift will be. And how can this be a bad thing?

Thanks, Covid. After all the crap you’ve thrown into our lives, there had to be something of value. You owed us.

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Could Covid take out the leaders of both Canada and the US?

The virus that just won’t quit has lasted longer than most people imagined, continues to chew its way through society, has levelled economies, erased the jobs of hundreds of millions, has public finances circling the drain and now, spectacularly, weakened both Trump and Trudeau. Could this be fatal? Actually, yes.

(A note: Okay, so this is a canine-investing-economic-real estate blog. Got it. But politics are integral to macroeconomics, markets and taxes, and never more so than during a pandemic when politicians turn off the economy. States of emergency have morphed democracies into benign dictatorships, with leaders assuming historic powers. Sometimes they go too far. We may be there.)

First, Mr. Trudeau. He’s been accused of having an ethical blind spot. That’s too kind. He’s sinking into a moral morass of his own making, highlighting a breathtaking lack of judgement.

In short, he awarded a contract of almost $1 billion to an outfit which stood to gain $43 million in payments, and did this without public tender. That’s just weird and unusual. Then it became known the organization in question had hired Trudeau’s mom and brother, paying them almost $300,000 personally. His wife also worked with the same group and had expenses compensated. In fact it was during a WE junket to the UK that Sophie caught the virus which kept the prime minister of Canada holed up in his house for a month as the pandemic raged.

But there’s more. The ‘charity’, WE, owns $50 million in commercial real estate in downtown Toronto and elsewhere through a tangle of corporate offshoots which apparently mingle personal and charitable activities. Where did this money emanate from? The finance minister, Bill Morneau, awarded WE $3 million in funding when his own daughter was an employee. And for years the two bros at the centre of this, the Kielburgers, have been viewed curiously as they raised tens of millions from the pockets of schoolkids and snorfled government money.

Conflict-of-interest does not begin to describe these actions. Trudeau, his spouse, his mother and his brother have been in a relationship with the Kielburgers that bolstered political fortunes while it helped line WE’s pockets. The awarding of a massive untendered government contract that would give these benefactors tens of millions in income seems like a payoff. Perhaps it isn’t. But it doesn’t pass the smell test. Under the cover of a pandemic, when public finances were a mess with millions suffering from virus fallout, did our prime minister reward friends with tax dollars and think that was okay? A blind spot, indeed. In politics, in normal times, this would be a death sentence.

Doubts? Take a look at what Justin Trudeau did for WE – appearing in a video that is an advertisement and an endorsement, as our elected head of state.

At the end of June a healthy 40% of Canadians said they’d vote Lib and T2 had a 74% approval rate. Now he has 36% support in a new survey, and the scandal is just unfolding. This,” the pollster said, “was an example of using a crisis and public funds to help friends and supporters.”

Now, Trump. The polls have turned against him as well. Unless public opinion sampling is as flawed as it was in 2016, he will lose in November. Joe Biden’s lead is double-digits, and seems to be growing stronger as the US body count increases. As of this week there have been four million cases of Covid in the US with 145,000 deaths. Yesterday 65,512 new infections were identified and 1,127 more people passed.

The president downplayed this when the pandemic arrived, then disappeared, then complained there was too much testing going on (the only way to identify, trace and stop infections), then he dissed his top medical guy and, while upholding the Confederate flag and sending scary paramilitary dudes to fight BLM protestors in Portland, said wearing a mask was patriotic after defending the right not to. He has blamed state governors. He blames China. He blames testing.

Trump needs the economy opened since GDP growth and the stock market are proxies for his success. But haste to do so has caused infections to mount, and voter anxiety to grow. His supporters, some of whom hang out here in their camo underwear and mullets, purposefully diminish the virus and claim deaths are falling (they aren’t, apparently) because Covid is killing the Trump presidency. Now that he’s done the mask pivot, he has likely hurt his own base support.

Some say Trudeau will have to resign before the next election. There’s no way out of this ethical mess. WE is in deep trouble. The Liberal brand is being tarnished. Now that we have a $350 billion deficit and a $1 trillion debt, there are only more taxes and hard choices ahead. Meanwhile Trump has helped polarize American society in a way unseen since perhaps the Civil War. The virus just threw one more log on this national bonfire of passions and poisons.

You will long remember 2020. Largely for what’s yet to happen.

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