Category: Accounting tips

Have you ever noticed the way media covers financial stuff?

Never fails. When the market loses 2% in a day, it ‘plunges’ as ‘investors stampede the exits.’ This is big news. Pay attention and be terrified. However, when stocks add hundreds of points in a day, the story is buried, and preceded with, ‘Markets moved higher. Here’s Karen with the details, and the weather. Looks like a nice weekend…’

Well, here at GreaterFool we don’t mess with the news. It’s all unvarnished. When the world’s going nose-first into the kitty litter, we report it faithfully. When the tide turns, you get that straight. These days investors should be grinning. Covid may have made a mess of a lot of things, but it also handed over a generational opportunity.

The S&P 500 (the only index you should watch, but not on BNN) is ahead 12% year/year. It’s even up overall in 2020, which is astonishing after a trip into bear market territory in March. In fact since the 23rd of that month, the index is ahead 49%. This year brought the swiftest-ever descent, and the fastest-ever recovery. It you sold when the virus hit, you got a spanking (not the good kind). If you backed up the truck and bought, you’ve made a pile. If you had a B&D portfolio and yawned right through it, Covid’s ended up a dud.

But that’s history. What’s next?

More.

Here’s why.

Stimulus from governments and CBs will to continue. Forever, apparently. The latest evidence came from the EU Tuesday – a package worth about one trillion C$ to finance European recovery. Stocks on that continent have outperformed those in the US for a couple of months now – so I trust your portfolio is global and has exposure there. If not, get some.

Second, a vaccine’s coming. Inevitably. The latest news is one will be approved in Europe in 2020 – and that might be beaten in the US if the Moderna juice continues to look promising. Remember all this is being financed by governments, willing to spend billions on quickly producing hundreds of millions of doses. Even if vaccines are less than miraculous, therapies for Covid are being tested and implemented routinely. The day one of these things is stamped as safe and effective, stand back. Your portfolio will have an eruption.

Third, Trump just wore a mask. He tweeted and used Insta Monday to say this was the “patriotic” thing to do. Amazing. So a river’s been crossed. All the anti-vaxers, socons and F150 AR-15 deplorables just got punked by their grand poohbah. The guy may have done the correct thing, but he’s political toast as a result. He lost the centre long ago. Now he’s ratted on the right. Markets like certainty. They just got it.

Next, look at the retail sales. In Canada they zoomed higher by 19% in May month/month and it looks like June delivered a 25% gain. Car sales soared 66%. Impressive and probably fueled by a heady mix of pent-up demand, deferred mortgage money and CERB cash. If people are dumb enough to live this way, the stock market is happy to profit from their profligacy. Up she goes.

Also coming is a giant new stimulus package in the States, to replace an income support program which is about to expire. Now just a few months from the pivotal election, it’s in nobody’s political interests to make voters suffer. Central banks, for their part, will continue to buy up gobs of assets and keep rates in the ditch. Expect mortgage rates, for example, to be in the 2% range in Canada for the next three years.

Those low rates not only suck and cajole people into fat debts and unearned home ownership, they also fuel stocks. After all, when cash, CICs and bonds pay next to nothing, where else will money go to earn a decent return? If you don’t have enough to retire on in ten or 15 years, there’s little choice but to have equity exposure. GICs are safe, but you’ll have to develop a taste for KD and Canadian wine.

We must face facts. The world is upside down. In a normal recession people lose jobs, deplete their savings, suffer a big income drop and are forced to sell their homes, which decline in value. In this downturn almost nobody’s working, savings are rising, incomes are going up, debt anxieties falling and real estate is plumping. Oh yeah, and the stock market just gained 49%.

More evidence you should never get your investment advice from the media. Or the comment section. Especially that.

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The Royal Bank of Scotland has told its 50,000 employees not to bother coming back to work. Until sometime in 2021.

Hmm, so it’s Scotland, not Canada. But this is definitely a trend. Not just working remotely, but the conclusion of major corporations that the virus will rage for a long time. A long, long time. Despite the news weekly about vaccine trials or Covid treatments.

It’s now been over 100 days since we got whacked. Six months have passed since the bug started earning serious headlines out of China, where authorities actually welded apartment doors shut to contain it. (Just try that in Texas.) Globally there have been almost 15 million cases and 600,000 deaths. The States has seen four million infections and almost 145,000 fatalities. Public health officials forecast 200,000 by the autumn, and it seems about right. By the time the November presidential election comes around, it will be one hell of a body count.

But this is not a virus blog (I wish). Instead we’re interested in what the little bugger is doing to the economy, finances and investments. So the RBS decision, bolstered by those of airline officials (these companies are essentially being dismantled) delivers this verdict: we’ll be in a virus-dominated world until the winter. Or maybe the spring. The pandemic, in other words, will be about a year in length. (The Spanish Flu pandemic, which sprang out of WW1, raged from 1918 until the early 1920s. Today we have a vaccine against this, which we call the H1N1. But people still get it.)

Can we last a year? Are markets pricing that in?

First, government money – the CERB, wage subsidies, enhanced child pogey, student cash, OAS bonus etc. – has pumped about $80 billion into personal bank accounts over the last four months. Historic. Meanwhile a million households haven’t been making mortgage payments. An unknown number of renters are living for free since evictions have been halted and landlord/tenant boards are shut. Millions are working from home with no commuting costs, no daycare to pay, no eyeliner or drycleaning.

The result has been an improvement in personal finances because of the virus, believe it or not. That’s what the latest MNP poll found. When Covid hit these guys told us that 49% of Canadians feared imminent bankruptcy, which caused journalistic apoplexy and a real estate plop. Today’s it’s a different story. Respondents say(mirabile dictu) they can now pay their bills! Four in ten state they have no debt regrets and a quarter believe they’re better off than a year ago. The number who report they are $200 or less each month from insolvency has dropped to 43% (in Canada, that’s a win).

The question is, what happens when the CERB ends, mortgages have to be serviced and tenants start being tossed for non-payment? And there is no answer. We don’t know. But it’s probably not good.

As for markets and financial assets in general, investors were punished in 2020 then largely restored. There’s no mystery as to some of the reasons why. Pandemics are temporary, of course, so no reason for investors to turtle for long. Beyond that, massive government fiscal stimulus and central bank monetary stimulus have filled in the economic crater that Covid caused. Now CBs say rates will stay low until 2023, which pretty much guarantees price inflation.

And don’t underplay the impact of speculation. As reported here, trades in Tesla alone hit 10,000 per hour recently on just one platform – Robinhood. That’s helped the stock climb more than 200% to obese levels. Apparently Millennials and first-time investors have fallen in love with equities.

Google searches for ‘how to invest in the stock market’ rose 83% as the virus hit and markets swooned. The year/year gain, says Investing.com, is 328% while searches for ‘stocks to buy’ have jumped over 400%. This is not investing, of course. It’s speculating. But this onslaught of money – much of it coming directly from government benefits and deferred mortgage payments – has been partially responsible for 40%+ market gains since the end of March.

As for real estate, you know the story. The virus crushed listings and squished demand. Reopening has spiked the number of buyers who are competing for limited listings and financed with 2% mortgages. So sales and prices have jumped. FOMO has returned. Multiple bids are happening in major centres (but not Alberta) across the nation.

None of this is normal. Understand that. In a way we’re living in a delusional time, walking through cities emptied of commerce and profits, amid the detritus of failed businesses with Depression-era joblessness, yet people have money and confidence. They’re buying houses, taking on new debt, speculating and looking for all the world like grasshoppers.

You may know how that ends.

About the picture: “Saw this tonight in Vancouver,” Mike says, “Hope it gives you a chuckle.”

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My buddy Ryan stirred the loins of the rightist barbarians who roam the barren steppes of this blog, bareback, when he dissed the Trudeaus. Papa and junior. Together they’re responsible Ryan pointed out, for half the trillion-dollar debt that Canada will shoulder by the end of the year.

Deficits and debts result from political decisions. Canada now tilts left. The Millennials love it. We have far more government in our lives and, consequently, the bills to show for it. Covid pushed spending into the stratosphere. The question’s simple: what comes next?

Can governments just keep printing and spending money? Is there a reckoning in the distance? Will Trudeau or the next gang to run the place decide austerity and higher taxes are needed to try to balance the books? Or at least stem the gushing river of red?

Well, forget belt-tightening. That ain’t happening coming out of a pandemic, nor does a minority government have any appetite for dishing up cuts. Canadians are addicts. They want more, not less. When small businesses find 62% of workers would rather collect CERB than go back to work, you know what’s coming. All those people have a vote.

CMHC funds research into home equity tax

So let’s assess taxes. If spending won’t drop and cutbacks are off the table, then higher revenues seem a slam dunk. This may be why CMHC, it’s reported, is funding university research into a potential home equity tax. “The objective is to identify solutions that could level the playing field between renters and owners,” says an agency spokesperson.

By sucking about $6 billion a year from the hides of homeowners, this levy would attack what renters and moisters call the ‘financialization’ of real estate. They think property should be for accommodation, and not viewed as an investment asset. Of course allowing people to keep profits on house sales free of tax has created this situation and grossly inflated values. Will the virus end that?

Nah. Not yet. A house tax may well be in our future, but it’s probably not happening any time soon, nor is an increase in the HST likely. The reasons are purely practical. This is a pandemic-induced recession of Biblical proportions. Unemployment is extreme, the GDP has a big hole in it, while airlines and tourism, hotels and concerts plus pro sports and conventions – they’re all on their knees. The engines of economic recovery will (the feds believe) be the same ones that got us out of the 2008 hole. That’s consumer spending and real estate. That helps explain the tens of billions in virus-related and kiddie pogey payments that have been flying around. Plus, of course, 2% mortgages.

Hiking the HST will reduce spending, burdening retailers and delaying recovery. Taxing residential real estate would stop the current boomlet in its tracks. Justin Trudeau – like Stephen Harper before him – is quite happy to let Canadians pickle themselves in unrepayable gobs of mortgage debt because it rekindles economic activity. Cheap rates are a cheap way of making that happen, since we all have no discipline.

So what’s left?

The top three candidate tax increase are…

Here are the main contenders, and what to do about them:

The inclusion rate rises on capital gains rises. This is a really bad idea since it’ll reduce investment when we need it, but politically it’s a winner in a financial illiterate nation. Instead of including 50% of a profit in income, this may become 75%. That’s a mother of tax increase, and should make you seriously considering taking gains soon that you were planning on harvesting in a next few years.

Corporate taxes will pop – from hitting the online giants to your family doc. Ottawa wants a big piece of the profits outfits like Amazon take in, and will move to get it. Also expect the war on personal service corporations to resume as passive income is targeted and doctors are given more reasons to leave. But, hey, who needs ‘em? When the next pandemic comes we can just use vets and podiatrists. Ideas: do not chuck millions into PC for retirement, or you will end up unhappy. Move income into your own hands. Take salary and build up RRSP room. Fund a family trust. Think about an estate freeze.

Expect a new tax bracket for the .01%ers. In his first budget Trudeau whacked people making over $230,000 with a new bracket and a higher overall tax take. There’s another one coming, which will make the deplorables happy but be a further incentive for top execs to find a more hospitable country. If you can, divert compensation into a registered pension plan, ensure you;re income-splitting with a less-taxed partner or kids through a spousal RRSP or loan, and get a seriously hardass accountant.

Finally, it’s worth remembering that income tax first arrived in Canada during the pandemic of 1918. It was introduced as a temporary measure to finance WW1 and, of course, became permanent. Blog dog Don was sorting through family papers and came across his grandfather’s ’18 return. “I think it was the first year you had to make a return,” he says. “I’ve attached a copy of the tax categories which I thought you’d find interesting.”

His gross income on a 77 acre farm near Chatham, Ontario was $2916.90. Just over half that income was from Tobacco.  It appears no income tax was due as he was married and the net income was under $2000.00. He paid property taxes of $66.96 on a $3200.00 assessment, and $2.00 a year to the Collector of Inland Revenue for a license to grow tobacco. I always read your blog, but never the comments.

And here’s the tax hit from 102 years ago, when the average income was south of $3,000. There were no Trudeaus yet.

Click to enlarge.

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   By Guest Blogger Ryan Lewenza

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Last week we got the summer fiscal update from the Federal Libs and it wasn’t pretty. This year our Federal deficit is projected to hit a staggering $343 billion, more than 5x the previous record of $56 billion set back in 2010. Let that sink in for a second.

As a consequence of our accumulated deficits, T2’s increased spending and deficits over the last 5 years, and the economic fallout from this terrible global pandemic, our total Federal debt will surpass $1 trillion dollars by year-end (it was $500 billion 10 years ago!).

Now I’m all for Keynesian economics, which posits that governments should increase government spending during economic downturns to stimulate economic activity and growth, but I want to know there’s a credit limit on the government credit card (AKA our tax dollars).

It gets even worse, unfortunately. Garth asked me recently on a weekly client conference call what I was looking for in this fiscal update and I responded “a plan and rough timeline for returning to balanced budgets over the medium to long-term.” Not only did our Finance Minister not provide this, he even backed away from the governments “fiscal anchor”, which was what the Liberal government previously provided as a target to drive the debt-to-GDP ratio to 30% over the long-term.

When asked about this shift away from the “fiscal anchor” and the record spending and deficits, our Finance Minister responded with his token and regurgitative answer, “We’re investing in people and jobs”. Unfortunately, this non-answer fails to address the previous $55 billion of deficits under T2 and does nothing to address many Canadians concerns about our deteriorating financial position. That’s the key thing: We should be running balanced budgets (or minimal deficits) during good times, so that we can be prepared to respond during these downturns.

When completing the research for this week’s blog post and updating my charts to reflect these new breathtaking numbers, an odd/sad thing occurred in my charts. Here is a chart of our yearly government budget balances before this year’s projected record deficit.

Canada’s Budget Balances Before COVID

Source: Bloomberg, Turner Investments

And here is that same chart when we include this year’s $343 billion deficit. Note that: 1) this year’s deficit is 5x larger than our previous record deficit in 2010 following the financial crisis; and 2) the dramatic change in scaling. Basically this number is so large that it “squeezes” the old historical data, making the previous deficits/surplus look like a rounding error. When seeing this it hit me like a ton of bricks, realizing just how meaningful this increased spending and deficits are.

Canada’s Budget Balances After COVID (Note the scaling)

Source: Bloomberg, Turner Investments

Now it wasn’t always this way. Back in the 1990s we got into some trouble with our then out of control deficits, until my Windsor pal, Paul Martin (I grew up (on the other side of the tracks) just blocks away from Paul Martin Sr’s family home). The Honourable Paul Martin saw the writing on the wall and slashed government spending, helping to balance our budgets and return us to a more sustainable fiscal path.

Garth’s pal, the Honourable Steven Harper, then maintained this approach by having balanced budgets from 2006 till 2009, when the financial crisis hit and the Canadian government agreed to a pledge by all G20 countries to spend 2% of GDP to help combat the effects of the financial crisis. From 2010 to 2014 Canada experienced large deficits before basically getting back to even in 2015.

But all of this changed when T2 took over and from a fiscal perspective, it’s been nothing short of a disaster. To be clear, I’m no T2 hater and I believe he’s a done a few good things (e.g., NAFTA renegotiations, gender equality, legalization of marijuana). However, on the fiscal file I think it’s fair to say he’s been a complete dud. But based on my analysis, maybe we shouldn’t be surprised by this given his family lineage and history. Let me explain.

The Trudeau’s (Pierre from 1968 to 1984 and Justin more recently) are very comfortable with increasing government spending to support their progressive initiatives and running large deficits. As proof of this I ran some numbers with pretty telling results.

I calculated the cumulative total of our Federal annual deficits since 1968 (when T1 became PM), which amounts to $1 trillion or the amount of our total Federal debt by end of year. I then calculated the total deficits realized under Pierre ($151 billion) and Justin ($397 blillion). So of our total $1 trillion in Federal debt that exists today, the Trudeau family has accounted for $548 billion or 55% of our total outstanding Canadian government debt. That’s a lot of red ink that has been amassed under one family.

Cumulative Federal Deficits Since 1968

Source: Bloomberg, Turner Investments

What’s the end game from all this spending and deficits?

I see only three potential outcomes. First, the government spending helps usher in a recovery and higher economic growth over the long-run making it easier to pay back the debt and getting the situation under control (laughable). Second, the current (or future) government finally see’s the errors of its ways and slashes spending similar to that seen under Paul Martin and put our country on a path to a balanced budget (highly unlikely). Finally, the last and most likely scenario to address our record deficits are through sizable increases in taxes. If I was a betting man I would bet on the higher taxes option, given this government’s previous track record.

So there you have it. Red ink as far as the eye can see, with no plan to return to our old ways of fiscal prudence and balanced budgets. Tack on the worst global pandemic in a century, escalating racial tensions in the US and Kanye West recently announcing his run for the US presidential election, 2020 is shaping up to be the worst year in as long as I can remember.

Have a great weekend all!

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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Welcome to the Friday edition of the not-a-virus, real estate, investing, macroeconomics, canines, babes (can I say that?) & balanced portfolio blog. Even if you’re not quite sure about your pronouns, we’re here to help. And the price is right.  Worth every damn cent.

First a follow on yesterday’s head-scratcher about how real estate values and sales can be rising when unemployment’s rampant, we’re in a recession and Covid lurks. Multiple offers are the norm again. Sadly. There’s nothing more irritating to buyers than blind auctions in which the seller’s agent holds all the cards. The practice has exactly the result intended – price inflation. And this is a bizarre outcome when a global pandemic continues to sweep through society. But it’s here. 2017 again. FOMO all over the place, from Halifax to Leslieville to Maple Ridge.

Pent-up demand is strong after everyone spent April in sweats on the couch watching Space Force. Inventories are low since sellers didn’t want germy showings and spit everywhere. But the real reason is the eternal one – cheap money. As interest rates drop, real estate lust rises, since Canadians long ago swallowed their fear of debt. This week the Bank of Canada boss, Tiffer, said rates will stay low for three years. And he specifically mentioned ‘mortgages’ in this fateful sentence. “If you’ve got a mortgage, or you’re considering to make a major purchase,” he said (unwisely), “you can be confident that interest rates will be low for a long time.”

CIBC is the latest to bite. A five-year, fixed-rate loan is now available for less than 2.4%. And there are even better deals from smaller outfits (but be careful). Bank mortgage departments are humming again after a year of misery and lenders are keen for new business, since close to a million clients aren’t making monthly payments – and won’t until the end of 2020.

Now people in the biz – mortgage brokers as well as realtors – are speculating Tiff Macklem is opening the floodgates to speculation and unbridled investor friskiness. This seems to fly in the face of recent attempts by CMHC to tighten up credit, and that agency’s warning house prices are unsustainable over the next year. The big question is what happens when (a) people have to start paying their mortgages again in a few months, (b) it’s evident economic recovery will take years, not months, (c) the jobless rate stays in double digits until Christmas and (d) the CERB cash river dries up. “Then we will see the true health of household balance sheets,” says an economist at RBC.

The inevitable, reasonable, rational, no-realtor-crap conclusion: this is a temporary phenom. Buy now with a little down payment and be prepared for negative equity next winter. That’ll be fun, especially if we get a second wave.

Now, on the issue of mortgage deferrals we told you that every week another few thousand people tell their lenders they can’t pay. Many can, of course. They just don’t want to. They think the money can be ‘saved’ for something better. And they believe this can be done with no consequence.

Better rethink that, says blog dog Darrell, after looking at his recent bank report.

“Proof on my personal account today that Trans Union is flagging and tracking accounts that have deferred payments,” he reports. “This is a Trans Union service offered to RBC clients. The “new” statement went up within the last few days.” And you can see – a deferred payment is now clearly part of the credit bureau summary.

So what? Time will tell how the banks choose to use information that a client has welched on his/her payments. Obviously a person who cannot pay because of a job loss is less creditworthy and can expect to have their file flagged when it comes time to renew, refinance or look for a new mortgage. The advice stands. Never, ever, ever defer unless the option is eating bugs.

Finally, about that CERB. The feds are throwing $82 billion into the virus small-biz wage subsidy program, basically as an incentive to wean people off the $55 billion money-for-nothing scheme that has been giving two grand a month to more than eight million little beavers. This, in turn, is all part of the $343 billion in deficit spending for 2020 that will make paying taxes so much fun for the next three decades.

The CERB was a lifeline for people whose income was sucked away by Covid. But it has engendered many problems due to the lack of supervision and qualification. More than $11 billion has gone to children who never worked a regular job and live with their parents, many of whom are also collecting. Many folks in BC think giving money to people just because they have a SIN and a bank account has resulted in record opioid use and deaths in that province.  And small businesses are definitely feeling a CERB backlash.

A survey of business owners just done by an industry group had a shocking result: 62% of workers said they’d rather stay on the pogey than come back to the job. Almost half said they don’t want to work (and would rather stay on the CERB) because they fear for their health. Says the Canadian Federation of Independent Business:

“It is clear that CERB has created a disincentive to return to work for some staff, especially in industries like hospitality and personal services. CERB was created as emergency support for workers who had lost their job due to the pandemic, not to fund a summer break. This is why it is critical that all parties support the government’s proposed change to end CERB benefits when an employer asks a worker to return to work.”

T2 extended the benefit, as you know, out to September. Maybe it will be forever. Work is such an outdated concept. Let’s just print money.

About the picture: No Corgis were sacrificed in the making of this blog post.

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It’s, like, eleven feet wide. Midtown Toronto. No parking. Asked $1.5 million. On the market one day. Multiple offers, sold for $1.8 million. With land transfer tax and closing costs, add another $90,000. So, yes, almost $2 million.

While this transaction was happening, Toronto mega-mayor John Tory was moaning the city faces a $2 billion Covid hit. The subway is 80% less travelled than before. Ten thousand civic workers laid off. Property taxes, he says, may have to rise 60% for the place to survive.

The downtown core is hollowed out. You can rise a bicycle along the Gardiner Expressway without being squashed instantly. GTA unemployment was 5% in December. In May it was 11.5%. Last month that exploded to 13.6%.

Whoa. What’s happening? In June house sales in Toronto rose 83% above those in May (similar story in Montreal – 75% – as well as in Vancouver, London, Ottawa and Fraser Valley). Prices have popped, too. The gain in the GTA was 12% year/year.

But wait. Were in the middle of a pandemic. People living in 416 can’t even get their hair cut. Masks everywhere. Empty streetcars. No schools or child care. Desolate downtown. No immigration. It’s a recession. With an absolutely withering rate of joblessness. How can we have a real estate/housing boom and wall-to-wall, 2016-style FOMO when the economic conditions are such? Are people just crazy? Is this bug now causing mental defects?

Well, this blog told you it was coming. Pent-up demand (as there was no spring market) has slammed right into low inventory (because owners don’t want to list in a pandemic) combined with historic low rates (since the economy is staggering). The result: panic buying. And oh, so much risk.

The federal housing agency, CMHC, is convinced this won’t last. Prices, it says, could fall by 18% over the next year. On a $2 million property, that’s $360,000. Ouch.  TD Bank economists are worried, too: “”In our view, as long as unemployment is elevated, population growth slows, and CMHC measures remain in place, growth in home sales and prices is likely to be subdued after this initial burst.” And it’s interesting to hear the view of a career mortgage broker, Rob McLister:

We’re in one of the most punishing recessions ever. Stock prices and home prices are not supposed to approach record highs amid record unemployment, say the textbooks. But while history is a guide, it’s also led many astray. Markets like the GTA are breaking records just two months after the biggest month-over-month selloff ever in April. When markets don’t do what you think they’re going to do, you’re either really early or really wrong. What normally happens with double-digit unemployment… What the CMHC says is going to happen to home prices… What cursory logic dictates should happen in a recession… is not happening. Buyers are realizing they’re not the only ones looking to buy the dip. If prices surge when they’re “not supposed to,” that’s when buyers on the sidelines throw in the towel and pay over asking price for fear of chasing the market higher.

So if you need to buy a house, especially in a desirable real estate market, shut out the noise, take a long-term view and buy quality property that you can afford. Timing the market is risky at the best of times, let alone times of thin supply and unpredictable market psychology.

Good advice. The same’s been said here for a long time. Buy when you need real estate. Purchase what you can afford. Don’t gut your finances or imperil your family in doing so. And today, above all, realize you’re gambling. Realtors will tell you to rush in. Economists are aghast. Both cannot be correct.

So what can go wrong?

Lots, as it turns out.

Government largesse, now underpinning the Canadian economy, will end. It has to. Toronto (and other cities) cannot run massive deficits. Hence the mayor’s warning about that incredible tax hike. And sooner or later Ottawa must pay the bills, which could bring higher income taxes or a hike in HST, as well as a reduction in payrolls. Meanwhile, banks – with more than $180 billion in mortgages not currently being serviced – are expected to tighter credit as they seek to rebuild profitability and trim risk. Hospitality, travel and tourism, key drivers of a metropolitan economies, aren’t coming back for years. And immigration has been halted. That could last a long time until Covid’s gone from regions around the world where it now flourishes.

The Bank of Canada says a normal life won’t come back for at least two years. Unemployment of 13% is unlikely to drop again to 5% by that time. Downtown hotels are a 1-5% occupancy levels. Pearson airport traffic has fallen 97%. Millions are still living on the CERB, and that mortgage deferral cliff looms ahead.

Conclusion: same as before. If you need it, can afford it and can swallow the risk, go ahead. Pay too much. Just don’t call this an investment.

Finally, a word from Rod, in Victoria. How much have we distorted the real economy? This much…

Just wanted to add my two cents to the ongoing debate about the effects of the CERB program. I own a painting company in Victoria, BC. At this time of year we would be well into the heart of our schedule with up to 30 employees. Painting is a seasonal trade with more than half the work being completed in the late-Spring and Summer period. One problem in 2020 – no one to hire. After months of advertising in multiple formats, putting the word out, and literally approaching people on the street, we have only hired 2 inexperienced people so far this summer; down from the much needed 15 or so. Quite a dilemma; more work than any time in the past 20 years, but no one to do it. Summer students are non-existent, and most experienced people have disappeared. Where to? A rejuvenated underground economy where $2000 from the Gov’t of Canada acts as the crux to cash jobs. One of our paint suppliers pointed to a major drop in contractor paint purchases and a tremendous increase in homeowner paint purchases. But who’s doing their work? Homeowners generally dont buy 5-gallon buckets of paint. Anecdotally, we hear that many other tradesmen (builders, tilers, carpenters, etc.) are doing the same. What started as our most promising year yet will likely see a 33% drop in income, not because of COVID shutdowns, but because of a dearth of employees. We turn down a dozen jobs per week and are trying to maintain our existing clientele. Did not see this coming or know where it ends up…

Thanks for your advice over the years. It has been indispensable.

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When the virus came, the Vix spiked and markets tanked, fear seized Jason. He’d given me a couple of hundred grand in an RRSP to invest for his retirement in a decade. “But wait,” he said. “There’s no way I’m investing now.”

When the spring arrived, volatility had crumbled and markets were higher by a third. Things were starting to open again and jobs trickling back. “All of this is just because of fake stimulus money from the government,” Jason told me. “It won’t last. Keep me in cash.” So we waited.

When the summer came, volatility had shrunk and markets had gained over 40%. Values were near record levels again as investors looked to a robust 2021. Unemployment was down. A vaccine was closer.

“But the virus has come back,” Jason said this week. “All over the US. Things went up too fast. They could crash again.” So we still wait. When the cost of growth assets is 50% higher than a few months ago, he’ll probably ask me to invest his money – buying far less with the same bucks.

Jason’s score: Emotion, 1. Brain, 0.

Here’s the latest: The S&P 500 (the Holy Grail) opened Wednesday 46% higher than it closed on March 23rd. And it’s still rising. The one-year return is 8% – which means if you lost consciousness last July and just awoke, you’d be happy. The Dow is also up 46% and Bay Street has gained 42%. Both are flat year/year. Balanced portfolios are up from last summer. Zero virus impact, in other words.

This week the Bank of Canada’s new boss, Tiff, reaffirmed interest rates are going nowhere and the central bank will continue to snorfle up government bonds at the rate of $5 billion a week (or more). Ditto for the Fed in the US, which indicated Tuesday it would do whatever it takes to support markets and fuel economic recovery. In other words, the guys with all the money have made it clear they have investors’ backs. Thinking financial markets could fall 40% with this assurance is, well, nuts. Don’t fight the Fed. You’ll lose.

Chasing the money: liquidity surges, assets follow

And did you hear the vaccine news?

Airlines, cruise lines and hotels all saw their shares jump along with those of Moderna. That company’s new drug seems to be working in preventing the virus from infecting its test subjects. It’s early going, there are some side effects, and producing hundreds of millions of doses will take a long time. But markets are forward-looking, and there was never much doubt therapies, if not cures and vaccines, would emerge in time.

Speaking of time, The Tiffer says it’ll take two years for Canada to heal. A 15% hole in the economy in 2020 will be replaced with significant growth next year and into 2022. During that time, government deficits will be ugly, the jobless rate stay elevated, small businesses will be whacked, real estate will grow swampy, tax pressure will grow, money will stay cheap and, yes, the sun will come out.

None of this should surprise. The crisis of 2020 was not the same as that in 2008. No banks are keeling over. Credit is flowing like the mighty Fraser. Governments and CBs immediately reacted. And pandemics, by their nature, pass. They do not bring structural change – it’s like a giant windstorm that tears off the vulnerable, over-extended branches. Not an earthquake ripping out roots. New shoots emerge. The tree lives and thrives.

Here is the message this pathetic blog carried four months ago. On the day markets bottomed, the following was published here:

Governments and bankers are going nuts trying to mitigate this. They have only started. There is absolutely no fiscal or monetary discipline at play here. Society will be awash in liquidity, complete with unprecedented corporate bailouts and social support payments. Remember that the US president is up for election and our guy leads a minority government. Expect no brakes.

Second, pent-up demand will be stunning…

Third, pandemics pass. So do oil wars. You know this. We all know it.

Finally, we are nearing capitulation. Just read the comments on this blog over the last few days. The number of people forecasting millions of bodies and years of 1930s-style depression is stunning. The bottom comes when most folks shed hope. It seems we’re not far off.

And we weren’t. But it has taken 120 days for that to start sinking in. During this time fear trumped reason. The media had a cow. Many people made bad choices. My client, Jason, was one. The Coronavirus Broadcasting Corporation and all the esteemed epidemiologists and infectious disease control experts in the steerage section got to him. He melted down. Jason forgot that you reach goals through buying low and selling high. Ignoring headlines. Investing when you have money. Focusing on the long game. Not being a market timer. Not thinking the stock market is the only financial asset.

Doubtless more bumps lie ahead. The virus. Trump and the election. Lousy corporate profits. Public debts. Civil unrest. China. There’s always something to fret about, especially in an age when everybody looks like a bandit and you have to social distance to buy hooch. But bad times beget better days.

So just man up. (Can I still say that?)

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Chris worries a lot. These days it’s about the guys running this joint.

“My hubby and I are in our late-50s,” she tells me.  “We’ve worked hard, bought a house for half of what TNL@TB told us we could afford, went without fancy cars and vacations, so that we could make double payments to pay off the mortgage fast. And despite setbacks over the last few years, we’ve managed to set aside money for a rainy day and for a reasonable retirement.”

Okay, all good. Frugal. Industrious. Prudent. Ace savers and planners. So what’s to sweat over?

Our biggest nightmare is that we save, save, save, only to have our retirement turn from reasonable to eating dogfood, all because our government is not being as fiscally responsible as we have been. Inflation is bad enough, but with our current national debt projecting to be over a trillion this year, we worry about whether hyperinflation is a very real possibility.

Would you be kind enough to cover hyperinflation in one of your upcoming blogs? I’ve been reading about Germany in the 20’s to try to understand this topic better but I know you could help with our understanding much more than books can. Is there fair warning or ‘signs’ before Hyperinflation hits? How long does this usually take (days, weeks, or months?) Would you recommend a different investment strategy (acquiring hard assets maybe?) if you suspected that hyperinflation was coming?

Thanks very much Garth. Your knowledge has helped us immeasurably over the years and is very much appreciated!

It’s true we’ve never had debt like this before, and certainly without a war to fight. Ottawa will spend about $350 billion more this year than it collects. That will be added to the debt, which will indeed climb to over $1 trillion. That equals 50% of the economy, but when provincial red ink is added the public debt climbs to 90% of total GDP. Globally, we’re already in the top 20 of wretchedly indebted lands. And it will take years now to climb out of this hole. If ever.

Yabbut, so what?, the voters cry. A poll this week found a majority think Mr. Socks should keep the spigot open rather than focus on getting the books in better shape. We like our CERB. And the NDP is making a lot of noise over there on the left flank calling for a wealth tax to Hoover the 1%ers in order to pay for the Covid billions, plus pushing for a universal income. CERB forever.

In any case, Chris, three things seem certain: there will be years and years of more deficits ahead. The beast is out. Second, taxes will have to increase at all levels, from property levies to a new bracket for income, to user fees and maybe more HST. Every level of government has been whacked. Third, public services will shrink – from garbage collection to the size of the armed forces. Along the way interest rates will stay depressed and savers penalized. Unemployment will be elevated for several years until pre-virus levers are hit. The economy will take a long time to restore, and a 97% year/year decline in passenger traffic at the country’s biggest airport clearly indicates such. (Pearson this week punted a third of its staff.)

Does this sound like a recipe for inflation? Actually, no. We’ll see under-utilization in the economy for a while – idled workers, lost businesses, reduced output and profits, downward pressure on real estate and lower consumer spending. In fact, Chris, all of this massive government spending has been in place to prevent deflation. Maybe even a viral depression. This explains 0% rates, asset purchases by CBs and overwhelming government spending as politicians scrabble back from the precipice.

But, I hear you mutter, what about those hundreds of billions just created? Don’t they water down the currency, make dollars worth less and ignite a wage-price spiral? Won’t inflation spike housing, for example, igniting FOMO as real estate gets more expensive every month and buyers panic?

Anything’s possible and, in fact, a bit of this is happening in some areas, to some commodities. Like Toronto housing, where pent-up demand is boosting prices. That’s not because of inflation expectations or devalued cash, however, but by demand exceeding supply and money costing next to nothing. Hyperinflation can start like this, but it would have to be on a much broader, wider scale – unlikely in Canada where people are already pickled in debt. So an outbreak of hyperinflation here would have to come through excessive money printing, drastically increasing the supply of currency.

That would crash the dollar, send the price of imports surging and lead to insatiable wage demands. Hyperinflation typically happens when prices jump by about 50% a month for a period of time – which is a far cry from the Bank of Canada’s current target of 2% per year. In fact, the latest monthly report came in at -0.4% which is, yes, disinflation. And look at the loonie. It’s worth about the same as it was five years ago, despite our national debt doubling in that period of time. Mr. Market, in other words, does not see the hyper hounds unleashed.

Inflation will not eat your wealth, Chris. Deflation, in fact, is a worse threat. Far scarier. And closer.

You are right, however, to look to Parliament Hill and despair – over the PM’s mom, brother, wife and the judgement of an entire family.

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Roughly 2,000 people a week, every week, ask for their mortgage payments to be deferred. Yes, this is atop the 750,000 (or so) households who have already told their lenders they cannot/will not make the monthly. The banks continue to accept deferral applications, and will do so until September. As a certain pathetic blog reported last week, there may be a 4-month extension in the works that would boost the total deferral period to ten months. When it all ends, the market will be impacted.

Yikes. Mortgage debt now totals $1.68 trillion, which has more zeros than a Drake fan club. Despite the fact real estate sales have tanked since Covid came to town, this is about eleven billion higher than last year. In fact mortgage debt is rising by close to a billion a month now – because of deferrals.

Not only are hundreds of thousands of homeowners not paying down their principals each month through blended payments, they’re actually hiking their long-term debt as accumulated interest is added to the principal owing. Repeat after me: this is a really bad idea. Mortgage rates may never be this low again in your lifetime (these are pandemic levels, after all), so more amortized debt means the cost of repayment will inevitably shoot higher.

Lenders are being starved of this cash flow, but bankers play the long game. By increasing the mountain of outstanding mortgage debt they stand to make more down the road. Plus, by delaying repayment for a lot of it until rates start to inflate two or three years from now, spreads increase as does profitability.

As stated here with numbing, nauseating regularity, do not defer unless salivating wolves are at the door. You’re doing yourself no favour. And don’t be naïve. There could be consequences to deferring mortgage, loan or a credit card payments.

Here’s Philip to share his experience. “I own three profitable companies and when things hit the fan in March, two were mandated to suspend operations,” he tells me. “Out of an abundance of caution I contacted every bank with whom I have credit instruments and requested payment deferrals. I never used them. All accounts are paid and up to date. No payment has ever been missed, but when I checked my credit report, CIBC had reported a LOC and Visa account as DEFFERED.”

When I contacted customer service, they assured me this would not affect my credit score. I let the lovely call centre agent know that CIBC could not guarantee that, as CIBC does not write the FICO algorithm or control how Credit Scores are calculated. I also suggested that how scores are calculated could (will) change in the future. My call was escalated three times until finally I was informed that even though I had made all payments, payment deferral reporting to Credit Bureaus is not dependant on whether payments were made, but only dependant on whether there was a request for a deferral. I thought your blog dogs should know.”

By the way, here’s a screenshot of Phil’s credit card payment summary with the maroon penguins bank. Those little black arrows are not cool.

It’s a myth that deferrals will not be recorded internally by all lenders, nor find their way into credit reports that are written by algos based on bank uploads. Will this prevent you from having your mortgage renewed in 2022? Probably not. But you might end up paying a higher rate. Or being asked to provide proof of employment and income. Or being turned down for a refi or a HELOC. It only makes sense that people withholding payments will be flagged as less creditworthy. And end up owning more.

$     $     $

Do you use cash?

Probably not. A survey this week shows Canadians cut their use of paper (plastic) money in favour of card payment by a whopping 42%, thanks to Covid. That’s double the rate in the States, and reflects the fact a lot of retailers (like Longos and Best Buy) just refused to accept real currency (even though that was illegal).

But, but, but. The Bank of Canada also reports that besides bumwad people were hoarding fifty-buck bills back in March when the virus hit. Now there are untold numbers of homes with Ziploc baggies of fifties in the freezer and taped inside the toilet tank.

Meanwhile there are more dollars floating around than there used to be. Mr.Trudeau and his pal Bill will spend $343 billion new ones by the end of the year, money created by the Bank of Canada and emailed over to civil servants who then direct-deposit it into the accounts of CERB recipients and others. Some of it will be recouped through bond sales. Some, well, just faerie dust.

All this got Andrew (in Van) wondering what’s going on when he read of a new job posting at the central bank.  “Looks like the move to a cashless society is in the works,” he says. Sure does. The gig seems innocuous – ‘Research and Development Technologist, CBDC” – but it comes with a “Secret’ security classification and is designed to appeal to crypto, digital and privacy experts.

Read this:

The Project
The Bank of Canada is embarking on a program of major social significance to design a contingent system for a central bank digital currency (CBDC), which can be thought of as a banknote, but in digital form. This project will require us to break new ground. It will take into consideration a wide variety of factors, including policy considerations, diverse stakeholder needs, difficult technical challenges and the development of a technical architecture to realize a CBDC pilot system.

The Challenges
We aim to design a CBDC with cash-like properties in digital form:
* Private: While not aiming for cash-like anonymity, CBDC should be highly private yet meet the obligation to be compliant with anti-money laundering and other regulations.
* Universally accessible: Regardless of their circumstances, CBDC should be usable by all Canadians, even by those without a bank account or access to a cellular phone, in remote communities not well served by cellular networks, and/or those with sensory, motor and cognitive impairments.
* Resilient: CBDC should continue to work even during electrical power and network outages.
* Secure: CBDC must have the highest levels of security so Canadians can use it with confidence, as they do our banknotes.
* We will design an architecture into which these properties are coherently embedded, with a potentially multi-decade evolving lifespan, supporting a business model designed to achieve CBDC policy goals.

Yep, go throw that baggie of bills in the microwave. Cash will be trash when that Bank of Canada chip is soon implanted in your forehead.

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So Trump wore a mask. True, he was touring a hospital. But it still happened. Could be a turning point, and a wise political move. Mr. Market will like it.

The virus is romping in the Sunbelt, ripping through red states the prez needs to be re-elected. (More on that from an eyewitness blog dog below.) The strategy of ignoring Covid and focusing on reopening was incorrect, evidently. Daily cases have been rising rapidly (over 15,000 yesterday in Florida) and deaths have started to increase. By turning a blind eye, Trump looks callous when folks are fearful. By donning a mask, he appears concerned. Strong leaders can also be empathetic. A lesson worth learning.

Well, this allows financial assets to continue their ascent. The pandemic will pass. Life will go on. Companies will make money and the public health emergency will be contained if Americans do what we did. Trump is signalling that may happen.

Here’s where we are: from the terrified lows of late March, the S&P 500 has rocketed higher by 45%. Astonishing. The one-year gain is currently 8% – which means if you went to sleep last summer and woke up now, rubbing your chin and saying ‘Huh? What virus?,’ you’d be pleasantly surprised at your portfolio growth. The index sits just a few percentage points below the all-time peak achieved last winter, pre-crisis.

What now?

It gets better, that’s what. The next corporate earnings season kicks off this week as about three dozen big American companies report. The numbers will be awful. Down 40% or so from year-ago levels. That will spike the earnings-per-share (EPS) to an elevated level, over 25, suggesting stocks are overvalued. But Mr. Market will love it.

That’s because the bottom will be in. Q2, 2020, will go down in history as the Covid quarter, that period of time when Depression-era GDP shrinkage and jobless inflation took place in the wake of a 30% stock market plunge. But it’s over. Because markets are forward-looking investors will be intent on what the second half of the year and 2021 hold in store. Expected earnings growth will bring that EPS right back to historic norms (around 19), likely allowing even higher valuations.

   Despite what’s happening in Florida, Arizona, parts of California and Texas, the US economy has rebounded, based on consumer spending. That, after all, accounts for about 70% of all American economic activity. Home sales have jumped dramatically, commodity prices have restored (oil has gone from negative $37 to plus $40) and this pace will continue, even if Covid slams into the southern states. Even if Trump tumbles in November.

     Meanwhile the Nasdaq is at record levels, Bay Street is up 40% from March and Canadian bank stocks – harbingers of the wider economy – have jumped 30%. Our nation has suffered over 8,000 virus-related deaths, but stands in excellent shape now for a broad and meaningful reopening of all sectors of society as the year grinds on. Just keep washing your hands and shunning sneezy people.

Now, let’s go to Texas, and an update from Chris. This is interesting:

I live in Houston and read your blog more often than I probably should.  Nonetheless, I’m always back for more every couple of days : ) I’ve noticed over the last couple of months that many people have been using the small percentage of the population that has been affected by COVID 19 to question whether social distancing and the related economic consequences are really worthwhile. When I run the numbers for Harris County (the county containing Houston) and compare them to Canada the following is what I see.

Approximately 0.8% of the Harris County population has tested positive for COVID 19 and approximately 0.5% of the population is still currently positive (not recovered yet). In Canada, approximately 0.3% of the population have tested positive and 0.1% are currently positive (not recovered yet).

At first blush, all of these numbers are very small.  But if you block out the politicians and actually listen to the people running the hospitals, you realize that the slightly less small numbers in Houston are big enough to have people in the know worried that all available surge capacity ICU beds in Houston will be full in the next 2 to 3 weeks if nothing changes….. and that’s not considering their bigger problem, which is whether or not they can find anyone to staff the extra beds.

At the same time, in Canada, it sounds like a number of hospitals are underutilized…… not much happening because there aren’t that many COVID 19 cases (relatively speaking), and people who don’t have COVID are avoiding the hospital unless they absolutely need to be there.

Two vastly different situations separated by a few tenths of a percent.

Obviously, this is a very simplistic and flawed comparison… the testing rate in Houston vs Canada has been ignored for example, as has the number of ICU beds per 100,000 and demographic data.  All of these, and many other factors could significantly affect the comparison, but at a high level, it seems reasonable to conclude that only a very small portion of a population needs to be COVID 19 positive before hospitals are in danger of being overrun.

Why bother you with this?

Firstly, I’ve had a front row seat to the sideshow down here and have watched a governor squander an opportunity to reopen the economy with proper safeguards in place due to political pressure, while many individual citizens seem to be unable to look past their own constitutional rights to make an effort for the common good (and their own collective economic wellbeing).  Sadly, “United we stand” appears to be an antiquated sentiment.

Secondly, I’m worried that a lot of people look at headlines from Texas and Florida and get the impression from the media that the portion of the COVID 19 positive population in those places is significantly larger than that of the place where they live.  The reality is that they’re only a few tenths of a percentage point apart, and this fine line is something that is worth keeping in mind.

Finally, I have the feeling that the current lack of catastrophe in Canada will start to turn sentiment against social distancing, mask wearing, etc. as things drag on, and I’m hearing anecdotal evidence that that may already have started.  The economy definitely needs to reopen, hopefully sooner than later, but the Texas example has shown that if the proper safeguards aren’t in place as the economy reopens, and more importantly, if citizens don’t actively support these safeguards, you can pretty quickly end up in a place that is much worse than where you started.  Hopefully Canadians can learn from mistakes made South of the border and keep the puck on the right side of the blue line.

My apologies if this is way too far off Greater Fool topic to be of interest.

Assuming you made it this far without falling asleep, I just wanted to say thanks for sticking with the blog, despite your frustrations.  Hopefully if it ever gets to the point where you are actually going to shut it down, you might consider just shutting down the comments and enjoy writing the blog?  Not as interactive as the current model, but probably better for the blood pressure… and you would still be reaching people.

 

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