Category: Accounting tips

  By Guest Blogger Doug Rowat

.

Every once in a while, usually accidentally, Donald Trump makes perfect sense.

Trump so regularly says and does things that are callous and self-serving that it’s easy to reflexively dismiss him, but when he tweeted in reference to the coronavirus crisis that “we cannot let the cure be worse than the problem itself”, I was, after some consideration, in full agreement.

Oddly, his tweet reminded me of Brad Pitt’s casino speech from The Big Short. Pitt, who plays a character loosely based on a former Wall Street trader who bet big against the US housing market during the financial crisis, reprimands two of his young protégés who are enthusiastically cheering for the downfall of the US economy. Says Pitt’s character: “If we’re right, people lose jobs, people lose homes, people lose retirement savings, people lose pensions…. Here’s a number: for every 1% that unemployment goes up, 40,000 people die.”

Now, I don’t actually know if those numbers are accurate, but they certainly sound reasonable in light of the poverty, despair, homelessness and loss of health care insurance that accompanies every severe economic downturn. However, the point is this: economic hardship costs lives also.

Has the US reopened its economy in a prudent and systematic manner? Of course not. Has the President contributed to the US’s divisiveness and the spike in new cases? Of course he has. But at the same time, can the US economy remain in lock-down indefinitely? Absolutely not.

As we become fixated on the rise in new cases and the number of deaths, consider the troubling numbers on the other side of the ledger. Bankruptcies are skyrocketing, and will soon rival—and likely surpass—the levels seen during the 2008–09 financial crisis. The list of prominent corporations that have filed for Chapter 11 protection grows every week. Thus far, it’s become a who’s who of the oil & gas and consumer discretionary sectors (recently Chesapeake Energy and Neiman Marcus, for example), but these sectors are likely just the canaries in the coal mine.

Bankruptcies will inevitably spread widely across all industries.

And while we cheer the rise of technology stocks and the nearly full recovery of the S&P 500 in recent months, consider the flip side: the still-massive decline of the S&P 500 Banking Index. And this is no minor index. It contains all of the largest financial institutions in the US—JP Morgan, Wells Fargo, Bank of America, US Bancorp and Citigroup to name but a few.

We also know that these banks didn’t fare particularly well in the US Federal Reserve’s recent stress tests, which resulted in the Fed suspending dividends and share buybacks for the entire group. The stress tests were followed immediately by a Wells Fargo dividend cut with almost certainly more to come (the options market suggests that the top seven banks will cut their dividends by at least 30% in the coming year).

And the failure of the US banking sector to participate in any meaningful way in the overall recovery of the US equity market should be concerning to all of us. If you need the perfect example of a ‘red flag’, this might be it:

Y-t-d performance disparity between the S&P 500 Banking Index (white line) and the Nasdaq (yellow) and S&P 500 (orange)

Source: Bloomberg

A recent article in The Atlantic nicely summarizes the dangers faced by the US banking sector as well as the dangers of focusing solely on our health at the expense of the economy:

…health risks and economic risks must be considered together. In calculating the risks of reopening the economy, we must understand the true costs of remaining closed. At some point, they will become more than the country can bear.

The financial sector isn’t like other sectors. If it fails, fundamental aspects of modern life could fail with it. We could lose the ability to get loans to buy a house or car, or to pay for college. Without reliable credit, many Americans might struggle to pay for their daily needs. This is why, in 2008, then–Treasury Secretary Henry Paulson went so far as to get down on one knee to beg Nancy Pelosi for her help sparing the system. He understood the alternative.

So, as much as some might worship Dr. Fauci or brand those who reopen their businesses (or solicit these businesses) as fools, locking ourselves in our basements for the next year is also not a solution. A middle ground is required.

I believe that the US will eventually achieve a successful balance of a reopened economy and a controlled infection rate—it is, after all, the wealthiest and most powerful nation in the world. But achieving this balance is by no means a certainty.

The global economy is also fragile and probably can’t handle another major crisis. What a second crisis might look like is, of course, unknown. It could be something familiar and foreseeable, such as a further escalation of the US’s trade war with China or a second wave of coronavirus. But it might also come from out of left field. Deutsche Bank, incredibly, has actually cited volcanic eruptions and solar flares as cause for concern. (True story. You can read about it here.)

But, again, the point is this: there are ample and unforeseeable risks facing the US and world economies at the moment. And risks, by the way, are almost always unforeseeable. Was a crippling global pandemic on your radar back in January? While we can’t know the extent of America’s insistence on civil liberties over basic common sense, predict future trade relations with China or anticipate acts of God, what we can do is control our own portfolios.

What this means is having a mix of many asset classes, across many geographies and across many sectors. Balance and diversification. Defense and offense. Safety and growth.

If the world works out as we hope, you’ll still benefit greatly by owning a balanced portfolio. However, if solar flares shoot from Trump’s eyes and volcanos erupt behind him melting people’s faces like Major Toht from Raiders of the Lost Ark and cause markets to take another nosedive, your portfolio will still be ready and your downside significantly minimized.

And don’t laugh. Anything’s possible this year.

Easing the pain: hypothetical balanced portfolio (green line) vs Cdn equity market (blue line) during past bear markets

Click to enlarge. Source: Ontario Securities Commission. Sample balanced portfolio (50% Canadian bonds, 16% Canadian equities, 18% US equities and 16% international equities) versus 100% Canadian equities. Total return. 

.

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

Source

What did the nation’s housing agency mean when it warned about a ‘deferral cliff’? (Because it appears most people think this is a nothingburger.)

Housing Armageddon, apparently. After all, about 750,000 households are currently withholding payments on $180 billion in mortgage debt, blaming the virus. One third of the Canadian workforce is unemployed (despite this week’s stats). According to the feds, the jobless rate will still be 10% by the end of the year and 8% (at least) well into 2021. And what if there’s a second Covid wave? Or a busload of germy Arizonians sneak across the border and wipe out, say, Windsor or White Rock?

Mortgage deferrals were for six months only, and that ends in September. CMHC’s point is simple: thousands – maybe tens of thousands – of people with houses won’t be abe to resume making payments because they lack employment. That would trigger a wave of defaults, foreclosures, powers of sale and oodles of new listings. It’s one reason the agency warned Canadians that real estate values could fall over the next year by 18%.

So why were sales in the GTA up over 80% pushing prices 12% year/year? Don’t people know what might be coming? Don’t they care? Why would you buy when there’s a cliff ahead? Are they listening to their moms instead of reading this pathetic blog and preparing?

Here’ the current thinking: next month the federal Liberals will announce a mortgage deferral extension. Four more months, maybe, to January. So almost a year’s worth of unpaid interest will be heaped on the backs of borrowers, but spare them from making monthly payments. It’s not a holiday from debt, but a giant exercise in kicking the can down the road and hoping for an economic miracle, come 2021. What a gamble. And it’s a fair bet most of the deferral folks have no idea how damaging this could be.

First, deferrals will not be automatic this time. The banks will extend them only to people in need. In other words, to qualify you’ll have to prove the virus stole your income, materially affected your ability to finance your debts and that you are without the resources to meet your contractual obligation. That, in itself, is a problem. Credit will be damaged in the eyes of the lender as you’re flagged a future credit risk. How could it be otherwise? Common sense.

Similar extensions have been announced in Britain and also house-horny Australia, Banks are being allowed to offer the deferrals – which impact their cash flow and asset base performance – without having to pony up new capital to offset the losses. Ottawa will do the same. But unless you 100% cannot pay your mortgage after Labour Day, don’t even apply.

The following words from a mortgage industry publication might be helpful in explaining the obvious, which is that mortgage deferrals will always be noticed, noted and could have credit consequences. The journal reports discussions with brokers on the misinformation most borrowers have about deferrals:

The broker explains that a customer showed them the most recent credit report he had received from his Big Six lender. Prominently featured multiple times was the phrase “Mortgage Deferred Payment Plan”.

“This is the first time we’ve seen this on a credit report,” the broker says.

Alerting other lenders to a client’s inability to pay a mortgage is neither new nor nefarious. But it’s worth asking: How many homeowners who opted to defer their mortgages did so under the assumption that their situations would be looked at differently because COVID-19 was the sole reason behind their inability to pay? There could be thousands of homeowners now facing the prospect of dragging their damaged credit reports, which they assumed would remain healthy even after deferring their payments, to lenders who will now have far less interest in working with them.

As reported here previously, credit bureaus (we have but two) aren’t listing deferred payments as missed ones, eroding credit scores, but lenders certainly are internally. Says another broker: “Our theory was that if you go and defer a bunch of payments with, let’s say, Scotiabank, and then you go to Scotia for a refinance, that’s probably not going to look good.”

Besides bruising credit, deferrals cost money. Debt totals rise and future payments will increase as a result. Those who skipped them to buy hot tubs, build decks, put in new kitchen counters or flow the cash into their TFSAs might regret it. Ironically people deferring would be better off to save the cash then make a lump sum payment against their home loan. But that wouldn’t feel like sticking it to the bank. Would it?

In conclusion, mortgage deferrals will be extended. The prime minister will stare at you with moist eyes and make you feel like he’s personally paying it for you. If you have no job, no income and no money to feed your family and pay your debt, defer. Then sell the damn house. Before the next crisis.

About the picture: “Long time reader of your blog every morning.  Coffee time would just not be the same without it,” says Mac. “My daughter caught a cool photo of her husband and Cache, a young Blue Heeler, racing for a stick at One Island Lake near Dawson Creek, BC. Thank you kindly for your time and efforts in producing a financial blog which benefits many Canadians.  I wish even more of us read it.”

Source

'No evictions' warriors storm TO mayor's condo

Peter and Janey bought an investment condo, pre-con, three years ago. “For capital gains, of course,” the suburban blog dog says, “but also for some steady retirement income. Three more years, and I’m done with the grind. The monthly cash flow is a big piece of our plan.”

Or not. Covid happened. Who knew what that would mean?

The tenant, a young female social worker, stopped paying rent in April when the local health authority curtailed its operations. She’s back working now, but decided to continue withholding the monthly. Because the province passed a law banning evictions during the pandemic and the Landlord/Tenant board is AWOL, Pete’s SOL. No income. Five hundred grand tied up with zero steady return. Condo fees, property taxes and insurance totaling over $800 a month. And he’s told it could be two years before he can legally boot her freeloading butt out the front door, given the bureaucratic backlog.

“You know I am so disgusted that I’d like to sell,” he says, “and in this market I could make money. But I can’t even find a buyer b/c of a tenant who refuses to budge. The people saying landlords are lazy, greedy, rent-collecting leeches should stand in my shoes. Every day I lose money.”

In Ontario the Ford admin is close to formalizing a law (Bill 184) that would allow landlords to bypass the Landlord and Tenant Board through a negotiation process. Tenants could be directly offered a rent repayment plan, without one being mandated by the government after an obligatory hearing. If they don’t accept an expulsion could be forced. An eviction later deemed to have been unfair could result in a penalty/reward equal to a year’s rent. Says the government: “When rent is overdue, we want to encourage landlords and tenants to work together to come up with repayment agreements, making it easier to resolve disputes — rather than resorting to evictions.” Common sense. Radical.

Of course, a lot of tenants (now living for free) want nothing to do with this, insisting every case must go into the long queue snaking its way through the system. Hundreds of them rallied before the legislature this week. Then they went and stormed the condo building where the mayor of Toronto lives. They climbed on walls and chanted, “Can’t pay, won’t pay!” and  “John Tory eleven floor, you can’t hide for class war!” plus “Hands off our homes!”. The cops pushed back. Ugliness ensued. The protestors claimed police brutality and pepper spray. The fuzz said no way.

Well, this is just the start of fundamental changes to cities, condos and the sad future of amateur landlording.

The virus has crashed Airbnb, for example, unleashing thousands of new units onto the rental market, as well as starting to swell listings. In less than a month, for example, rentals have almost doubled in Toronto (from 4,000 to about 7,500). That’s giving renters more choice and forcing rents down – by about 10% since Covid started. Already, pre-pandemic, four in ten owners of ‘investment’ condos were in negative cash flow, so lower incomes just make t worse.

Source: https://TorontoRealEstateCharts.com

Meanwhile more than twenty thousand new condo units are coming to this one market, the result of a years-long construction boom triggered by Millennial house-horniness and a desire to be part of the downtown vibe.

But wait. The core’s now a ghost town. People have to mask up when they ride the streetcar, run to the store for avocados or get a new tat. Bars are empty. Patios, too. The office towers stand vacant, and social distancing means it takes ages to await a lift and get up to your concrete box on the 48th floor.

Finally, credit is tightening. Condo buyers can’t borrow money for down payments anymore, even if they’re not asking for mortgage insurance. Banks aren’t dumb. They know half the condos in urban areas have been purchased by specuvestors who seek to carry debt with rental income – and that now the formula’s not working. It’s too much risk.

So, this is the reality for Pete and Jane. They have a non-performing asset which cost them half a million bucks and now bleeds ten grand a year. They can’t collect the rent owning. They have an acrimonious war on their hands with the tenant. They can’t sell since they cannot offer vacant possession to a buyer. And they’re cast as social pariahs, rentiers, victimizing downtrodden working people. On top of that, the unit they own could well erode in value as the virus swells rental inventories, depopulates the urban centre and scares off citizens terrified of elevator cooties and sticky garbage room door handles.

Plus, if P&J do see their rental income resumed once they get rid of the squatter, every dollar will be added atop their retirement incomes and taxed at the marginal rate. No break, as with investment income which flows in the form of capital gains or dividends.

“This,” he says, “was the worst decision of our lives.”

But the social worker’s happy. And, unlike the landlord, she has a DB pension.

Source

By now you know the news. Red ink and guts everywhere in Ottawa. Harper’s $56 billion credit crisis deficit was just a warm up for Trudeau’s $343 billion pandemic hole. The last time the feds spent like this we were in World War 2. We’ve just seen the first credit downgrade in 25 years. And no other country in the world is facing a reversal of fiscal fortunes like ours – a 1,000% deficit increase over the forecast of a few months ago.

A third of the workforce has been idled. The jobless rate will (as this blog told you) still be 10% at Christmas and close to that level in 2021. Revenues have cratered by over $100 billion. The economy in 2020 will shrink almost 7%. In the Great Depression the decline was 10%. Close enough.

So, Canada will soon have a $1.2 trillion national debt. Without a shadow of a doubt, this means higher personal and business tax rates. A hike in the HST. The seeds sown for wealth and inheritances taxes. And a bad time to have a professional corporation.

Covid’s cost has been stunning, no doubt. The pandemic has also increased the scope and reach of government in a way that was unimaginable a year or two ago. Now with eight million people on the federal dole, there’s the expectation this level of support will continue. Face it – most Canadians like getting CERB and kiddie support deposits in their bank accounts. So the next stop is the UBI – universal basic income. After Finance Minister Bill Morneau’s little talk on Wednesday, there’s little doubt this is the agenda.

No point debating if this was the correct path. It’s history. Trudeau’s 74% approval rating shows it was political gold. Giving people $200 billion in direct payments over four months sure changes the polling numbers fast. If the virus continues to dissipate, we may be looking at an autumn budget and a spring election. Peter McKay better have some rabbits in his hat and horseshoes exiting his bottom, or this one’s already a lock.

What comes after CERB? More Herculean heaps of borrowed money?

This week the Parliamentary Budget Officer, that indie and sincere soul, said giving everybody income support until next spring would cost another $48 billion, or maybe $98 billion. It depends if the support would be reduced by 50 cents for every dollar earned, or a lesser amount – 15 cents. Annualized income would be about $17,000 for a single and $24,000 for a couple. This would allow about $15 billion in existing spending to be folded into the new program, but the cost would still be extreme.

The question, starkly, is how to ever turn off a tap that’s been opened? Trudeau already found he couldn’t end the CERB after 16 weeks. It was extended until October. Now it’s clear the program will morph into something else. The wage subsidy, Morneau announced, will be extended by another $50 billion. And so Canada seriously widens the tax gap with the US.

Well, get used to it. For example, the coming budget is likely to increase the capital gains inclusion rate (to 75%, if the NDP gets its way), which means you’d be wise to lock in some gains before that happens. We might well see a new tax bracket created to further ensnare and drive off the 1%ers. Self-employed who pay themselves exclusively through dividend income, rather than salary, might come to regret that choice.  Or there could be a lifetime cap placed on TFSA contributions or (more draconian) on accumulated tax-free balances. The feds could simply decide – since we don’t have enough rich people – to shift more tax from income to consumption, and bring the sales tax back up to pre-Harper levels.

Details to follow. This is just the warm-up. The government may not have had much choice but to subsidize a nation of over-extended, leveraged, indebted housing-lusty citizens who were completely vulnerable to economic shock. Letting them flounder would turn recession into something worse. But now, in hock to our necks, we need a plan. And an opposition.

By the way, Dorothy and I both received $300 direct-deposit payments into our joint chequing account on Wednesday morning, labelled ‘Canada Fed.’

Coincidence?

I think not.

Source

“I’m a dude that’s trapped in Eastern Europe,” writes Marvin, “due to divorce/child custody.” Hmmm. Sounds serious. But I didn’t ask. “I’ve enjoyed your blog for many years, and to be super honest, as I sit in this hell-hole, reading it each night along with your witty remarks makes me feel a little closer to home.”

But Marvin’s perplexed. How, he wonders, in the middle of a pandemic, could Canadians be so weird?

How is that housing in Ontario is still undergoing bidding wars?  A friend of mine is a RE agent in Ottawa, and last night I heard from her that she’d been ‘losing’ deals for the past two weeks, getting outbid even when coming in 80K over asking on residential homes in Ottawa?  This seems crazy.  Ottawa is a sleepy town inhabited by civil servants.  They may have relatively stable jobs, but they’re also not seeing massive increases in earnings year over year.  So what gives?  How the heck are people engaging in bidding wars at a time when the economy is taking a massive dump, unemployment is gargantuan, and everybody is already up to their ears in debt?  None of it seems to make any sense.  I’m somewhat concerned, as I’d like to come home in the next few years, and it seems like I’ll be walking into a situation where buying a home will cost an absurd amount of money (either in the GTA or Ottawa; my two preferred destinations).

It gets worse, M. The latest housing stats out of Toronto this week give the impression people are partying like its’s 2016 all over again. You remember that, of course. Multiple bids. Blind auctions. Drive-by viewings. Unconditional offers. Rockstar realtors. Bully buyers. Greedy vendors. Endless FOMO.

According to the continent’s largest real estate board, the only epidemic is among buyers infected with house lust. The better part of 9,000 properties changed hands in Toronto, an increase last month from May of 84%. Yes, eighty-four. Semis jumped in price by 22% year/year – meaning the average cost of half a house is now $1.3 million. The average property gained almost 12%, while prices of detached passed the $1.5 million market, an increase of 14%.

The realtors point especially to, “a resurgence in the higher-end market segments,” and forecast that by the time this strange year ends there will have been an increase in average prices, just like Covid never came.

Okay, so what gives? Marvin’s quite right in pointing out the obvious, even while he rots in the Old World. Canadian unemployment is in double-digits and will stay there all year. Eight million on pogey. A million mortgage deferrals. GDP hollowed out 12% in one month. Public finances shredded (more on that tomorrow). Empty downtown streets. Travel and border restrictions. Mandatory masks in Toronto. Social distancing. Emergency powers. Why were nine thousand people in one city confident enough to buy houses averaging a million bucks each? Are they not paying attention?

Nah. Of course not.

Regular addicts will have noted this is exactly what the pathetic blog told you would happen. During 100 days of viral terror, lockdowns, quarantines, bumwad-hoarding and non-stop panic from the Coronavirus Broadcasting Corporation real estate sales plunged and prices dipped. Showings stopped. Sellers retreated. The market croaked.

But that was followed by the unleashing of pent-up demand since, after all, Covid came right at the start of rutting season, when hormonal young couples paw the earth, flare their nostrils, bellow, rear back and thunder towards open houses. What normally happens in April this year juiced June. Meanwhile two more factors assured a big jump in prices as sales resumed. First, available listings have crashed – down year/year in Toronto by a third (and similarly in Ottawa, Vancouver and Montreal). More demand and less supply means a surge in values. Second, Covid caused central banks everywhere to crush interest rates and add stimulus to a collapsing economy. So now we have five-year fixed-rate mortgages at just a hair above 2%. Cheap financing means more borrowing, which escalates property costs.

This explains the current situation. What lies ahead?

Here’s what we know so far:

• Mortgage deferrals will end. No way do the banks want to forego interest on $180 billion in home loans any longer than they much. This means hundreds of thousands of people who have made no payments must start again this autumn. But jobs are slow to return, suggesting many people may bail. More listings coming.
• CERB can’t last forever. The feds cannot afford this level of support. It, too, will taper away as 2020 draws to a close. Less income support means more tough choices for households without employment. Expect an increase in listings.
• The pandemic will ease as time passes. Slowly, albeit, but the outcome is known – a slowed rate of infection in Canada, better therapies, maybe a vaccine. Potential sellers will lose their fear of opening their homes to buyers. Yes, more listings.

CMHC and others think like Marvin. The negatives for housing are stronger than the positive (which is cheap money). After the deluge now, real estate will pause and dip until employment is restored. Maybe in 2022. That would mean this is an excellent time to (a) list your property and sell for big bucks to a greater fool then (b) use those funds to seriously trash debt.

Unless Covid taught you nothing.

Source

Blog dog Dan has way too much time on his hands.  Must be a teacher. “With the help of a javascript and a perl script,” he writes, “I extracted these stats from the comment section of greaterfool for the entire month of June, 2020. Yep, it includes every posted comment for the entire 30 days. It never ceases to amaze me the amount of blather you must weed though daily.”

So last month, Dan discovered, there were 5,366 comments posted on this pathetic blog by 1,204 unique users. (Consistently about 1% of visitors leave comments. The rest know better.) That chewed up just under 3 million bytes (and hours of my life, gone forever). Here are the top 10 posters, by number of comments:

235, Sail Away
165, crowdedelevatorfartz
127, IHCTD9
121, TurnerNation
117, Faron
95, Ponzius Pilatus
78, Nonplused
65, Howard
65, Flop…
58, Wrk.dover

And by the amount of space consumed, the wordiest five (byte count): Sail Away (117,261), Crowdedelevatorfartz (93,243) IHCTD9 (73,431), TurnerNation (71,430) and Ponzius Pilatus (63,922).

Okay, so now we have a better idea of the readers who jobless, unemployable, retired, socially shunned or whose family moved out in disgust. As mentioned here last week, before I went on strike for the weekend, this site’s steerage section has been a cacophonous swamp in recent months, a condition rendered worse by that damn bug.

And that segues into the latest set of predictions. Six of them. These appear to be the defining characteristics of the period lying ahead which, it now appears, could be a lot longer than any of us thought when the snow was still around.

Jobs are easier to erase than create.
It will take years, a decade maybe, before employment returns to the level of February, 2020. Standard and Poors says Canada’s economy will be considerably reduced even after Covid is gone (if that ever happens). In the US, a key Washington agency states unemployment will stay elevated into the 2030s. Yeah, ten years. This blog estimated weeks ago the rate would be above 10% at Christmas. That may be optimistic. The implications for housing are very real. Ditto for Trump.

Rates will be in the ditch for ages.
The big banks have five-year mortgage rates down to barely above 2% now. But inflation keeps falling and the economy shrank 12% in a single month (the decline in 1931 was 10%). It now appears US rates will not rise about their current near-zero level for five years Maybe six. Our guys won’t dare change the cost of money here before the Americans do. So while house loans stay cheap (but credit will be tighter), this crushes savers. HISA accounts, GICs and bond yields will pay nothing, so risk-averse people better hope they already have a huge pile of dough or risk running out of it.

The virus has legs.
Comparatively speaking, Canada has done well. But reopening is slow, cautious, tentative and far too slow to gas the economy or restore small business. Social distancing is becoming the norm. Mandatory face coverings are coming into effect in major cities like Toronto and Ottawa. When my corporate partner announced in early April that its Toronto bank tower offices would not reopen until May 31 it looked extreme. Now it’s July. Still empty. Getting half the people back by September seems a stretch. And what if the schools stay shut? Globally Covid is getting worse, not better. The economic cooling is unprecedented. This is the time to stay liquid and flexible. Above all, eschew debt.

Trump’s toast.
So the latest surveys suggest. As the virus rips through red states, the president’s approval rating declines. His weird, hellfire, us-vs-them speeches surrounding July 4 didn’t help much. Now his son’s GF is infected. A Pew poll found people in counties (Florida, Texas, Arizona – Republican fortresses) where the virus is spreading are 50% less like to vote for Trump. Older voters, 65+, are the same, saying by a wide margin Washington should prioritize protecting people instead of reopening the economy. That’s the opposite of what Trump’s been doing. So as the virus leaves big blue cities (NY, Boston, Chicago) and assaults the Sunbelt and rural US, it’s bad news for the president. Can he survive the triple threats of a public health, record jobless numbers and civil unrest? Unlikely. But it’s four months until election day. Things change.

Real estate is for greater fools.
Low mortgage rates fuel real estate. Unemployment kills it. This is the battle to be waged over the coming months. Big banks have deferred $180 billion in mortgages, but that will end and listings increase. Credit is being tightened. CERB money will peter out. Realtors will coo over surging sales, but this is in comparison to the disaster that was April. In reality, things are more dire. Accepted offers last month in Vancouver were the lowest in 15 years at just 560. Contrast that to over 800 last June, or 1,500 the same month four years ago. “Into 2021 a whole new kind of methodology will prevail,” says analyst Dane Eitel, “the fear of overpaying for a depreciating asset.”

Money’s pumping into financials.
How can stock markets jump more than 40% from March when the virus-whacked economy sucks? This mystifies many people who point to lower corporate earnings, laid-off workers, weak export demand and soggy consumer spending. But it continues. The principal reason is simple: money is flowing where it has the best chance of a return. With interest rates in the ditch, and likely staying there for half a decade, fixed income assets pay diddly. But the pandemic will eventually subside, economic activity will rebound and traditional growth assets will grow again. It seems like a safe bet, despite inevitable volatility. Massive government and CB stimulus will continue. Trump will do anything to win. If you don’t have enough put away to retire on, saving won’t get you there with 0% rates. What choice, but to invest in the financial markets? More gains ahead.

Well, there you go. The future in 730 words. No need to blather. It’s a lock.

About the picture: “Hi Garth. I saw this today as I drove down the street in Burnaby. If you can use it in your blog…..feel free. If you use it, please mark me as an avid fan…. Anonymous :)”

Source

  By Guest Blogger Sinan Terzioglu

.

A recent bank poll found a third of Canadians, 45-54, have no retirement savings. About 20% have under $50,000.  On average Canadians have saved around $200,000, but most estimate they’ll need $750,000 to fund a comfortable retirement.  Depending on lifestyle and years of retirement to fund, $750,000 may not be nearly enough.  As life spans increase, more and more Canadians will be living their later years with health conditions, continual inflation, and personal debt that continues to build.  They’re heading towards a retirement crisis. Are you?

Everyone’s goals and circumstances are different, so retirement planning is not a one-size-fits-all scenario.  The same bank poll found more than half of Canadians didn’t know if they’d have enough savings for retirement. This is a huge risk we’re not taking seriously enough.

Most have no employer pension plan to force savings, so they must create and consistently contribute to their own pension-like portfolio. This should begin with setting aside (ideally through automatic direct deposits) at least 10-15% of income into tax advantaged accounts like RRSPs and TFSAs. When those are full, funds should be directed towards non-registered accounts.  While these accounts don’t have initial tax advantages they can form an important part of your retirement income plan.  Withdrawing from non-registered accounts first allows the funds in tax deferred RRSPs to continue to grow, pushing out the tax burden.  It also maximizes the tax advantage of TFSAs.

Many believe real estate is the only retirement plan required.  Housing in many Canadian markets has done very well over the last 30+ years, leading to believe that will continue.  But this ignores valuation and personal/family balance sheet risks which could be financially very destructive.  Only a generation ago, housing costs were recommended to be no more than three times your income. In Toronto today, a house costs over 10 times the average family after-tax income.  In fact, Canada has the highest median home price to median income ratio in the world.

I recently had a discussion with a couple in their mid-30s about their retirement goals.  They were thinking of purchasing a house, and planned for this to be a large part of their retirement savings.  They were trying to identify an upper price range that would allow them to be comfortable day to day, and still allow saving for retirement.  They have a young child with another on the way so they would like more space and a yard.

Their net worth is $500,000 with $250,000 in RRSPs, $25,000 in TFSAs and the rest in cash ready for a down payment.  Their jobs are stable but they don’t expect significant income growth throughout their careers. They collectively earn $200,000 and have no employer pension plans. Houses in their desired area are in the $1,000,000 to $1,250,000 with rents of similar properties at $3,000-$4,000 a month.  Taking an investor view, this would work out to a cap rate of 3-4%, barely ahead of inflation and significantly lower than historic real estate returns.

This couple’s parents had bought homes 30 years ago for $300,000 which are now valued around $1,300,000.  This works out to a compound annual return of 5%.  They, like many, have come to believe these historical returns are an expected outcome of real estate ownership.  Property has risen traditionally by the rate of inflation, which in North America has been 2-3% over the last number of decades.  I explained it is very unlikely residential real estate would again outpace inflation by such a wide margin. If values were to stagnate or contract that would result in significant lost opportunity costs for their family.

Assuming they paid $1,000,000 and put down 20%, amortized over 25 years at 2.65% their monthly payment would be $3,650.  Add to that property taxes, insurance, maintenance and the monthly outlay reaches $4,500-$5,000 plus the significant land transfer tax they would have to pay.  While their after-tax income would comfortably cover monthly costs they’d be taking on a significant financial risk.  First, because the valuation is so high there’s little margin of safety.  If real estate prices contract by 10-20% (very possible) the value of the property would drop by $200,000, wiping out their equity and cutting their net worth by half.  If they continue renting, invest the $200,000 plus the additional savings from lower rental costs and achieved a 6% annual rate of return this would grow to between $400,000 and $500,000 in 10 years.

After much discussion about their lifestyle, comfort and retirement goals, my advice for this couple was to hold off on the purchase, or consider less expensive options.  We spoke about more affordable areas where they might find the space and yard at a price that was manageable for them.  This is becoming increasingly possible with remote work options today.  If they decided they must be in their desired area, we discussed renting for 5-10 additional years to build up their net worth before purchasing.  By delaying an expensive housing purchase they would be able to prioritize early retirement contributions, giving the funds more time to grow over their working years instead of trying to play catch-up closer to retirement.  By building up their assets first they would have more flexibility, lower financial risks and importantly for them, less stress and worry when buying later.  It would also allow them to comfortably fund their children’s educational savings early on.

When thinking about your long term retirement goals, first understand what you will require on an after-tax basis, indexed to 3% inflation.  Work backwards to develop a savings plan allowing those goals to become a reality.  Understanding retirement cash flow requirements will make prioritizing savings much easier.  As Garth says, you can always rent a roof over your head but you cannot rent cash flow.  Ensure you are always on track to build up enough liquid assets so that your money works for you so one day you no longer need to work for money.

When you have enough in liquid financial assets that consistently produces monthly cash flow to cover fixed and variable expenses you’ll have achieved financial independence.  This will give freedom and choices.  The pandemic has proven just how important financial risk management is.  There is no such thing as job security now.  Costs will continue to rise. Financial savings should be your number one priority.  After that, if you can afford to purchase real estate, go for it. But never, ever make the mistake of thinking it is the only retirement plan you need.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.   

Source

   By Guest Blogger Ryan Lewenza

.

“It’s tough to make predictions, especially about the future.” – Yogi Berra

I love this quote from famed baseball player Yogi Berra. Over the years I’ve had to make a lot of investment calls and this quote has often come into my mind as I make these predictions, recognizing just how hard it is to consistently make the right calls. This is why I tell clients that if I can go 6 for 10 in our calls and investments that that’s a decent batting average and we can likely deliver on our stated return objectives. Well, since I’m a glutton for punishment, it’s time to pull out my crystal ball and provide my expectations/predictions for the second half and highlight what I expect will be the key drivers of the markets for the remainder of the year.

Here it goes…

First, I believe the equity markets could consolidate through the summer months and trade in a range. For example, I see the S&P 500 potentially trading in a broad range of 2,700 to 3,300 through the summer months. Of course I’ll take the gains if the markets giveth, but I think it would be healthy for the equity markets to consolidate their recent strong gains over the historically weaker summer months. This would allow the markets to rebuild “internal energy” and set us up for a nice year-end rally. After all the crap we’ve had to endure this year wouldn’t that be nice!

Our Expectation for the Second Half

Source: Stockcharts.com, Turner Investments

The first big driver of the equity markets in the second half will, no surprise, be the US/global COVID infection and death rates. We’ve seen a marked increase in US infection rates, in large part driven by surging infection rates in some of the southern states like Texas, Arizona, and Florida. Florida alone hit over 10,000 new daily infection cases this week. Either the virus is moving south or this is the fallout from those state’s looser restrictions and quick reopening plans.

Below is a chart of the number of new reported COVID cases in the US, which after peaking in April, has surged higher in recent weeks. The daily rate has increased to 40,000/day and Dr Fauci this week predicted the potential for 100,000/day of new cases. This is not a good trend at and something we’ll be monitoring closely.

New Reported COVID Cases in the US

Source: NY Times
Next up will be the economic data. We’ve seen a nice turnaround in some key economic releases over the last month and as the economy continues to reopen I see a continued improvement in the labour market and other arears. This week we got the critical US nonfarm payrolls report, which showed 4.8 mln jobs were added in June, and the unemployment rate dropping to 11.1% from 14.7% in March.

Additionally, we saw a huge turnaround is the US manufacturing sector with the ISM manufacturing index jumping from 43.1 in May to 52.6 in June, now indicating expansion in the manufacturing sector. The rebound in the auto sector would have contributed to this nice turnaround in the manufacturing sector with total US domestic auto production falling to 1,800 cars in April, just a tad below the average of 230,000 cars per month.

While it won’t be a straight line, I see the economic data generally improving in the second half and into 2020, which if correct, will be supportive of the equity markets. The key risk to this is the virus and infection rates, so this is no slam-dunk call.

US Unemployment Rate and ISM Rebound in June

Source: Bloomberg, Turner Investments

The third potential driver of the US equity markets in the second half will likely be the US election in November. We covered this in detail in our last blog, where I showed that the S&P 500 has historically done better under a Democratic president (57% average return over the 4-year term), than a Republican president (26%). So if the polls turn out to be right this time and Biden wins, then based on history, this could be a positive thing. That said, I expect some market volatility as we near the election in November, given the uncertainty around who will be the next US president.

S&P 500 Performance under Different Presidents

Source: Bloomberg, Turner Investments

The last key thing I’ll be focusing on will be any additional government stimulus announcements. There is talk of a second round of fiscal stimulus in the US, with proposals for another one-time $1,200 payment to individuals, Trump’s pushing hard for a payroll tax, and some are shooting the idea around of a jobs/infrastructure bill.

I believe all the government stimulus (monetary and fiscal) is one of the key drivers of the equity markets right now. Below I illustrate this overlaying the Fed’s expanding balance sheet and the S&P 500. The Fed’s balance sheet has exploded from US$4 trillion to start the year to now US$7 trillion. For those bad in math, that’s an increase of US$3 trillion in stimulus in just a few months. Incredible! What’s a trillion dollars between friends? And given the strong correlation between the Fed’s balance sheet and the stock market, this may have something to do with the roughly 40% recovery since March.

Fed’s Balance Sheet and S&P 500

Source: Bloomberg, Turner Investments

There you have it. I see US infection rates, economic data, US election and government stimulus as the major drivers for the US equity markets in the second half. It’s going to be a bumpy ride but I see the potential for more gains coming later this year when all is said and done.

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.

Source

This won’t take long.

It’s been an interesting few days. Canada’s BD on Wednesday. US this weekend. Muted, tentative and confused in both nations. We’re on a journey. Destination, fuzzy. Public sentiment is alternating between fractious and fearful. I titled yesterday’s post ‘Polars’ for a reason. Opinion is splitting quickly, deeply. This damn pandemic has made the cleave worse. It may take a long time for us to regain a sense of purpose. And stop fighting.

The left wants to rewrite history, erase historic injustices, bring racial and gender equality to every corner of life and force unity of thought. It’s assumed the ethical high ground. That’s behind the ‘white silence = violence” meme. Climate change. Universal Basic Income. BLM and BIPOC. As monuments, place names, statues, the RCMP and Canada Day itself are attacked and soiled, we inch closer to the book-burning which swept others into power, pre-war, through the elimination of memory.

The right wants what Trump represents, or tries to. Patriotism, protectionism and power, stressing state over self. Police agencies, first responders and the military are revered and supported. History is seen as a foundation, not a shame. Law and order is celebrated, majority rule is accepted and capitalism embraced. A new nationalism has emerged, tearing away at global ties. Liberty is a virtue, freedom means the right to think independently and protestors should never make choices for you.

Normally a national crisis brings people together in a common cause. Not this one. The first global pandemic of our times has deepened the divisions. To my regret, this has been reflected on this blog, some days to the point of destroying it. Covid has truly frightened many, changed their habits and massively impacted their lives. For others, the virus poses an attack not on society but their value system and their hero, Mr. Trump, who may end up its highest-profile victim in November. Thus, infections are brushed aside as the result of excessive testing and deaths are diminished because they’re just a bunch of old people. The World Health Organization, public health officials, Fauci, Tam and others are routinely undermined.

Well, this is interesting. A tale of two nations. The data below is from John Hopkins University, and measures new daily cases of Covid 19.

New daily infections, Canada

New daily infections, America

Some may look at this and conclude, Canada = compliance. America = resistance. That’s simplistic and facile. Or is it?

The virus doesn’t kill a lot of people but it makes many sick. It certainly has slayed the economy, which hurts those running for reelection in 2020, just as it’s rendered more popular leaders who give away historic amounts of public money, shackling society with future tax and debt. It will be years before we have a valid perspective on this experience.

Meanwhile this site has come to mirror the distemper, prejudice and intolerance of our times. And I hate it.

Source

Another few points heaped on the Dow Thursday, going into a historic July 4th weekend. Stocks have confounded the Debbie Downers, Karens and Chicken Littles among us by flipping a bird to the virus and romping higher. Since the March low the S&P 500 is up 43%. Even poor Bay Street has swelled 40%.

Despite the best efforts of public health officials to scare the crap out of investors, the gains have held. Looks like they will, too. If you were waiting for a new low, big fail.

Now, did you catch the latest US jobs stats? In June the American economy recaptured 4.8 million lost positions, with the unemployment rate tumbling to 11%. Big win. Analysts had predicted more than a million fewer new hires and a 12% jobless level. That’s why markets shot higher at the opening bell, and why the American president immediately hit social media with this message:

So it’s four months today that Americans are scheduled to choose the next president or keep the existing one. Never before has an incumbent faced double-digit unemployment, a broad-based social protest movement or a public health emergency which has (so far) killed over 132,000 citizens. Trump’s approval numbers, naturally, have been tanking. People are pissed. That’s why many are marching in the streets and a whole lot more are afraid for their health and angry the pandemic has gripped their country (as opposed to, say, Canada).

The jobs rebound still leaves millions out of work

Source: New York Times

It remains a possibility there will be no election. Not if a second wave hits, physical voting is deemed too dangerous and mail-in balloting too wonky and untested. Is that why Trump refuses to be masked? Some people wonder. But that’s as irresponsible a question as asking it Joe Biden has dementia. In the next 120 days, expect political circus and the clash of polar opposite views.

Speaking of Biden, he’s 10 or 14 points ahead in most polls, and strong in states with big weightings in the Electoral College. That gives him 85% odds of winning and explains his recent low profile. Politics 101 says, “if the guy you’re running against is imploding, just shut up.”

Mr. Market is now ruminating on the chances of a triple-header, with Democrats winning the House, the Senate and The White House. What might that mean?

Higher corporate taxes, as the Democrats roll back a part of Trump’s big cut of a few years ago. That’s estimated to dampen profitability about 5%. Ouch, but not fatal. Biden’s also expected to spend a ton of money on infrastructure programs, and the market likes that. It means big government stimulus in an area that creates a boodle of employment moving dirt and pouring concrete.

Biden’s viewed as more predictable than Trump, which is not hard. Markets like a steady hand on the tiller, since it allows for long-term tax and strategic planning. Death-by-Tweet would be a thing of the past.

The unknown is this, however: would Biden embrace or ignore the wild-eyed radicals on the Democratic left, like Bernie Sanders, Elizabeth Warren or the dreaded (if fetching) AOC? After all, implementation of the Green New Deal would be a huge negative for investors, while medicare-for-all would send shock waves through the mammoth medical and insurance complex.

And, meanwhile, how will Trump fight and claw his way towards reelection? Will it be constructively through a big stimulus bill that helps deal with a second wave of Covid, or destructively by inciting civil war with BLM and its growing supporters, shredding and defaming Biden or even seeking a vote delay?

Beats me.

But the virus. Maybe it has a plan.

There were 50,000 new infections in the US in a single day this week. A record. A dozen or more states have paused or reversed reopening steps. That makes some people think the giant jobs gain in June may well be just a snapshot in time, not a harbinger.

In short, we have no idea what lies between Independence Day and Election Day. And while the markets are likely to be choppier, more volatile and sometimes just weird, investors get this: (a) pandemics are temporary. They pass. (b) The US central bank has the market’s back, ready to pull out every stop necessary to prevent disaster. Downside is limited. (c) We know Trump already. But same with Biden. No shocks there. (d) The worst of the virus, in terms of economic destruction, is over. (e) Never bet against America.

In other words, stay invested. You will feel jolly and fat, come Christmas.

Source