Category: Accounting tips

Somewhere I have a picture of Dorothy I snapped in the tunnel buried under the front lawn of Parliament Hill, connecting Centre Block and East Block. She’s beaming, holding a little flag, standing there all cute amidst the asbestos-coated steam heating pipes and dodgy electrical conduits. Love it. And her. It was a great night.

We were on our way to my office after the big concert up above on Canada Day night. That was twenty-eight years ago. The first time I lost my mind and ended up in the House of Commons. It was the 125th anniversary of the nation, and I was feeling smug. Just met the Queen. Randy Bachman had just played my Fender Stratocaster on stage. Over a dozen rock stars had performed the version of the national anthem I’d financed with corporate donations. Dorothy and I were headed for an epic party, where this bevy of rockers would line up to sign my axe.

Still got it. Here it is.

So after the first political gig I wrote a few books, got a network TV slot, then headed out. Dorothy became my roadie. We spent eight years travelling the country, as I delivered an average of 200 lectures annually on investing, real estate, the economy and the future. Crystal ballrooms to church basements. Fort St John to Wabush, St. Johns to Vancouver. Two or three provinces a day, jumping between Air Canada and Canadian planes seamlessly because all the gate personnel knew us. We knew them.

Later I returned to Parliament (that was a brawl), went back on TV, wrote some more books, started a television production company, created eight network series, launched the first online streaming broadcast, owned a few stores, pubs and eateries, then a decade ago started a national financial advisory practice, which evolved into one of the largest in the country. Oh yeah, and a blog.

Here’s the point: I know Canada. Dorothy knows, too. The 49 years of our union have been a tale of travel, experience, revelation and joy. Now in the time of Covid we reflect on this – the freedom of movement, lack of fear, social embrace and civility of our land – and are grateful. We’ve been blessed. Canada gave us that.

Crawling out of quarantines, lockdowns, self-isolations, confronted daily with social distancing, masks, suspicion and de facto martial law, many wonder what happened to the country. There are no parades this July 1st. No fireworks. Fewer flags. Nary a gathering. Parliament Hill’s front lawn is empty. Many people chose to work today so they could take Friday off, creating a long weekend. Just another stat holiday.

That’s a mistake. The country may be a little bent, not broken. The post-pandemic future will be different, which does not mean worse. All the grousing, sniping, bitching and carping on this pathetic blog cannot wipe away the reality of our great fortune. There is peace, plenty and promise in Canada. These days the contrast with the US, our deeply divided neighbour, puts this in focus. The simple fact we’re winning a viral war through cooperation and respect says much. Life may not look as steamy and perfect as it did to me in that tunnel years ago. But a new perfection will emerge. We’re all blessed to be Canadian.

Now go find a Mountie and hug her.

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First to go, Bandit and I noticed on a morning walk a month ago, was a slow fashion store. (I had to ask Dorothy what the hell that meant. Now I know.) Then her fav bookstore went down. An art gallery up the street has disappeared. So have the horse-drawn carriages. On the weekend the main coffee hangout on the corner opposite my office posted big “CLOSING” signs (above). Everything half price. Fixtures for sale. Fail.

Such is the toll of the virus on a tourist-based economy. As Air Canada and Westjet go, so goes the economic fate of thousands of small businesses. Hotels. B&Bs. Restaurants. Tour operators. Here’s what the entrepreneurs running the local coffee shop had to say to the community:

CLOSING DOWN  The uncertainty associated with the impact of COVID-19, especially in relation to its effects of tourism along with the considerable expense load that we carry, has forced us to make this decision. We are so very grateful to the amazing staff both past and present who joined us in establishing our unique business style. We tried to create a type of oasis where our customers were surrounded with tasteful and cheerful merchandise while enjoying the atmosphere of an old fashioned cafe. We would sincerely like to thank all our many customers for their continued support, it has been extremely rewarding to receive so many genuine compliments, literally on a worldwide basis. Sad day.

Sad indeed. The pooch and I walk every morning into the aroma of their roasting coffee beans. No such pleasure soon. Plus an empty storefront. Another one.

So the latest economic stats are grim. The Canadian economy shrank close to 12% in April, on top of a 7% dive in March. May probably saw a small (3%) uptick, so it’s safe to say we have about 16% less GDP than we did back in the halcyon days of Feb. By comparison, during the darkest days of the Great Depression – 1931 and 1932 – the economy withered by 10% annually. And here we are with a 16% tanking in a hundred days. Gulp.

This is the worst. Ever. All 20 sectors of the economy took a drubbing. Accommodation and food was obliterated with a 42% collapse, after a 37% drop the month before. It just doesn’t get any suckier. Entertainment and sports, down 25%. Construction, 23%. But online shopping up 17%.

Now, look at this. It’s a snapshot of Covidian chaos as of Tuesday morning. Things seem under control in Canada but are suddenly raging south of the border. Given the integration of the two economies, Trump and the inability of Americans to corral this bug, it suggests recovery may take a lot longer than new all hoped.

Seeing red: the virus erupts in 29 US states

Meanwhile many people you know are direct victims of this economic contraction, as they carry fat debt. Even as the virus was ravaging jobs, mortgage debt grew substantially in May – a new record high. And why? Not because of a ton of real estate sales, but rather thanks to deferred mortgage payments, which added to the overall debt load. The better part of a million households are not making loan payments, and haven’t for several months now.

The result: $1.08 billion in new debt added every four weeks to the steaming pile of $1.68 trillion, since folks choose not to service mortgages worth $180 billion. Payments they cannot or will not make are simply thrown on the heap – money that’ll have to be paid in the future. Mortgage growth of over 8% (annualized) during May was the highest in a decade. What an awful validation of the financial illiteracy of a nation of debt-snorflers.

So if Trump blows the virus challenge, US GDP tanks and true recovery takes a few years, what to do?

Play defence.

This is exactly why this tedious blog has yammered for years about the logic of having a balanced, diversified and liquid portfolio. It’s designed to dampen volatility and, unlike most husbands, be predictable. When darkness descends and markets fall, it protects you. When times are good, it joins in. Just look at the experience thus far in 2020.

Beyond this, pull in your horns. No big purchases. No investment condo. No leverage. Do not let 2% mortgages seduce you. Don’t defer debt, but pay it down instead. Take advantage of a localized real estate surge, based on pent-up demand, to unload. These are the days to crave maximum liquidity – wealth in negotiable securities, not tied up in a property that could soon take ages to flog.

Oh, and go buy something from the dude on the corner. There, but for the grace of dog, go thee.

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Covid log date 6.29.20.

It’s now been more than a hundred days since the giant office towers emptied into the Bay Street canyon below, as furloughed workers scurried furtively underground. Their last subway ride. For many, the final time rubbing shoulder-to-shoulder against a stranger. Without a mask. At that moment they were employees for whom ‘going to work’ had meant, well, going to work. Not going home.

But that was then. The changes since have been breathtaking. This week came more signals the world these souls knew, so distant back in February, is kaput – or soon to be. Witness the following words, part of a memo sent to the worker bees of a major financial outfit with offices in the cores of most big Canadian metropolises.

The question is: can we be effective at work without needing to be in the office all the time? Based on how the last few months have gone, the answer is a resounding yes. Looking ahead, my hope is to build an environment for my team that incorporates some of the flexibility we have gotten used to into the post-pandemic work world, whenever that arrives. Think in terms of a greater emphasis on results and output rather than evaluating people by their presence in the office or the hours that they work.

Can you imagine the big poohbah telling you that six months ago? Offices are optional. Hours uncounted. Remote is fine. Flex is the new religion. Stay in your skivvies, if you want, but remember to dress above the waist for Zoom. Results matter. No need to haul your butt downtown. Ever, maybe.

This all makes perfect sense for corporations. Dump the office overhead. Pare down the infrastructure. Let people stay at home and buy their own hand sanitizer. The bottom line actually gets fatter. Employees are less stressed. Child care issues resolved. The dog loves it. No commute. No traffic. No smelly transit buddies. No deathly elevators. Just a thick web of IT people hanging it all together. Yes, they work from home, too.

So will Covid turn out to be a long-term employment game-changer, for both corps and the folks who toil for them? If so, big ripples. Downtown cores, somewhat depopulated of commuters, will not sustain the thousands of small businesses who located there solely to suck off the foot traffic. Falafel and sushi booths, dry cleaners, dental clinics, office supply stores, and endless retail outlets, many located in the underground pathways that used to be clogged with people in business attire.

Urban condos? The impact could be huge over time. Fewer jobs in the canyon, so why would you compromise paying hundreds of thousands to live in 500 square feet of concrete? And besides making high-rise lifts totally terrifying, the virus is impacting the entire market. “The pandemic health concerns, coupled with reduced employment and hiring activity, has resulted in less immigration and reduced in-migration into the GTA,” says a report from Rentals.ca. “These consequences of the pandemic have significantly reduced rental demand at the same time as supply is increasing via short-term rentals and high-rise apartment completions.”

Meanwhile Airbnb has collapsed, throwing a ton of units on the market and depressing rents. “I live and own a downtown Toronto condo,” writes Greg.

A recent Toronto Star article stated my building was Airbnb’s 3 biggest revenue source for a single building. Since the state of emergency was declared short term rentals have been banned. The operations of the building, lobbies, concierge desk, elevators and common spaces have dramatically improved since, this building as I imagine most condo buildings were not designed to be hotels. The current state of the building is 46 units for sale, 146 for rent. The management office recently issued a memo saying to expect delays when registering new tenants due to the high volume.

Covid has also put the ice on immigration, while Ontario (and BC) still have an anti-foreigner buyer tax – which doesn’t look so genius anymore. And guess what happens when the pandemic eases and the Landlord/Tenant board gets back into operation, allowing owners to punt all those scuzzy renters who stopped paying? More supply on the market. Already rents are falling as available rental listings overwhelm demand. Rents are about 3.5% less than a year ago, and declining monthly.

And then there’s this: the pandemic flight to the boonies. Why pay $2.4 million for an okay house in mid-town Toronto (to have a 20 minute drive downtown) when you can get a mini-mansion for half that amount in Kingston, Grimsby or Kitchener – and work remotely? Why pay $800,000 for a 750-foot, two-bedroom condo on the 34th floor of a teeming downtown hi-rise when that will buy you a townhouse with a garage and an actual backyard in Burlington or Ajax?

It’s already happening, say the realtors. Sales in Halton are up 22% and in Durham by 8%, while falling 13% in Toronto. Same seems to be occurring in YVR, as activity flourishes in the Fraser Valley, on the Island and in the OK. It’s taking place in the States, too, as more New Yorkers and Bostonians head for the burbs.

After all, if you have to work from home, then home should be, like, awesome.

Bosses who talk nice to you, and valid reasons to ditch urbanity. Plus you can hide behind a designer mask. Nice work, bug.

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Four months of virus, now. Ten million cases globally. The bug eating Texas and Florida. The White House losing control. Air Canada, Westjet ditching distancing. Masks everywhere. Condo units flooding the GTA market. Second wave with more hoarding threatened. No hockey in Vancouver. Locusts in India. Civil unrest in America. Toronto finances crumbling. Eight million on the dole and a million mortgages unpaid. Elevators as death traps. A US election that’ll rock the world.

Did I miss much? This is a year we’ll ne’er forget. And it’s not even July.

But enough doom, blog dogs. Let’s leave the gore and desperation for the MSM. For even in the darkest night there burns a flicker of hope. Many, actually. Today we’ll celebrate the unexpected gift just bestowed upon us by those two evil powers, Covid and the CRA.

It’s called the prescribed rate of interest. Yes, exactly. I’m aroused too. Here’s how it works…

Every few months the revenue guys set a new rate, based on three-month T-bills. Because the cost of money has been crushed by the Bank of Canada in response to the virus, the rate (effective Wednesday) plunges by half, way down to just 1%.

So what?

So you can now loan buckets of money to your married spouse, common-law partner or other family members at a rate which is absurdly low to accomplish income-splitting. Even better, if you set this loan up over the next three months (the rate could be hiked again later in the year), then the 1% is permanent for the life of the borrowing. It’s fixed, not variable. So imagine having that in place six years from now when the rate is, say 5%. Big win.

How does this income-splitting, prescribed-rate thing work?

Simple. If you and your squeeze earn different levels of income with one of you in a higher marginal tax bracket – or perhaps one person at home looking after the spawn – create a loan. Money is borrowed (at the ridiculously low rate of 1%) by the partner who is taxed less, then invested. Because it’s a loan, not a gift, all gains or income flowing from the investment portfolio belong to the borrower and are taxed in his/her hands. In other words, no attribution back to the person who actually made and owned the money. If the dough had been handed to the less-taxed person to invest and came as a gift, all returns or profits would be attributed back to the donor, and taxed at his/her higher rate.

There’s more. The interest, as piteous as it might be, is tax-deductible. So a stay-at-home mom, for example, can have a portfolio financed with a spousal loan and deduct the cost of that borrowing from the investment income. The same can be accomplished for minor children through a family trust. Loan the trust money. It pays 1% per year to get it. The funds are invested with the kids as beneficiaries. They get the benefit of the investment income and likely pay no tax. Or the trust can be used to finance their education (such as private school tuition) pay summer camp fees or buy them drums and amps.

Remember how beneficial dividends can be, by the way. A family trust could earn more than $53,000 per year, per kid, and pay not a nickel in income tax, if that is the beneficiary’s sole source of income. Same with a spouse who is out of the workforce, engaged in child care.

To make this loan arrangement work, there must be documentation in place which will withstand CRA scrutiny. Have a written promissory note drafted and ensure there’s a physical, actual, real exchange of interest by January 30th of each year. That payment is taxable in the hands of the lender and (as mentioned) deductible to the borrower.

Moving income and assets into the hands of a less-taxed family member through this type of loan can save your household a bundle. Just like establishing a spousal RRSP, into which the higher-earner contributes and reaps the tax break, but the money belongs to the spouse who can eventually withdraw it at a lower rate. Ditto for the strategy of the common expenses (food, accommodation, dog food) being paid by the person who earns the most while the other partner does all of the investing.

This, by the way, is completely opposite to the way 90% of most marriages work. Especially those suspicious, secretive husbands and wives who keep their finances separate and suffer financially (and emotionally) as a result. (Why did you get hitched if you don’t trust?)

Finally, the virus.

It’s not going away, as planned. Some US states are even suspending or reversing reopening measures. Trump ain’t helping. Economic activity will be further impacted. Mr. Market’s taking a dim view of it all. Volatility is returning. Assets values will be under pressure after a meteoric rise. The period between now and the American election (if there is one) could bring big opportunity.

What a wonderful time to loan all your money to your heartthrob. Just remember the 1% must be paid in cash not cuddles.

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  By Guest Blogger Doug Rowat

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There are many famous Warren Buffett stories, but perhaps my favourite is the one told by his first wife, Susan Buffett.

As the story goes, one day when Susan was sick she asked Warren for a bowl for her bedside because she was feeling nauseous. Warren banged around in the kitchen and eventually came back with a colander. Frustrated, Susan explained that this wouldn’t work because it had holes in it. Warren returned to the kitchen, banged around some more and returned with the same colander but this time on a cookie sheet.

Such is the impossibility of trying to decipher the mind of a genius.

Though much has been written about Warren Buffett, perhaps those who have deciphered him best, at least in terms of his approach to investing, are David Clark and Mary Buffett (Warren’s daughter-in-law).

Their many books on Warren contain great insight into his techniques and approach to the market. While too numerous and complex to detail in their entirety, one surprisingly straightforward factor that contributes to his investing success is simply this: he buys old companies.

Why? Because Warren likes companies that have predictable products and predictable profits. And a brand-name product or service that’s been around a long time, preferably decades, gives a company a durable competitive advantage, which usually results in better and more consistent performance. Warren’s famous explanation of why he likes Wrigley’s chewing gum, which was first introduced in the 1890s, perhaps says it best: “I don’t think the Internet is going to change how people chew gum.”

David Clark and Mary Buffett detail his preference for old companies in their book The Warren Buffett Stock Portfolio:

Why is OLD so important to Warren? It has to do with the product or service the company is selling. Take Coca-Cola for an example. Coke has been manufacturing and selling the same product for well over a hundred years. It spends very little on research and development and has to replace its manufacturing machinery only when it wears out. This means that the company gets maximum economic use out of its plants and equipment before it has to replace them.

Old also goes to the nature of the product. Do you think that if Coke has been selling the same product for the last hundred years, it will be selling the same product ten or twenty years from now?

Now, I don’t highlight this passage to recommend buying Coca-Cola stock—my preference for broad-based and diversified ETFs, as well as my Raymond James compliance department, prevents me from making this recommendation. However, I do highlight the passage to emphasize the importance of considering a company’s age before investing in it. It’s certainly not a complicated strategy, but nevertheless, all things being equal, buying older is better.

Indeed, when I looked at the components of the S&P 500 and ranked them all by ‘years of incorporation’ and simply split the Index in half, the oldest half has outperformed the youngest half over both the past five years and the past 10 years. Unsurprisingly, these older companies have also been less volatile. (Looking at periods longer than 10 years gets problematic as the number of data points gets scarcer as too many younger companies actually don’t have 15-, 20- or 30-year trading histories.) What’s even more remarkable is that the youngest half contains a large proportion of high-flying information technology and consumer discretionary stocks such as Netflix and Amazon. Yet collectively, the old fuddy-duddies, like Johnson & Johnson and Kroger, still came out on top overall. In fact, virtually all of the top-10 oldest companies were incorporated prior to 1900 (some prior to the Civil War!).

The youngster in the top-10 was Eli Lilly, but even this company was still incorporated over a century ago in 1901. (To put 1901 into perspective, there were fewer than a million phones in use in the US and carrier pigeons were still sometimes used to send messages.) So, clearly, in terms of business models, any companies that’ve been around for a hundred years or more must know a thing or two about creating and offering successful products and services.

I further examined how this older-is-better approach has infiltrated (albeit somewhat unintentionally) our own portfolio management at Turner Investments. In particular, with our Canadian equity exposure. For many years now we have taken a non-benchmark approach to the Canadian equity market, overweighting an ETF that minimizes volatility and dramatically limits energy exposure. However, as it turns out, this ETF also contains companies that are much older on average than those in the overall S&P/TSX Composite. Unsurprisingly, the ETF that we selected has strongly outperformed:

Better with age

Source: Bloomberg, *measures years of incorporation

Click to enlarge

So, Warren Buffett, as usual, was right. Older is better.

Companies, it seems, are like fine wines: they get better with age.
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And finally, this came in my junk mail this week. Could there be a surer sign that Covid-19 is becoming a normalized part of our lives? I hope that they’re all actually smiling under those masks…

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

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The financial media briefly had a cow yesterday when Canada lost its perfect credit rating. This blog chose to bury the news in a riveting post about, well, we forget the topic. Anyway, it was outstanding.

Why kinda ignore the Triple-A thing?

Because it was so inevitable. We may be the first western economy to get slapped around by a bond-rating agency over Covid, but nobody here should be surprised. The Trudeau government has spent more money than Drake did on his new bathroom – a deficit of maybe $300 billion by the time the year’s out. The accumulated debt will pass $1 trillion. Mr. Socks-&-Whiskas will go down as the spendiest PM ever.

In response to the news from Fitch the Canadian dollar swooned a little, but shrugged it off. The next day Bay Street had already forgotten, and stocks traded higher. Bond yields actually went down, which was the opposite of normal. Downgrades should mean higher interest rates. Not this time.

The raters said this: “Pandemic lockdown measures and depressed global oil demand will cause a severe recession of the Canadian economy.” Our debt-to-economy ratio will zip from 88% to 115%. So, yes, the country’s finances are starting to look just as pooched as those of most Canadians.

But wait. This sounds serious. So why is even the Parliamentary Budget Officer – a wily, suspicious, dark and rebellious figure – saying, “it’s not that big of a deal in my opinion, and not something that comes up as a big surprise”?

Because it’s not. We keep an AA rating with Fitch and a better one with the other two big credit-rating agencies. Ottawa will have no more difficulty flogging its debt. The dollar wasn’t too whacked. Of course, long-term, somebody has to shell out to pay the servicing costs on over a trillion in debt, but the Boomers couldn’t care less. It won’t be them.

So if Mr. Market isn’t vexing over credit ratings, historic debt and your financially-eviscerated grandchildren, what’s the focus on?

The restoration of economic activity. Period. Jobless claims numbers in the US announced on Thursday were okay. No big surprises. The virus is ripping through a few US states faster than anticipated, but that has not seriously stopped any of those regions from lifting social and business restrictions. In Canada the Royal Bank is lauding Trudeau’s CERB bucks, saying that they’ve moved us towards a “V-shaped recovery,” – exactly what the stock market’s been telegraphing.

Latest stats show a surge in consumer spending in the fist half of this month, as eight million people took their two-grand-a-month pogey and blew it. “We didn’t expect it to come back that fast,” says the bank’s CEO. “We’re positively surprised…”

No wonder. So far CERB has flowed more than $52 billion into the hands of those who claim to have been impacted by the virus – lost incomes, sickness, caring for others or child support. The impact has been astounding – from an average -25% income drop before CERB and when Covid hit, to a +16% jump in cash flow and a hike in spending.

“They are actually helping to simulate the economy with some of the extra cash flow,” the bank boss told a certain TV network that you should never watch (BNN). “So, from that perspective, you’re seeing those CERB recipients continuing to spend and not just save the money.”

Of course, it’s what Canadians do. Spend. Forget savings or paying down the debt that creamed you in the first place. The tat parlours are open again. How can you not go?

Well, there is a problem, however. The economic recovery may be moving ahead and will gather much more speed when Ontario lifts its state of emergency order and travel restrictions ease, but what about when the CERB ends? What happens to people making more moolah staying home than going to a job? After all, a husband and wife both on the Trudeau virus dole, plus collecting enhanced CB for a couple of kids can have a monthly (untaxed) income of almost $5,000. No daycare costs, either. No commuting. Not princely. But not poverty. Enough to ignite a V-shaped spending boom, apparently.

It’s also enough for people running restaurants, grocery stores, pizza palaces, factories and retail outlets to have jobs go begging. Enough for students to work a few weeks then quit to collect during the rest of the summer. Enough to do serious damage to the work ethic. Just as masks and distancing are shredding the social one.

The dawn is coming, yes. Do not discount the cost.

About the picture: “I’m a long time reader and fan of your wit and wisdom,” writes Enzo. “We’re tucked away in the southern gulf islands between YVR and Victoria weathering the storms comfortably thanks to your sage insights.  My nephew sent me this photo and claimed that it was taken after the brushing.”

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Recently I fessed to having a corner office on the 53rd floor of a swaggering bank tower in downtown Toronto where I can see across Lake Ontario all the way to Nova Scotia.

Well, okay, Scarborough. But it’s a bitchin’ view, anyway.

The point is, I’m not there. Nobody is. Empty floor. Everybody – all my suspender-snapping portfolio manager smartypants colleagues and their assistants – are at home. Working remotely. Zooming, texting, VPNing, phoning and emailing each other and the clients they care for. The corporate overlords shut the place in March. Then the entire giant, 68-story edifice closed. People were told they’d go back at the end of May. Didn’t happen. The mayor begged employers in the downtown core to keep employees away until September. And the betting now is that just a trickle will return, even then.

So, yes, it’s a changed world. When this pandemic is finally over it’s only rational that a corporation which functioned 100% okay for six months with a dispersed workforce will rethink things. After all, people at home buy their own hand sanitizer, pay for their own connections, power their own A/C and arrange their own toilet paper.

The rethink, however, may go beyond how much pricey, leased space an organization needs. How about what people are paid?

Facebook’s Zuckerberg kicked this conversation into overdrive by telling 48,000 associates in May that people working remotely, living in the boonies where things cost less, could expect a pay adjustment. Down. The rationale was simple. First, the pandemic has gutted business models, wiped out profits and made corporations think hard about survival in a changed world. Cutting costs, reducing structural overhead (rent, salaries, benefits) is essential. Second, equity. If people can work from a location where real estate costs 50% less than in Menlo Park, or SF, or 416 or YVR, they should pocket less than colleagues in the city. Only fair. After all, no commuting, cheaper rents or prices and a lower cost of living.

This is but one result of the pandemic we’re all living through. Over the last four months so many new realities have emerged. Empty city cores. Commercial real estate doubts. Millions on government benefits. Remote employment. Mass mortgage deferrals. Hardened provincial and national borders.

The longer the virus hangs around the more certain that structural change will ensue. The latest news from the US is grim – record new cases in several areas, a surprise restriction of inter-state travel to places like New York and New Jersey and a warning from the famous Dr. Fauci that America is suddenly losing the Covid battle – truly bad tidings for the president. Meanwhile global infections are spiraling higher, thanks in part to the rightist dinglenuts who runs Brazil.

So while a lot of Canada is virus-free and the curve here was pummeled down, we’re not immune to the broad implications. Mr. Market signaled that on Wednesday, taking a dive lower after a breathtaking ascent of 42% since the end of March. Pandemics are temporary, and this will pass. But 2020 might mark the end of certain things. Fun air travel. Conventions. Adele and Drake concerts (there are benefits, too). Sixty-storey condos. Commuting. Open offices. Airbnb. Expect higher taxes and lower immigration. Structural unemployment. More government. A raft of business failures in 2021. Tighter credit. And a significant impact on real estate.

This week CMHC was at it again, warning people not to misinterpret the current burst of housing activity resulting from 90 days of pent-up demand being unleashed, particularly in Toronto. We should expect “severe declines” in both sales and construction activity, it said. How could it be otherwise when unemployment sits at double digits and incomes have taken a hit? The agency says it will be two years before things might restore to pre-Covid levels.

“We do not yet have a grasp on the answers to questions, such as the impact of greater work from home, differing impacts across industries, the effect of less mobility across provincial boundaries and the decline and immigration following cutbacks and international aviation,” it adds. CMHC also suggests rents will be fading with fewer immigrants, more difficult mobility within Canada and a ton of new condos coming to market which were started prior to the virus eating society. Lower rents are the last thing hundreds of thousands of amateur landlords need – people already stung by negative cash flow.

Meanwhile, especially in the GTA, it appears to be greater fool time. Sales are increasing, prices are inflating and June could set a new record for valuations. That’s the result of plunged inventory, cheap mortgages and hormonal demand after the markets was Covid-crushed in April and May. If you’re caught up in this, believing the faerie poop Remax is peddling, be careful. Logic tells us this won’t last. Normal is not close by.

On Wednesday StatsCan released a report on what the virus doing to the economy, and the lasting impact. “The degree to which COVID-19 results in permanent layoffs will have a major impact on how the pandemic affects Canadian workers over the longer term,” it concludes. “Looking back over recent decades, at least one in five Canadian workers who was permanently laid-off experienced earnings declines of at least 25% five years after the job loss.” BTW, Westjet laid off 3,300 more people today. And Canada just lost its Triple-A credit rating.

Next week is July. When the virus hit there was snow in the air. We’ll still be talking about the damn bug when the leaves are gone. So, don’t buy anything big. Borrow nothing. Build your financial reserves. And really suck up to your boss.

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There’s no virus in broad swaths of Canada. The east is basically Covid-free. No cases. BC is good. The North, too. Seems once Ontario and Quebec get their outbreaks over (drawing closer) the nation will not only have flattened the curve but kicked the little bug’s germy butt.

This is in stark contrast to the US, where active cases are romping higher in many areas (including red states). Globally, the WHO says things are worsening. There have been 9.2 million cases with a little more than half recovered thus far. Over 475,000 have died, and a quarter of those in one country – America. Officials say the toll there will double by autumn. It’s an indictment – of something.

Covid brought unemployment of between 13% and 17% to Canada. The economy has taken a huge hit. Public finances are a mess. About 20% of people can’t/won’t pay their mortgages. Eight million are on public emergency benefits. These are unprecedented times.

The good news? I got my hair cut last weekend. No longer do I look like the homeless drummer for a ‘80s metal band. Or like my dog.

We know pandemics are temporary and will pass. Stock markets and investors have obviously been counting on that (the S&P 500 is ahead 42% since March and up 8% year/year). But what about public psychology? When will things go back to normal? What changes are in the offing? How long will recovery take?

This much is clear: public health officials and governments did a great job of changing behaviours. This has done three things: (a) punt the virus, (b) crater the economy and (c) scare the crap out of everyone.

Look at the latest Leger poll results. Astonishing.

Most (66%) of people don’t want social distancing to end. And they’d like it kept at two metres, double what the WHO recommends. That pretty much pooches restaurants, which need higher occupancies to survive. Ditto for airplanes, concerts, bars, sporting events and a lot of stores. Overwhelmingly (74%) Canadians expect a second wave of Covid to hit and 51% think they might get it.

But to date only one-third of 1% of the population has been infected – a little over 100,000 cases in a population of 36,000,000. So far 65,000 people are healthy again and the recovery rate is 92%. In other words, the fear and the stats don’t hunt. (Total cases per million is almost three times higher in the States.)

The key question: is this a public health triumph and are people correct to stay vigilant, or was this an example of epic overreaction and government overreach?

Beats me. You don’t know, either. Nor will anyone for a few years. But we do know a lot of people are freaked out, diving around in their cars wearing masks, leaping off the sidewalk when you approach, avoiding stores or just staying home. Leger found 46% of folks are stressed when they have to leave the couch. Six in ten believe ‘normal’ is a long ways off. A third say it’s gone forever.

What are the implications of this?

Full economic recovery will take longer in Canada than the US, where many more will be stricken by Covid. People will still be jumping off the sidewalk when there’s snow on it. Stands to reason that the Canadian equity market will reflect this (already happening).

It will be two years (likely) before Canadian interest rates crawl out of their near-zero ditch. The new Bank of Canada boss, Tiff, has made that clear. This was reflected in the advent of the lowest-ever mortgage rate this week – 1.65% for a one-year term. Yup, below inflation. Free money.

Cheap loans coupled with financial illiteracy and house lust will, sadly, set up more people as victims in the next economic bust. Will we never learn that a one-asset strategy and over-leveraging are dangerous? Of course not.

We may lose an airline. Without a doubt there’ll be blood running down the gutters of many towns and regions that live/die on the tourist trade. It’s July next week. Millions of people have been home for three months. Kids off school since March. The line between work/ not-work has been erased and family vacations are a quaint notion in 2020. Just going shopping is a life-altering experience.

For investors, this means keeping your maple exposure in check. Yes, you need Canadian assets because you live here, in Canadian dollars, and want the tax advantage of domestic assets. But our nation has rapidly eroded its fiscal position, will recover more slowly from the virus, is likely to extend social benefits longer than anyone imagined and is turning into more of a high-tax regime. Plus there will be a federal election in 2021 with a Liberal majority, followed by a UBI.

That’s the real message of the Leger poll, in case you missed it. And you thought it was just a pandemic.

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Memo to self: never, ever again (ever) write about Trump. Juices and prejudices have made debate or analysis impossible. The deplorables win. Pass the ammo.

Last week we parsed the mortgage deferral thingy. Do not, this pathetic blog warned you, stop making payments and think there’ll be no consequences. That’s not a rational position and there’s zero chance lenders being stiffed on $180 billion worth of loans will just turn the other cheek. Ditto for credit cards. You’re being watched. Scored. Monitored. Recorded.

Astonishingly, three-quarters of a million households (as of Friday) had stopped paying their home loans. Another 450,000 people have deferred payments on cards. Never before has such a mass delinquency happened, which is the result of a once-in-a-century global pandemic.

If you’re truly pooched and must decide between food and the mortgage, then choose to feed your family instead of the bank. When the crisis ends and normalcy returns, sell the house. Obviously you can’t afford it. Trash the debt, rent, and focus on building up liquid assets. Never again let yourself be wooed into an asset beyond your means.

But the evidence suggests many are deferring because they think this ‘saves’ them money or that it’s essentially a payment ‘holiday.’ Un-huh. You still owe every cent deferred, which is added to the outstanding debt, and it’s highly unlikely (probably impossible) the grace period will be extended. This is the ‘deferral cliff’ CMHC’s badass boss, evil Evan Siddall, warned the nation about a few weeks ago. It’s coming. Many believe it will result in a flood of new listings in, say, October. That could have a lasting market impact.

Let’s review.

Credit agencies (we have but two of them) are 100% automated with few actual humans wandering around and there’s a decent chance deferred payments will be classified as missed. Bad news for your credit score. Even if they’re correctly marked as deferred, your lender knows what you did – claiming a payment reprieve because of financial distress. Do you seriously think this will not go on your record and have some bearing in the future? Then I have some great magic beans for you, back at the ice cream truck with the unicorn.

Mortgage renewals could be less automatic as you are asked for additional employment verification and details. Maybe a new net worth statement. The lender may want to know if you took the CERB, and why. Renewal rates could be adjusted if you’re judged to be in a higher-risk profession or (horrors) self-employed or paid via commissions. You might be refused. You might pay more. As we have no clear idea what the future holds, nor how banks may be re-assessing their risk tolerances, why would you create potential credit issues if you don’t have to?

Meanwhile, property listings continue to mushroom – up about 70% last month. They’re significantly outpacing sales, suggesting the current situation (multiple bids, rising prices in many urban hoods) cannot last. This could reflect people selling due to job loss, of course. Tweeted CMHC’s Siddall a day or two ago: “House prices lag economic events. Current price resilience proves nothing: don’t take comfort from low-volume price action. Multiple offers are consistent with a huge decline in new listings. Government support programs have deferred (& reduced) an inevitable economic adjustment.”

There are alternatives to deferring your mortgage, in essence abrogating your contract (and irritating the bank). For example, make your amortization period longer. A $400,000 loan with a 2.6% rate will cost $1,820 a month amortized over 25 years and $1,600 when the period is extended to 30 years. That helps. If you have a HELOC in place, take money from it to help make mortgage payments. Those funds don’t need to be repaid into the line of credit, requiring interest-only servicing until you’re back on your feet and can pay it off. No messing around with your credit score or unblemished payment record.

Most of all, reconsider your fixation with property. Is this really the best place to put the bulk of your net worth, leveraged up the wazoo?

The proportion of households with mortgage debt who have deferred is staggering – 20%. If they’re all in trouble, ouch. It took but 8% of US property owners who were over-extended and in distress to topple that market, creating a 32% plunge in overall values (it was 70% in some areas, like Phoenix and Florida’s Gulf coast).

By the way, in its most recent report the Bank of Canada said this: About 20 percent of all mortgage borrowers do not have enough liquid assets to cover two months of mortgage payments.

And what percentage are currently not paying? Yup, 20%.

The folks who loaned them billions, now collecting nothing, have some ‘splaining to do.

  Hey, a whole post and I didn’t say ‘Trump.’ This is progress.

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What a blog. My snappy portfolio manager buddy Ryan set you up for Trump’s pivotal Tulsa rally with his astute, research-based post yesterday. And today I will clean up the damage.

Not from Mr. R, of course, but Mr. T. What an awesome mess the 45th president of the United States has left in the wake of his Oklahoma excursion, and it’ll be interesting to see how financial markets react over the coming days and weeks.

First, the hype. The Trump campaign, the man himself and lots of his parrots and cockatoos on this site chirped about one million people having requested tickets for a mass rally of historic proportions. Well, didn’t happen. About ten thousand showed up. That’s a mess of people, for sure, but it left half the seats empty and amounts to 1% of one million. There was no overflow outside, when the campaign had suggested perhaps 40,000 might clog the streets. So a speech by Trump in that location was scrapped. The elaborate outdoor stage was dismantled. And claims that MAGA fans had been turned back by protestors was showed, live on TV, to be false.

In short, a disaster. One of the biggest fails in modern campaign history. The base did not rally. No flocks of new supporters. A sea of vacant blue seats.

Turns out hundreds of thousands of tickets were reserved by TikTok dancing kiddies and K-poppers doing mischief. Imagine, using the Internet for political reasons. Like Trump on Twitter (‘Hillary is a criminal!’, “Joe has dementia!”). The real worry for Republicans is (a) how the most sophisticated and data-oriented campaign ever didn’t pick this up and (b) why Trump and others fell for and promoted it – a million attendees in the middle of a pandemic. Duh.

Second, Covid. Truly scary, since Oklahoma has recently seen a spike in cases and public health officials warned against a rally, complete with a Presidential mosh pit. In fact, this was the largest mass gathering on the planet since the pandemic arrived – which so far has infected almost 9 million and  killed 467,000, a quarter of them in the US alone.

Most people did not wear masks. Maybe 10%. During his speech Trump said he’d asked officials to “slow down testing’ for the virus because too many new cases were being discovered, making him look bad. And yet every public health official everywhere has said without testing the virus spreads undetected and cannot be halted. Less testing, more deaths.

In fact, pre-rally we learned six Trump campaign staffers have Covid. They were removed, of course, and it was reported today 45 was livid this news had been allowed to leak.

On stage he called the virus ‘Kung Flu’, a racially-charged epithet. Coming amidst the mass protests against racism on three continents, this was a shocker. While the president likely thought he was just dumping on China (again), this is not what Americans of Asian heritage (23 million) want to hear. More polarization, blame, discrimination and hate in US society. Not what you expect from the boss.

Today Trump has more to worry about than he did Saturday afternoon. His campaign let him down. He looks weaker, less relevant. John Bolton’s tell-all will be published Tuesday. Tulsa suggests there’s no silent majority, but a reckless minority. And no amount of inflamed rhetoric or oratorical passion can chase off the demons the president faces.

Forty million Americans are out of work, as the jobless toll swelled from an historic low to Depression-era levels. Public finances have been creamed as Washington spends trillions to stave off decline. Economic growth has turned into a GDP crater. It’ll take years to climb out of the hole. Half of Americans are still terrified of Covid and say they’re not ready to go back to work, fly or eat out. Finally, hundreds of thousands of people of all backgrounds, ages and races have been in the streets since the death of George Floyd in a movement the guy in charge does not acknowledge.

Whatever your leaning – right or left, con or lib, GOP or Dem – facts are facts. Trump narrows his base of support daily in mishandling these pivotal challenges. Tulsa was meant to be a symbol of renewal and rebuilding. Now it suggests naivety and ego. He looks remote, out of touch. More extreme. Every time he calls his opponents a ‘mob,’ he drifts further from the mainstream of voters, who worry more about their health, their jobs, their families. Joe Biden may be ancient and a tad creepy, but he’s no rad.

Mr. Market preferred Trump. Expect change.

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