Category: Accounting tips

   By Guest Blogger Ryan Lewenza

.

In the very immediate future, the US presidential election is about to kick-in to high gear and will be a focal point for investors and the markets. Currently, investor focus is on COVID and new infection rates, the reopening of the US/global economy, the unrest in the US, and all the government stimulus announcements. However, soon investors and the markets will be turning their attention to the US election and what the outcome could portend for the economy and equity markets. In this week’s post I examine the historical impact of presidents on the US equity markets and review the key policies that could impact the US economy, equity markets and Canada.

Currently, Trump is on his back heels with Biden being the clear front runner based on numerous polls and betting websites. Below are the current odds of winning the Electoral College from The Economist. Based on their models they have Biden winning 341 electoral votes to Trump’s 197 votes, and have Biden at an 85% probability of winning the Electoral College and becoming the 46th US president.

Now a lot can change from now till then, and as we saw in the 2017 election, polls don’t always get it right. But given these current readings and Trump’s recent setbacks (e.g., handling of the pandemic, the ongoing recession, and his response to the recent protests), I believe Trump faces an uphill battle to securing a second term. This is not a political statement, rather my current assessment of the US presidential race.

What are the implications of a Biden win (if I’m right) or a Trump win (if I’m wrong)?

Chance of Winning the Electoral College

Source: The Economist

There is a commonly held view that the US equity markets perform better under republican control given the party’s focus on lower taxes, deregulations, and overall being more business friendly. Well the facts don’t support this thesis, as based on my analysis, the equity markets have performed better under democratic presidents.

Below is a great chart that illustrates this. I calculated the average performance of the S&P 500 over the four-year president term since 1945 under both democratic and republican presidents. The results are surprising. On average, the S&P 500 has gained 56% (price return only) under a democratic president versus 27% under a republican president.

Now it’s important to stress that luck and circumstances also plays a role in these returns. For example, President Obama took over after a terrible bear market under Bush II, and saw great returns over his 8-year term in office. But even with this, given the numbers we’re dealing with (8 democratic and 9 republican presidents) this is a decent sample size, and I believe has some investment merit.

Key point here is, don’t jump to conclusions and think that if Biden pulls out the win and becomes the next US President that the stock market and economy are going to go into the crapper. In fact, this analysis shows quite the opposite.

S&P 500 Performance under Different US Presidents

Source: Bloomberg, Turner Investments. Based on S&P 500 data from 1945 to present

The most significant impact to the equity markets, should Biden win in November could be with corporate tax rates and their impact on corporate earnings. Biden proposes raising the US corporate tax rate from 21% to 28%, reversing some of the huge Trump tax cuts that went into effect in 2018 (Trump and the republicans cut the corporate tax rate from 35% to 21%).

If Biden wins and is able to pass this legislation then this will surely impact corporate profitability, which is a key long-term driver of equity returns.

Expectations for S&P 500 earnings next year are $162/share, which equates to a 29 Y/Y growth rate, based on 2020 estimates of $125/share. If Biden hikes tax rates then this could shave off 5% or $9-10/share in earnings next year. Basically, this could cut potential earnings growth from 29% Y/Y to 22% next year, which doesn’t help stock prices.

The upside of these tax cuts (assuming he doesn’t just redirect all the higher tax revenue to increased spending) would help to cut their massive deficit, which is a big concern of mine.

All else equal, a Biden corporate tax hike would be negative for US stocks, if enacted.

Next up is China, which is critically important as it appears that a cold war is brewing between these two competing, hegemonic nations. Trump has taken a very hardline approach (some of it I agree with) with China through aggressive trade policies and tariff increases. I do see some long-term benefits of these aggressive moves (e.g., onshoring manufacturing, having more control over supply lines) but Trump’s strongman approach brings some negative reactions as well as there is greater uncertainty, and global tensions, which is never good for the economy and stock markets. We saw numerous market declines over Trump’s first term, which were a byproduct of his aggressive moves with China.

While I don’t see Biden as a pushover, I think he would take a less hostile and combative approach than Trump with China, which I see as a positive for the US/global economy and equity markets.

Lastly, a Biden win would be bad for our already battered energy sector, as he’s been very direct about his opposition to TC Energy’s (TransCanada) Keystone pipeline, a position shared by his old boss President Obama. Biden recently stated “I’ve been against Keystone from the beginning. It is tarsands that we don’t need — that in fact is very, very high pollutant,” in an interview with CNBC. It wouldn’t be a death blow to our energy sector, especially with TransMountain gearing up, but it definitely wouldn’t help it either.

I see pros and cons for both Biden and Trump on the economy and markets (my focus on this blog is finance and investments and I try to leave my political opinions/biases aside), and I see the US election playing a bigger role in the media and markets in the coming months. A lot’s at stake in this upcoming election so it’s going to be interesting. Buckle up!

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

There are 12,500,000 households (more or less) in the nation. Of those, 206,600 have managed to accumulate $5 million in assets, or more. That’s 1.6% of the population. Together they own 28% of all the wealth. Some of them – fewer than 3,000 families – have a ton of dough, $100 million or more. Under a dozen have a billion.

How did 1.6% of people get 28% of the money? Some inherited it. Most did not. And the bulk of the wealth isn’t in cash, but invested in businesses. Some of those employ armies of people. Like Galen Weston, for example, currently a punching-bag of the leftists. He’s worth about $8 billion (largely in corporate stock) and employs just under 150,000 Canadians.

But billionaires are rare. We could use more of these job-creating titans. And wealthy people are cash cows for the government. The top 10% now pay 54% of all the income taxes. That allows forty per cent of households to pay nothing, net of government benefits.

Wat did Covid teach us?

Lots, sadly. Eight million people (of a workforce of 19 million) went on the dole. Close to a million households (of the 3.65 million who own houses with mortgages) decided they couldn’t make payments. It took less than a month after the virus arrived for a crisis to emerge. Now the federal government has discovered (no surprise) that it can’t turn the tap off. It will be Christmas before the CERB expires – and no guarantee that will happen.

For a dog’s age, this blog has argued a real estate obsession has lured people into historic debt, caused them to spend money unwisely, cratered savings, set up a retirement crisis, created a dangerous one-asset financial plan and actually fed financial insecurity. If you need proof of this, read the paragraph above once more. On average Canadians have $1.50 in debt for every buck earned. Debt ratios are 450% of income among new homebuyers in Toronto and Vancouver. Interest rates are at historic lows. Just imagine in a few years when the virus is a memory, economies are restored and the cost of money begins to rise.

The payroll guys found repeatedly that over 40% of households were one paycheque from disaster. Now we know it’s true. Credit bureau surveys discovered, pre-virus, that six in ten families felt they might not be able to pay their monthlies, because of debt. Also true. Over half of all households are vulnerable financially – in a country where 70% own houses. Remarkably, this comes after the greatest-ever run-up in real estate values. Instead of harvesting profits and diversifying, Canadians kept buying up the property ladder, hiking debt and danger. Incomes have matched neither spending nor appetites. Debt filled the gap. Now the reckoning.

Meanwhile the wealth gap spreads. Families with diversified assets have had a far different Covid experience. Thanks to dramatic government fiscal stimulus and historic levels of central bank monetary stimulus, capital markets have recovered fast from the virus. As interest rates collapsed, more money has gone into equities – since fixed income pays squat. And Mr.Market accepts that pandemics are temporary, so the economy will inevitably reopen and corporate profitability restored.

This is what investors, therefore, have seen happen while millions of real estate-indebted families struggle. The gauge of fear and volatility, the VIX, has tumbled dramatically from its March peak.

The gauge of fear tumbles…

Concurrently, equity markets have rebounded dramatically, as shown here by the S&P 500. We’ve just seen the fastest, steepest ascent from bear market territory in history. Those people who panicked and sold in late March took a paper loss and made it oh-so real. Those who ignored the drop are seeing their portfolios restored.

…while market confidence grows

Does this still look like a V-shaped recovery? Investors think so, despite the damage lockdowns and quarantines did to the economy, despite huge unemployment, despite the potential of a second wave and that weird guy in the White House. As society reopens the negatives will diminish while the fiscal and monetary stimulus continues. What would cause markets to stumble and fall – that we’ve not already faced?

Stay invested. Ignore the “stocks are too risky” discredited moaning of those (including advisors) who totally missed the rebound. Balance, diversification & liquidity are the three muses of the 1%ers. They’re making the wealthy wealthier. And no realtors involved.

Source

Dipper leader Jagmeet Singh did a victory lap on Parliament Hill this week after blackmailing the Trudeauites into another $34 billion in CERB payments. The program will have dished out roughly $90 billion to workers claiming a virus impact by the time it ends (Christmas).

In exchange for allowing the T2 gang to survive a money vote (confidence), Singh demanded – and received – the 16-week benefits extension. And so the most costly short-term social program in Canadian history continues. Rest assured his next demand will be for UBI. If the Libs don’t agree to start crafting a universal basic income, well, we get an election. Ironically that could wipe out the lefties and usher in a Liberal majority. (Peter? Erin? Anybody home?)

The deficit for 2020 may well be $300 billion (the indie PBO says $256 billion so far). The federal debt will squirt past $1 trillion. The debt-to-GDP ratio will rise from the mid-30% range to 50%. With provincial borrowing added, the number becomes 90%. Still better than the US (110%) but poor contrasted with Germany (60%). Expect these comparisons when Bill Morneau gives his ‘fiscal snapshot’ on July 8th arguing that it’s no big deal when the deficit increases by a factor of 10 in a single year or that one administration adds more new debt than any which has gone before.

Chances are most voters will agree. After all, eight million households are getting direct deposits of two grand a month. Four in ten already pay no net tax. Child support benefits have inflated bigly. Wrinklies receive more, too. Plus billions going to companies to subsidize the wages of people who aren’t working, and business loans a quarter of which is forgivable.

It’s all astonishing. And as Galen Weston found out in the last few days, you can never take back what you generously gave. Society has turned. Not for the better.

Well, let’s dive into a single little example in the life of one woman to ascertain the impact of CERB. It’s spring, so we’ll call her Iris. She lives in Ontario, reads this blog and admits being pissed.

Your last post was about CERB extension, so I thought you might be interested in posting just another view. The math is very disturbing. I lost my job due to COVID. I am eligible for unemployment benefit, but was forced to get CERB instead.

Now the interesting part – I was offered a part-time job. First 2 months it paid $2600 and now less hours offered and the pay – $1300. Should I refuse it? It just doesn’t make any sense to work for $1300 when you can get $2000 for doing nothing, right? And the room for extra earning is max $1000 under CERB. However, under old EI benefit more extra earnings allowed, I would get $3592 the first 2 months and $2942 for the third and forth. So overall for 6 months I would lose 2×292 + 2×992 + 2×1642 = $5852

First time in my 20 plus years career I am collecting benefits and so very disappointed and angry. I don’t know what to do. Shouldn’t we all have a choice to collect CERB vs EI? Do I start a petition?

Iris is miffed CERB replaced EI (although she can go back on unemployment benefits when the emergency money ends). This, she argues, is unfair. She feels entitled to the larger amount after twenty years of making EI contributions. But by the time CERB ends, Iris will have collected $16,000, and paid no tax. With an average income of $30,000, it would take 33 years of EI contributions to equal that amount. She’s way ahead of the game. But wants more. Another Galen Moment.

Here is the dilemma. Accepting a job and going to work isn’t even an option in her mind. Why work for less when the government will pay you more to watch Netflix?  It’s a question many are asking since the virus came to town and the direct bank account deposits started.

There are answers, Iris.

Accepting a position can lead to advancement, more hours, better pay and responsibility. Sitting at home watching Space Force does not. Never will. You stay unemployed.

Working means human contact and interaction with others (even with social distancing). To do this you must put your pants on (well, usually), wash your hair, leave the couch and practice social skills. Or you can stay home and hoover cheezies.

Being employed gives daily meaning and context to a life. ‘And what do you do?’ is a universal question. ‘I brush the cat’, is a bad answer. There is a sense of dignity and self-worth that comes when you are paid and have a task. No pogey payment can provide that.

Having a job means building a resume. Staying employed and gainful during a global pandemic will probably be noticed, admired even, by future employers. Staying on the CERB will be noticed, too. So, Iris, why not collect a grand a month for part-time hours, plus an equal amount from Ottawa, and let it be known that you’d like a full-time gig?

Some people worry leaders like Singh (and now, Trudeau) are hastening the destruction of our work ethic. Moreover, they’re helping ensure small business failure. When people get more to do nothing than take temporary, part-time or entry-level employment, what are entrepreneurs to do? Just pay more? But many cannot and stay viable. The failure rate – even in good times – proves the fragility of Main Street.

Yes, millions of people need temporary relief. Covid’s been a bitch. But Iris gives us a small example of the unintended consequences of political actions.

Workers who don’t work. Employers who can’t hire. Soon, taxpayers on the brink.

Source

Tiff would be a swell name for a guy on your rowing team at Harvard. Or as CO of the cadet corps at your boarding school. Ditto for your daughter’s tennis or dressage instructor at the Club.

Well, here he is. Patrician, steady, old-school solid. Now in charge of the Bank of Canada, Tiff Macklem is all about creds, not surprises. Economist. Banker. PhD. His father was CFO at Birks. Nurtured in Montreal’s tony Westmount. He’s worked in the Department of Finance, headed a major business school, repped us at the G7 and has served as deputy governor of the central bank. If you’re looking for a good time, lose his number.

Now Tiff is presiding over an economy on its knees. No BoC boss ever – save the guy who just left, briefly – had to deal with a global pandemic, eight million people on the dole, a cratering GDP, forced economic shutdown or a tripling of the jobless rate in two months. There is no playbook. No precedent. Nobody to ask for advice. What the Tiffer does next will impact a slew of citizens.

He testified before our lame, hobbled, shameful, held-to-ransom Parliament this week. “What we really want to avoid,” he said, “is a non-recovery.”

“The biggest risk to Canadians becoming insolvent is not having a job. Monetary policy has lowered interest rates to reduce the interest costs Canadians are facing. That is the best contribution we can make to getting Canadians back to work, which is the best thing we can do to prevent Canadians from going insolvent.”

Okay, that’s why the yield on the benchmark Government of Canada bond currently looks like this. See what’s happened since the virus came to town in March?

Also note the language used by Macklem. Canadians are not ‘struggling’ or confronting ‘financial stress.’ Instead they risk “going insolvent”, thanks to excessive debt-snorfling, over-leveraging, house-horniness and the kind of financial acumen usually associated with small, burrowing rodents. In other words, interest costs must be plunged or else many will drown in their own payments.

But, is it too late?

Robert Hogue, a biggie economist at RBC, is suggesting this may be the case. Look at real estate listings, he says. Getting scary.

Realtors across the country reported a jump of almost 70% in properties hitting the market in May after a barren April. Says Hogue: “There are early signs demand and supply are decoupling. We expect further decoupling in the period ahead. Economic hardship is no doubt taking a toll on a number of current homeowners — including investors. Some of them could be running out of options once government support programs and mortgage payment deferrals end, and may be compelled to sell their property.”

Yes, as a certain pathetic blog has been yammering about for weeks now, the decision by almost a million homeowners to stop making mortgage payments is consequential. If these people lost employment and income and became unable to service their loans after a month or two, it shows deep financial failure. If some decided to cease servicing their debts out of economic uncertainty, well, nothing has changed. The jobless rate will stay elevated and society seriously abnormal for months to come. When payments on $180 billion in abandoned mortgages restart, the stress will return. And more may realize the burden and risk posed by housing debt in a post-pandemic world.

Says RBC: prices will fall in most markets in the coming months. “Strong starting points in Ottawa, Montreal, Toronto and Halifax will provide these markets with a temporary buffer. Prices are already declining in Alberta, and Newfoundland and Labrador. Nationwide, we expect benchmark prices to fall 7% by the middle of 2021 though believe a widespread collapse in property values is unlikely.” Recall that CMHC is forecasting a decline of up to 18%. CIBC says 10%. Moody’s says 30%. Remax says phooey.

Meanwhile, have you noticed what crashed interest rates have done to financial assets?

From the virus-infused low on March 23rd, US stocks have gained 42%. Bay Street is ahead 38%. The S&P 500 has given investors who ignored the pandemic an 11% year/year return. Amazing, and many people wonder how stocks can be so disconnected from the real economy.

One reason is this: where else is money going to go? Bonds pay diddly. Cash and GICs have zero returns. Commercial real estate is suddenly looking dodgy. Houses are the inflated tools of the indebted, chattering class. Landlording’s a death wish. So even with a pesky virus nibbling the planet, diversified and balanced portfolios of financial assets seem more secure – and have performed admirably.

And now here’s Tiff. Expect low rates, he says, until things start looking the way they were way back in February. The best guess? Two years. The next Bank of Canada move up will take place in 2022, the odds suggest. That means low bond yields, cheapo corporate financing, buckets of monetary stimulus, central bank bond-buying and more dough migrating into growth assets.

As for real estate, the soma of the masses, it all comes down to jobs. If they come back fast, then the market holds (after the current boomlet). If millions are still collecting CERB in October, expect rampant poochedness. The non-recovery.

Source

It’s official. Eight more weeks of CERB. Estimated (additional) cost: $34 billion. As mentioned last week, that’s almost twice what the army, navy and air force cost to operate for a full year. Never before has one social program sucked off this much – $94 billion or so by the time the CERB ends and our cerbitude begins.

Surveys show Boomers worry about this stuff. Millennials don’t much. GenZers couldn’t care less. There’s a growing cadre of kids who believe the Bank of Canada is full of pixies who just print money, give it to Justin who then gives it to them. This has a name – ‘modern monetary theory’ – and MMT’s now at the heart of Democratic politics in the US. It’s the rationale for justifying UBI, a universal basic income. In a rich country like America, the progressives ask, why can’t wealth be created for citizens as easily as the Fed spends $250 billion buying corporate bonds?

But the US owns the world’s reserve currency. Our dollars are essentially priced in theirs. Creating more dilutes the value of all existing loonies, which leads to inflation. If you think buying a house is hard in Vancouver or Toronto now, just wait. MMT promises wealth for all, but could end up being a wealth destroyer.

Anyway, the federal deficit is on its way to $300 billion now. Next month there’s an economic statement. In the spring, a budget. In 2021, higher taxes plus an election. Remember the advice proffered here yesterday. Things I’m hearing about: a new tax bracket, some diddling with TFSAs, a higher capital gains tax inclusion rate and a ‘temporary’ Covid-19 tax. Yeah, temporary like income tax was in 1917.

The virus has sure changed real estate. Sales plunged in April, staggered back in May and low inventory levels have kept values level. Forecasts of big price declines abound, but housing is an emotion-driven commodity and if people feel confident buying, they will. Even when unemployment is high and the economy unsure.

Insufferable Tyler, a regular blog dog, sends along this report from his Toronto hood:

I have been following the for rent/for sale market for the last two months in Etobicoke.

April 6: For Sale = 5,772; For Rent = 6,302
June 5: For Sale = 7,043; For Rent = 9,444 (22% and 50% up).

“For rent” availability has been steadily increasing but the increase in “for sale” availability is mostly since mid/late May. I wonder if it’s a trend or just seasonality. We’ll see in a few months I guess… An anecdote: in our complex (three buildings) there is usually 1 condo available at any given time. Now it’s 5-6. One 2bed/2bath was originally $3,200/m (May 14). Now it’s $2,850 (since June 3).

Negatives for big-city real estate include the virus (duh) which tarnishes condos, especially those soaring downtown germ factories; the collapse of Airbnb, bring more rentals and listings to market; now-structural unemployment; tighter CMHC restrictions; and banks pissed-off by a million mortgage deferrals and in no mood to give credit to sketchy borrowers. Positives include the lowest mortgage rates in memory; seriously pent-up demand and, well, that’s it.

But what about all these virtual tours and the inability of buyers to actually go and see what they’re purchasing? Surely that is a huge obstacle to selling something as visceral, physical and tactile as real estate?

Nah. No more.

A survey by Ontario realtors reveals 42% of people are open to buying digs they’ve only seen on their iPads. Just a third indicate they want to open cupboard drawers, peer into basement corners, check out the yard, flip around the electrical panel and look behind the dryer.

Of course, this is insane. Sellers and their agents spend big bucks ensuring virtual tours are gauzy, fetching, evocative, compelling, emotive works of marketing art. They stress décor and lifestyle, glossing over or ignoring stuff like amperage, insulation, moisture penetration or if the neighbour raises illegal livestock. Just as nobody sane should buy a pre-con unit from plans with a builder’s contract, nor should they go firm based on a YouTube production. At least get your agent (not the seller’s agent) to walk through FaceTiming the place, and make the offer conditional on a proper home inspection.

Oh, and here are two more reasons to delay buying. Almost 40% of homeowners surveyed had planned to list their homes pre-virus. Now the majority say they’ll wait until Covid is “officially over”. Expect a torrent in the fall. Plus 40% expect prices to fall somewhat or “a lot.”

Sheesh. Might as well self-isolate in the apartment, collect free money and refuse to pay rent. Like the government wants.

Source

The next four months will be a ride.

In Canada the CERB is slated to end, punting eight million people back onto their own resources. Unless, of course, the Trudeau government keeps the tap flowing. In that case (done deal), federal finances will further disintegrate, promising higher tax rates. Either way, not a swell outcome.

Close to a million households which have deferred mortgage payments for half a year will have to find the dough to start paying again. Don’t count on the banks extending this program – it’s too damn costly. So expect more listings since the unemployment rate is staying high for a while. A long while.

There’ll be a federal budget, or at least an economic update. It’ll be shocking.

And, of course, there’s a US presidential election on November 3rd. Unless there isn’t (more on that in a moment).

American politics loom large for everybody. Trump has been a polarizing figure now facing the electorate with (as mentioned last week) three daunting challenges: a public health crisis (Covid ain’t over yet), civil unrest plus a crashed economy and record unemployment. Joe Biden currently has a wide lead in polls (49.8% to 41.7%), favoured by blacks, Latinos, suburbanites, women, Mills and a growing number of older white dudes. He’s also ahead in key battleground states like Wisconsin and Michigan. Polls change fast, but right now they point to a Trump crash-‘n-burn.

Biden in the White House would likely mean expanded trade (good for investors) but a bigger government presence and enhanced social spending (not so good) as well as forced corporate reform (bad). Enhanced taxes are likely. So Mr. Market would rather have Trump.

Now, let’s dip into the contentious issues of Black Lives Matter and, while we’re at it, MeToo. These days we’re bombarded with newspeak and newthink. “White silence equals violence,” for example. Or corporations telling people to alter their signature blocks with “preferred pronouns.” Or the spreading use of fuzzy words like “allyship.” In recent weeks, since the death of George Floyd, the BLM movement has exploded with the same force and fury as did MeToo post-Harvey Weinstein.

These causes are seminal of course. But it’s interesting to note why they gained so much velocity so fast, and what impact they might have on your TFSA (to be crass about it). A US political scientist, quoted in the New York Times, has an interesting theory about social justice and Donald Trump.

Simply put, the populace moves in the opposite direction to leaders. When Obama moved left, people drifted right, making gun control legislation impossible. As Trump lurches right, citizens trend left, giving momentum to social justice issues like racial and gender equality. Of course, the shock of George Floyds’ death mobilized public sentiment and Trump has been extreme on a daily basis, exacerbating change. Plus hundreds of millions of people are frustrated, inconvenienced and impacted by the virus.

As a result, there’s a yawning appetite for change, now focused on two of Trump’s weakest profile points – race and sex. And this helps explain the shift left in politics. Biden isn’t exactly the embodiment of a youthful, ethics-based revolution, but he stands to reap the harvest.

Source: New York Times

Unless there’s no election. Or, at least, a fair one.

Covid will be with us in November, and the only logical way to have a vote without long, dense lines of people is with mail-in ballots. Many people worry this process is open to manipulation, fraud or just bumbling and results could be inconclusive. In that case the 12th Amendment calls for a president to be elected by the House of Representatives, where each state gets one vote. So much for the big Democratic bulge in places like New York and California. Trump wins.

Far-fetched? Absolutely. But when 2020 started did you expect there’d be a global pandemic, 15% unemployment, the worst economy since the Depression, no hugging, eight million Canadians on government pogey, masked people in the grocery store, shuttered office towers, areas and malls or mass protests on three continents ignited by one death in Minneapolis?

Of course not. And it’s only June.

Takeaways?

Be careful where you invest. For example, people with units in a major real estate-based mutual fund just learned they’re locked in. No redemptions.

“During this challenging time, we want to help protect the long-term value of your plan members’ investments in their group retirement plan. This is why Manulife is temporarily restricting member-directed redemptions and transfers from the Manulife Canadian Pooled Real Estate Fund in your plan, effective at 4:00 p.m. ET on June 12, 2020.”

That notice was sent out three days after the fund was locked down, ensuring nobody could cash out. Nice. Thanks, Manulife.

Expect volatility. The Vix shot up from 25 to 40 in recent days (it hit 82 in April when the virus arrived). The next few months may well see a return to big daily swings on stock markets as a torrent of economic, health, social and political news washes over investors. In a world like this, seek balance. Ensure you have a stable fixed-income component to your portfolio. Some boring is good.

Let no tax shelter or advantage go unused. Shift assets into your TFSA until it’s stuffed. Ditto for your spouse and adult kids. Utilize your available RRSP room, and borrow at today’s ridiculously low rates to do so – using the tax refund next year to pay the loan down. Or make a contribution in kind, shifting existing, taxable assets into your registered retirement plan.

Also consider harvesting capital gains while the inclusion rate stays low (now at 50%) instead of waiting until after the next budget. Split income with a spousal RSP into which the higher-taxed person contributes and claims the deduction while the other can cash out later at a lower rate. Set up a spousal loan to gift investment funds without attribution. Make the less-taxed spouse the investor while their partner pays the bills. And, of course, don’t defer your mortgage.

Oh, and get a helmet.

Source

Regular addicts may recall bold blog dog words such as these being published here over the last few weeks:

I am one of the 700,000 Canadians not paying my mortgage at the moment.  Lately you have been bashing those deferring as not having any savings and just spending on Netflix and N95’s and completely house poor.

We have a home worth about $850k and a $265k mortgage.  $300k invested in a relatively B/D self-directed portfolio and $20k in cash. No other Debt. Could I pay?  Yes.  But why be in a hurry when money is so cheap?

My reasoning behind not paying is:
1. Our variable rate on the mortgage is 1.45% – why cash in my BMO stock paying me 6.24% divvies to pay down a mortgage at 1.45% (coincidentally with the same bank)
2. We will be putting a new roof on this summer as well as sending a child off to Uni in September.  If we kept paying the mortgage, by late fall – the cash in the bank might be depleted and we might have to dip into our investments.

Cashing out some of the investments now or in the fall would force us to take a loss.  Should I really have more than $20k in cash and be opting to continue to pay BMO? Not sure you’ll reply but wanted to give you my perspective.  Am I nuts?

Probably. For taking an unnecessary risk – which is the worst kind. With almost a million in net worth and (presumably) a job, how can you not service a $265,000 mortgage at 1.45%? What’s the need to sell stock? That’s only a grand a month, so deferring it for half a year would save but $6,000 in cash flow. The interest, of course, gets tacked onto the mortgage principal – so it grows. Not a great outcome. And this is not the sole cost.

Second, with a portfolio of only $300,000, why’s it full of bank stock? The dividends are nice, but the volatility can be a stress – certainly not sounding like a ‘balanced & diversified’ account. (No normal person should own individual equities with less than seven figures in a portfolio.) As for the kid and the roof, what was the plan before the virus hit? Sounds like Covid and the advent of deferrals furnished an excuse to paper over lousy budgetary habits and sketchy personal discipline. Don’t try to make this sound like a genius financial strategy. It’s not.

Hundreds of thousands of people have deferred payments on $180 billion in mortgages. This is troubling for so many reasons. First, those who would lose their homes after three or four months because they lacked an income, savings, resources, investments or an emergency fund or LOC and could make no payments since they own more debt than equity, made bad choices. They should not own real estate they cannot afford. By doing so they imperiled themselves and their families reaching for an asset obviously beyond their means. They failed. The lenders giving them the financing failed. Society with its maniacal obsession with houses failed. Covid proved this.

When the deferral cliff comes in autumn this will not be a happy time in many lives. Jobs will return, but far more slowly than they were snatched away. We’ll all pay for real estate lust.

Second, those folks who can pay their obligations but chose not to must think they’re gaming the system. The pandemic, they believe, gives cover for sticking it to the bank – diverting money into toys, renos or a TFSA – without consequences. Prepare, ye delusional serfs. This may not end well.

The credit bureaus – Equifax and TransUnion – are doing what they’re supposed to,  recording deferred payments as missed ones. They may well be listed correctly on your credit report but heed these words from mortgage broker Rob McLister: “Mortgage deferrals aren’t supposed to hurt people’s credit scores but when a mainstream lender sees you’ve had a deferral, it’s nonetheless a red flag.”

What does that mean?

Just what you’d imagine. Lenders who note you could not (or would not) make mortgage payments for a number of months could, according to McLister, scrutinize your income and analyze the stability of your job or your employment sector as well as request more documentation about your financial situation. They may also, “Decline you if you have borderline qualifications, particularly if you’re employed in a higher-risk industry.”

Deferrals cost. Lenders you have failed to pay because of the virus will be looking for an explanation why, and may be asking for pay stubs, receipts or contracts to prove income has been restored. Don’t assume your mortgage will be renewed automatically with no questions asked, and certainly don’t try to get refinanced or switch lenders while payments are being deferred.

And good luck trying to repair your credit with the bureaus, which are likely to be overwhelmed in the coming months. These are almost-entirely automated systems with meagre human resources to deal with reporting errors or requests. If you’ve ever tangled with them, you know.

In short, pay your bills. Or get out.

Source

  By Guest Blogger Doug Rowat

.

What do they say about mullets? Business in the front, party in the back? Zoom meetings during the Covid-19 lockdown have become the mullets of 2020: suit and tie for the camera, anything goes below the waist.

I have to confess to my clients on Zoom, this is what’s most often going on below my waist:

But avert your eyes for a moment from the Cro-Magnon-man legs and notice the Air Jordans. Not only are they damn comfortable, but like almost everything else that I’ve purchased in my 23 years or so on Bay Street, there’s an investment angle.

The shoes are a retro version of Michael Jordan’s iconic “Bred” Air Jordans, which were famously banned (so the legend goes) by the NBA because they were in violation of its team uniform policy. Most things ‘Michael Jordan’ are good long-term investments anyways, but I was fortunate to own them just prior to the release of Netflix’s epic Chicago Bulls documentary “The Last Dance”. Below is their appreciation on StockX, a benchmark for the US$2 billion sneaker reseller market (possibly on its way to US$6 billion. Guess when the documentary was released?

Air Jordan Retro 1 High OG “Bred”

Source: StockX; chart reflects price movement since 2016 release date (US dollars)

Alas, if only I’d invested in Jordan’s 1986 Fleer rookie cards, which were going for US$40k-$50k prior to the documentary, but now routinely sell for US$75k-$85k in top condition (check out the ‘completed items’ on eBay and see for yourself). Given his enormous and enduring popularity, I doubt that their value’s peaked.

The coronavirus lockdown combined with the insanely popular Jordan documentary may have marked a tipping point for the entire sports card market and I continue to think that, if approached carefully, sports cards make an excellent alternative investment.

Gary Vaynerchuk is a fascinating American entrepreneur. Fascinating not only because he’s successful, having grown his net worth to more than US$150 million, but also because he makes an enormous effort to engage and educate the public through books and social media, and does it without a hint of elitism (sound familiar?). He’s famously said that he gets as excited by a one-dollar garage sale find that he can turn into eight dollars on eBay as he does from a large business deal. He makes the case for sports cards perfectly in this short interview.

What the video doesn’t show is Vaynerchuk’s further recommendation that you spend at least 80 hours thoroughly researching the market before you make even a single purchase. He also notes that concentration risk is a critical consideration—recognize the risks and don’t buy in a quantity that will derail your financial future. Understand also how the risks vary from one type of alternative investment to the next. Vaynerchuk has suggested that comic books, for instance, are lower risk than sports cards—Iron Man will never break a leg, but an athlete might. However, risks aside, an alternative investment should, above all, be fun.

I’ve covered all these points in my previous blog posts:

There’s nothing wrong with having a small allocation (perhaps 2–3%) of your overall portfolio held in something non-traditional.

Perhaps you collect wine, scotch, antiques, vintage cars or motorcycles, artwork, coins or stamps, vinyl records, classic movie posters, sports memorabilia or Star Wars collectibles (check out the Netflix show The Toys that Made Us—a rare Boba Fett action figure can put your kids through university). What’s important is 1) it’s enjoyable and remains so, and 2) you constantly educate yourself and purchase carefully, thus increasing the odds that your collection actually appreciates.

You also need to be fully aware of the risks of your investment. For instance, I know that sports card companies can easily disrupt the market by producing too much product. This is what happened in the mid-1990s when the sports card market was on life support due to oversupply. I’m also fully aware that fraud and counterfeiting are ongoing problems. But this is true of most other investments as well, including art and wine. Witness the collapse of the legendary New York art gallery Knoedler in 2011 or the uncovering of prolific wine fraudster Rudy Kurniawan in 2012.

So, what do I personally collect? Connor McDavid rookie cards…. He’s clearly lived up to the hype. We’ll see if my investment appreciates in 10 years, but it’ll be a lot more fun than investing in, say, a bond ETF. Don’t misinterpret: bond ETFs are crucial long-term investments, but they certainly don’t get the pulse racing.

Investing can be an anxiety-inducing emotional rollercoaster. But the smaller, non-traditional sleeves of your portfolio shouldn’t be this. They should simply be enjoyable.

Just look at that picture with my Air Jordans, my swim trunks and my hairy legs. Do you think I’m not having a great time?

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

Source

Wall Street laid an egg one day this week. Bay Street had a cow. After surging more than 40% in history’s giddiest 50-day rally, stock markets gave back about 7% of that in a single day, before stabilizing.

What to do?

Easy. Ignore it. A feature of the Covid world we’ve been in since mid-March has been big swings in financial markets and, for a while, a huge spike in volatility. But investors with balanced & diversified portfolios have seen their wealth restored after being robbed. The reasons have been repeatedly probed here – fiscal and monetary stimulus, crashed interest rates, the expectation of recovery, rivers of public money and the knowledge that pandemics always pass. People who went to cash when the virus hit, or sat on the sidelines for three months, missed the ride up. So, simple. Stay invested. The world ain’t ending anytime soon.

Having said that, here’s why we may have a raucous few weeks or months ahead of us.

First, the bug is not finished. Globally cases continue to escalate. Brazil is a mess. India, too. A complete lack of international coordination to fight a world-wide scourge is vexing humankind. Sometimes nationalism sucks big. This may be such a moment. Until we’re clean everywhere global travel and trade will remain crippled.

Second, the whole reopening thing is spotty, uncoordinated, clumsy and confused. In Toronto the transit guys just decided every passenger has to be masked – so they’re handing out a million of them. In the East three provinces are forming a ‘bubble’ but hardening their borders to the rest of the nation. Montreal’s still a disaster. Areas outside the GTA have been shut down again. Everybody shopping in every single store needs to wear a face covering. Yet recently we saw ten thousand hipsters sweating together in a Toronto park. Protests marches have clogged the streets. But you have to stay six feet from the guy ahead in the liquor store lineup. Huh?

Third, we should worry about the US. Things are even less coordinated there, thanks to the fragmented power structure of states. Concerns about a second wave are growing in places like Houston. New York may be opening too fast. The BLM movement has thrown hundreds of thousands of people together in a way that has public health officials cringing.

Fourth, big warnings from the International Monetary Fund. And the OECD. Plus the World Health Organization that right-wingers are trying hard to discredit. International bodies say global growth will be far less robust than anticipated and the pandemic’s effects may last a few years.

Fifth, Trump. He’s losing it. Trailing in the polls, the America president is fighting on three fronts: a public health emergency that has killed over 100,000 people, the greatest economic contraction and jobless rate since the Depression plus a gathering social unrest sparked by the George Floyd death-by-cop. No president in history has faced such a trifecta.

Sixth, Biden. The Trump challenger, some fear, has been co-opted by the leftist fringes of the Dem party, and will turn into a tax-and-spend leader forcing unwanted morality on US corporations, eroding profits and spanking stocks. Voter surveys now give Biden a 54% chance of winning, plus a Democrat-controlled Congress. What does this mean?

“We believe a Biden victory should be a net mild negative for equity prices,” says a Pennock Idea Hub report. “Much depends on the degree of control by the Democrats should Biden win the White House. The chance of a Blue Wave sweep is possible, and it would embolden the progressives within the Democratic Party to steer policy further to the left with bearish consequences for the suppliers of capital.”

Okay, so outside of asteroids and locusts, these are the main concerns. Should you hide your wealth in a can in the back yard?

Nah. Bad idea.

Simply put, there’s no way politicians or central bankers are allowing this market to croak. The Fed indicated this week it’ll do whatever it takes to support the economy, barrage Wall Street with capital, ensure credit’s in place and create enough liquidity to float bricks. Don’t fight the Fed. It’s fatal. Meanwhile in Canada the Trudeau Libs have proven they’ll spend with whatever recklessness is necessary to paper over unemployment, lockdowns and decline. The Bank of Canada is also into this with both feet, which explains why a five-year mortgage is available for 1.99%.

So, worry if you want but understand this: the gap between Bay Street and Main Street will only grow wider. Investors will trump savers. The wealth divide will increase. Volatility may well spike again and wild days ensue. But the virus will ultimately fade, vaccine or no. Leave trying to time markets over the next year to all those day-trading moist Mills with their Robinhood apps.

The pros need others to feast on. And that is perfect.

About the picture: “I was taking pictures at a drive-by baby shower,” says blog dog Scott, in Hamilton, “and this guy went by.” (The biker-pooch we get. But what’s a drive-by baby shower?)

Source

Would you work in a warehouse in steamy Victoria for nineteen bucks an hour (plus benefits and a bonus for showing up routinely)? Yesterday on this blog Carson moaned he couldn’t find workers to do so, and that people would rather stay home on the CERB. Yes, it pays less. But the actual work involved is, well, zero.

Tara just wrote me. She has a candidate:

Will gladly sacrifice the mushroom in the basement, who has become a bit too comfy with the Trudeau re-election bribe money, to apply for this work. What’s the name of the Victoria warehouse looking for an employee? I’ve got one here. He offers expert-like finger dexterity, an uncommonly high degree of skill at commanding phantom war-like scenarios and can tolerate flashing light beams and loud blasting noises. As an added bonus, he comes with his own chair.

Thanks,
His Mother

As you may have heard, federal oppo parties (to their credit) have nixed Mr. Trudeau’s plan to extend the CERB payments. But this largesse is not over yet. In preparation, those with wealth should be stuffing their RRSPs and TFSAs, realizing tax-advantaged capital gains, setting up spousal loans and registered plans and considering a family trust. (More on this as we move towards the next federal budget.)

Now, let’s yak about the other pachyderm in the bathroom, which is mortgage deferrals. There’s growing consternation about exactly what happens when this payment holiday runs out.

The extent to which Canadians are pooched is in the stats: 8.5% of Americans during this pandemic crisis asked for their mortgages to be deferred. In Canada the latest rate is 17%, and still rising. That equates to over $180 billion in housing debt not being serviced by upwards of a million borrowers. All this money is accumulating interest, and missed obligations will be added to the outstanding principals. That’s issue #1.

As TD is warning its mortgage customers:

The deferral has increased your amortization period and the total amount of interest you will have to pay. The mortgage deferral offer is a pause on mortgage payments themselves, not a forgiveness of the mortgage payment obligation. Interest will continue to accumulate and be added to your debt. The interest will be compounded on each payment due date.

The bank offers mortgage deferral calculator to help people visualize the impact of not making payments for half a year. Good idea.

Now while overall debt will increase for those deferring their loan payments, the value of the asset being financed may drop. CMHC has famously said a decline of up to 18% in prices, nationally, could occur over the next year. Moody’s says 30%, maybe. National Bank estimates 10% which would be “sharper than any of the country’s last three recessions,” including the 2008-9 credit crisis.

The conclusion is that potentially 10% of the people now deferring mortgages could end up defaulting on their loans, especially those with a small amount of equity (which is apparently the majority of the deferrers). This would amount to 70,000 to 100,000 households. Says mortgage broker/blogger Rob McLister “That’s too big a problem for the government not to do something about.” So, this is issue #2.

Now, jobs. When are they coming back?

The latest news was good – 290,000 positions regained in May, compared to the previous month. But at the same time 490,000 more people started looking for work, so the jobless rate increased to almost 14% (it was barely over 5.5% in February). This is the worst it’s been since WW2, and Canada now has the lousiest jobs status among all major economies. Yuck. Of the jobs stolen by the virus, 10% at best have been replaced. Thus, 90% have yet to be reinstated. This will happen over time as the economy reopens (pandemics are by their nature temporary) but it will not occur in the next 90 days – when $180 billion in mortgage deferrals ends. Current estimates are for an unemployment rate of double-digits by Christmas.

But wait. There’s genuine skepticism over how valid last month’s employment stats may have been. “Whether or not you believe that Canada created about 290,000 jobs last month depends, critically, upon what fraction of those who worked no hours in May but said they were employed will ultimately return to their jobs,” says Bay Street economist Derek Holt. Three million people claimed to be ‘employed’ when they actually worked no hours last month. Figure that out.

How many now unable to pay their mortgage will still be struggling in November? We have no idea. But it’s logical to think the number will be significant enough to impact local markets as these folks decide the best solution is to list and sell. So, issue #3.

Finally, the Big Banks just gutted profit margins by setting aside $11 billion to cover bum loans, including those now being deferred. They’re not happy about this. Nor is this whetting the corporate appetite for risk. Just the opposite. Odds are the days of money-for-all mortgage approvals feeding a real estate FOMO frenzy are over.

So after you’ve told your lender the virus caused so much financial distress you couldn’ make payments for six months, do you really believe that will be forgotten? Unrecorded? Omitted from your file? Not a consideration when renewal or refinancing time comes along? Maybe the Tooth Faerie lives in your garage, too, and she can explain. It’s issue #4.

Free money to live on and mortgages without payments. What a country.

Next stop, reality. Bring your chair.

Source