Category: Accounting tips

Scott and Lisa run a four-person home reno business. Twenty-four years now. All was peachy until the virus came to town. Actually, until the CERB came to Canada. The two F/T employees asked to be temporarily laid off, so they could get an extra two grand a month. Scott objected. Big fight. The guys quit. The enterprise was crippled.

Carson says he started reading this pathetic blog four months ago, and passes on this tidbit from Victoria:

I figured I’d share with you that we are desperately seeking employees in our warehouse and we offer a great compensation package for an entry level job, $19 an hour plus a $3 dollar an hour bonus paid monthly if you show up for all your shifts, plus benefits. We’ve had the job postings for 3 weeks and have only received a couple applicants. Turns out other business owners are experiencing much the same in my area. The highest levels of unemployment ever and lots of places hiring, yet no one wants to work. Covid-19 isn’t killing our business, having no one in our area who wants a job is killing our business.

Thanks, CERB. It’s interesting what happens when you pay people not to work.

Here’s Steve in Vancouver. With a little tale about his 15-year-old daughter and the desperation now being experienced in the restaurant business.

She’s been sitting in front of a screen for two months and finally lost her marbles last Saturday.  So we went down to Granville Island and I suggested we go to a well known restaurant for brunch.  They had just opened and the servers were suited up with masks and we had to follow all kinds of procedures……like moving our dishes  to the edge of the table so the server cannot get too close to our germs.

So our daughter comes back from the bathroom and says ‘hey guys I saw a sign on the wall in there that says they are hiring here, are you OK if I talk with the manager right now?  We say yes and within minutes she has a business card and an application.  We go home and help her get it in right away.  Tuesday she gets the call for a Thursday interview and we get her down there.  She is back in 15 minutes with her first job…..as a hostess that will lead to server (and tips)…..and she starts in two weeks as soon as school ends.  She told them she was willing to start out washing dishes, but no, they said, we need you out front.  She learns that much of the staff turned over and they are desperate.   By the way, I have a friend who has two teens on the CERB, sitting at home.

Says Joanne in eastern Ontario, where she and Jim run a small business struggling to survive: “CERB was offered and given fairly freely to everyone who asked, basically on honor system, or did we miss something? As Jim said to me, take the average employee making more at home on CERB and asking to be laid off/refusing and see if they want to fight like we are to stay alive and employ people. How did the government not see this coming?”

Well, more than 8.33 million people filed 15.18 applications for CERB money. As of a few days ago more than $43.5 billion had been shovelled out the door to these folks – and it’s not even the middle of June yet. The payments are slated to last 16 weeks per person, and can extend right into October. Moreover, the Trudeau gang is under pressure to extend the benefits even longer.

Ottawa originally budgeted $35 billion for CERB. It’s now 25% over budget so the Liberals have earmarked $60 billion for the program – which will propel it 70% above the original amount.

Yup. It’s interesting what happens when you pay people not to work. Some don’t.

Because the government turned the economy off, it was ethical to compensate those impacted. As you know, the CERB gives $2,000 a month to anyone who claims to be virus-impacted, including looking after kids because the day care place closed. To qualify for total of $8,000, a person need have had an income of only $5,000 in the previous 12 months, or a thousand in a four-week period. Folks whose EI ran out could also claim it. And apparently many who are being paid by their employers through the federal payroll-subsidy program have been pocketing CERB. This week Trudeau warned the CRA will be working to ferret out fraudsters, but double-dippers who ‘made an honest mistake’ will just have to pay the extra back. Next year. Voluntarily.

Is this just the start? How does the government turn this money off? Will this lead to that UBI, giving everybody a base income?

On Wednesday the indie Parliamentary Budget Office published a costing of extending the CERB to January, expanding the benefit period to 6 months, then gradually phasing out the payments as employment income clicks in (CERB would reduce by fifty cents for every dollar earned). That, says the PBO, would cost Ottawa an extra $64 billion. For the sake of comparison, sending OAS payments of $600 a month to six million seniors requires $38 billion annually. To run the army, navy and air force costs $20 billion per year. So doling out the CERB to eight million for less than twelve months at a cost of $125 billion is, well, off the charts.

Now imagine extending a UBI to the entire workforce – about 19 million people. Pressure is mounting for this to occur. The kids want it. Thanks to Covid, we have a taste of this nectar. Intoxicating, and toxic.

About the picture: “I took this in Vancouver,” says Bruno, “and thought you might like it. Thanks for your great blog.”

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  By Guest Blogger Sinan Terzioglu

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The large cap US equity market has bounced over 45% from the low set on March 23 and sits 6% off the all-time high set February 19 – about even year-to-date.  Some of the largest components of the S&P 500 index such as Apple, Amazon and Facebook have made new all-time highs in recent days.  This has been the best 50-day stretch ever.  After experiencing the fastest 30%+ drop in history, it’s understandable people worry about another market plunge. But if history’s any indication odds are the recent gains will hold and the market will continue to grind higher.

Looking back at the previous eight best 50-day stretches for the US market since 1957, equities were higher 100% of the time six and 12 months later.  The average 6-month return was over 10% and the average 1-year return over 17%.  So while most believe the biggest risk is to be fully invested during big market drops, the reality is the biggest risk is not being invested for the huge market recoveries, plus the eventual longer term market moves higher.

Following the financial crisis of 2008-2009, I observed many investors doubt the recovery and cash out as the market rebounded.  They sat on the sidelines anticipating another big pullback.  There was volatility, of course, plus declines but none to the degree of the worst days of the crisis period.  As a result, many continued to wait and missed some of the strongest years.  Recently, I’ve seen the same thinking as people significantly trim their equity exposure in anticipation of another big market pull back.  It reminds me of former Fidelity portfolio manager Peter Lynch’s quote, “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections.”

Over the long term individual investors have underperformed the broad markets by a wide margin. The longer the time period the wider that performance gap gets. Too many investors are tempted to time the market when there are significant market cycles and swings.  The biggest challenge for most is not to find the best performing investments or least risky ones, but rather to prevent being your own worst enemy.

While much uncertainty lies ahead, I’m confident we will get through it.  For the year ahead and beyond, I continue to be constructive on the markets for the following reasons:

• Short covering: Bearish bets on US markets have been steadily rising through May.  According to Canaccord Genuity strategist Martin Roberge, total short positions on US equity futures hit a record high of US$275 billion at the end of May. Short positions will eventually have to be covered meaning positions must be bought back.  This could help to continue pushing the market higher.
• Negative inflation-adjusted government bond yields:  Credit Suisse equity strategist Andrew Garthwaite recently put out a note saying stock valuations are set to rise because inflation-adjusted 10-year US Treasury bond yields are currently negative and likely to stay negative.  Price-to-earnings ratios have climbed in proportion to the amount real yields have fallen and Garthwaite expects falling yields and therefore more upside for equities. As my colleague Ryan noted, in relative terms, stocks are very attractive relative to inflation-adjusted government bond yields.  There is still a lot of cash on the side lines and much to be trimmed out of bonds and into equities.
• Resilient economy: As Garth has been saying over the last few months, the economy did not have a structural issue heading into this health crisis.  The economy was turned off.  Compared to the financial crisis of 2008-2009, the financial system is significantly stronger.  Banks are much better capitalized.  Even after setting aside over $11 billion for loan losses, the big five still have very healthy balance sheets.  The banks are still profitable and dividends are being maintained.  Before the virus came about, US unemployment was at a 50-year low.  Last Friday’s employment numbers showed just how resilient the economy is
•  Massive liquidity injections: JPMorgan expects global cash balances outside the banking system will likely increase by 17% in the coming year.
• Virus data improving: While the number of new infections remains high in the US, the outbreak is decelerating
•  Credit card spending is rebounding: Visa US payments volumes in May was down 5% year over year which was a big improvement from April when volume fell 18%.  Consumer spending makes up 2/3rds of the economy and there is a lot of pent up demand.
• Trump/Biden: The S&P 500 hasn’t had a down year in a US Presidential election year since 1940.
• Strong company fundamentals: The largest components of the US equity market continue to grow at above average rates and earn above average returns on invested capital.

Remember that the biggest contributor to your long term results will be time in the market, not timing the market.  What matters most is your long-term risk-adjusted rate of return which is why we are such big proponents of balance and diversification.  It’s natural to want linear progress with any investment but markets have never worked in a linear way and never will.  There will be many bumps in the road on your financial journey but as long as you have set up an all-weather portfolio with the right mix of ETFs that are balanced and not overly exposed to risky sectors, the short term bumps will be bearable and the long term ones hardly noticeable.

In the end, how you behave is much more important than how your investments behave.

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

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In three weeks it gets tougher for the kids to score a mortgage. CMHC’s badass boss Evan Siddall warned us the hammer would drop. Here it comes.

These are the changes:

First, borrowers will get less financing based on their income. The maximum share of earnings that can go towards a home loan is dropping from 39% to 35%. The gross debt ratio (mortgage payments plus credit cards and other monthlies) also declines. Second, no Bank of Mom borrowing (or other unsecured loan) will be accepted as downpayment equity when calculating what a person can borrow. Third, credit scores of borrowers must top 680, instead of 600.

This is not changing:

5% down. Yes, evil Evan hinted to MPs recently he’d be asking the Trudeau cabinet to double the minimum downpayment, but apparently he was denied. Too bad.

This is why:

CMHC (and a mess of credible economists and forecasters) think brokers are blowing smoke when they say the pandemic will have no lasting impact on real estate values. Not believable, says Siddall. Not with double-digit unemployment, an economic contraction and several industries on their knees. The feds are forecasting a national price plop of up to 18% – shaving a quarter million off SFHs in 416 and YVR.

The move, says Siddall, is to “protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.” The big fear: a mess of underwater homeowners two years from, tipping the market into chaos.

This is what it means:

In general, first-timers will be borrowing about 12% less next month than now. In a sane world, that would reduce prices.

This is the reaction:

“If the government proceeds with this, the dampening of housing activity will worsen the economic pressures, further impairing the economy,” says housing economist (and booster) Wilf Dunning. “On the surface, it is remarkably poorly timed,” says Scotiabank’s economist. “Restricting access to credit in a period of economic need is certainly an unconventional policy approach.” And, says blogger/broker Rob McLister, “Regulators usually make such changes when times are good, not when housing is teetering on the edge.”

So, yeah, it’s controversial. In the short-term (this month) the changes will actually increase sales, demand and prices – just as local economies start to open and real estate agents vibrate and grow damp with anticipation. Since the CMHC announcement, showings (virtual and in hazmat garb) have exploded. Listings are rising rapidly. Offers are starting to fly. As Re/Max lashes out at the federal housing agency it and other property-floggers are telling buyers that normal has returned.

Meanwhile the lowest mortgage rate in history has just been bestowed upon us by the predatory lender known as HSBC. Yes, 1.99% for a five-year, fixed-rate term. (The variable also drops, to 1.75%)

Yikes. This is like dangling a drippy ribeye in front of a MAGA camo dude. Cheap money certainly undercuts the regulator’s efforts to curb house lust and debt snorfling. And that’s why the stress test is in place – regardless of how big a discount the lender’s giving, you still have to lump over that qualifying hurdle.

For someone renewing these days, 1.99% is irresistible. It’s a total slam-dunk rates will be far higher when that mortgage term expires. In fact, they’ll be fatter 12 months from now. This is a gift – so long as you don’t try to end the contract early. (HSBC has a high mortgage-break fee structure, just like the banks.)

So, here’s the nut of this debate. CMHC says the virus “has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians.” It’s hard to argue that when eight million people are on the dole and a million homeowners aren’t making payments. Joblessness may still be double-digits come Christmas.

But, but, but.  Look at what Mr. Market says. Last Friday’s employment stats threw more gas on an historic rally that continued Monday. In little more than 50 days stocks have gained 40%. Is there a giant contradiction here? Will real estate rebound just as fast as equities?

Short-term, maybe. June’s numbers will be thrilling to the Audi set, as sales volumes and average prices inflate from pandemic levels amid pent-up demand, cheap mortgages and beat-the-new-rules action. But beware of the bull trap. This rally does not have legs.

Facts are facts. Household debt is rising. Employment income has fallen. Millions will see their government cheques phased out. Major industries (airlines, hospitality, travel, tourism, conventions, theatres, sports) aren’t coming back for years. Meagre savings have been consumed, Banks, stung by deferrals and setting aside billions for bad loans, will be more risk-averse. There’s a case for saying Peak House was the spring of ’17 – those idyllic, bubbly, care-free, multiple-bids, naïve days of our innocence.

Remember when the only thing we had to worry about were rockstar realtors? You dunno what you got till it’s gone.

Today’s factoid: Zillow has discovered homes with black doors sell for an average of $6,271 more than expected.

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In February few envisioned lockdowns, quarantines, masks, border closings, airline collapse, remote work, historic public debt, shut offices, mass protests in the streets, fear and pandemic. But here we are. In June. Living in an altered society, craving normal, but pried two metres apart.

Dogs don’t get it. They can’t social distance. Lately animal adoptions have been at record levels as people separated from people look for bonds, loyalty, touch and love from another species. Over the years this blog has used canines as the representation of trust, continuance and goodness in a sketchy world. These days we need it more, when everything else seems so irrevocably screwed up.

The smell of pads. The caress of fur. A waggy tail. Unabashed joy when you return. A soul never afraid of walking too near. Eyes speaking volumes. An utter dependent that’s also a fearless defender. A suck and a hero. Unashamed at both. Such is a dog.

In days of virus, economic chaos and civil unrest, here are a few glimpses into the lives of some readers whom the animals have captured.

“My son just sent me this photo,” writes Dharma Bum.

“He put in an application to foster a dog, and unexpectedly ended up with getting 2 puppies (among dozens) rescued from a reservation in Saskatchewan (he lives in Alberta). So, he and his girlfriend now have the responsibility of raising these cute little critters. Luckily, he’s maintained his employment throughout this recent COVID madness.

“I thought you might like the photograph and could use it for the sheer adorableness of the image. The puppies are pretty cute too! Hahahahaha!”

“Hi Garth. My beautiful friend passed away in my arms last Monday,” Elena tells me. “I thought I would send you her best pics, starting with the very last one of us together. Everything sucks.

“Her name was Hrusha (it means piglet in Russian) and she was 8.5. Dogue de Bordeaux dogs live a short life, and anything over six years is a huge bonus. She was tender, clumsy and so very good. She’s never not once growled at anyone (I guess who needs to growl if they look like a perfect liking machine! She was formidable when she ran.. every creature froze in its tracks, knees bent:)!) You are very welcome to use her pictures and name. Thank you. This means so much.”

“After a decade of reading your blog,” says Kate, “we finally got a dog.

“His name is Billy and he is 11 week old. Feel free to use his picture on your blog, if you want to. Your daily dog photos helped us to make the right choice albeit it took so much time.”

“I was turned onto your blog from a coworker around 2009 when I was a young and naive kid who just got up to Fort McMurray,” says Corey. “Appearances would put me square into the Male, Albertan, redneck, boom/bust energy sector worker but a balanced, diversified portfolio has given me the ability to weather anything and the confidence to take risky career moves that occasionally pay off. The wife knows that my longest relationship to date has been my used 1997 Lincoln towncar, followed closely by this blog.

“Louie is a two year old rescue dog, saved as a pup by my sister who works for an animal rescue in Edmonton. He enjoys destroying things with his baseball bat tail, fiscal responsibility and eating giant ice cubes that hit the floor instead of into a whiskey glass. Louie is not impressed with the thought of going to work.”

“Just a quick note to say thank you so much for being one of the few voices of calm and reason these days,” writes Aaron.

“Your blog has been very meaningful to me over the years, but a recent post really got to me. It was informative and blunt, but still kind and funny, as usual. It also made me realize anew what a dearth of common sense, honesty and true leadership there is at the moment. And yes, I suppose anyone with those traits would indeed make a lousy politician. 😉

“Anyhow, don’t let the haters get you down, and thanks again for continuing to try and save Canadians from themselves. As a small thank you, I did up a quick illustration of Bandit wearing a face mask. Take care, and stay healthy – we need you more than ever these days!”

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   By Guest Blogger Ryan Lewenza

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Not sure about you, but I’m finding it a struggle to remain my normal chipper self. Even the Dalai Lama must be feeling a little melancholy these days. We’re currently in the worst global pandemic since 1918, the US/global economy has suffered its deepest downturn since the 1930s, and we’re witnessing the worst race riots in the US since the 1960s. 2021 can’t come fast enough!

While the headlines booming from the TV, newspapers (yes millennials these still exist), and the internet are all so scary and dour, there are some silver linings that are developing. Today, I highlight a few key positives that I see for the economy and equity markets.

First, there has been a significant turnaround in the technicals for the major equity markets. After that disastrous Feb-Mar decline of 37% for the S&P 500, the equity markets have rallied sharply on government and Fed stimulus, the re-opening of the economy, and receding fears over the coronavirus.

As a result of the strong gains, the S&P 500 has broken back above its key 200-day moving average (MA). This provided good technical support in 2019 so it’s an important level and milestone.

Now in the short-term the equity markets are technically overbought (lower panel), suggesting the potential for a consolidation/pullback. I would like to see the markets take a “breather” for a bit and work off this overbought condition and rebuild internal energy. This could then set us up for additional gains. I’m bullish longer term, but there will pullbacks along the way.

The S&P 500 Broke Above the 200-day MA

Source: Stockcharts.com, Turner Investments

Another positive was the improvement in the key US manufacturing index – the Institute of Supply Management (ISM). This is one of the most important indicators I track and if I was stranded on a secluded island and there was one economic report I could access to track where the US economy is, this would be it.

The ISM report tracks manufacturing activity in the US and is a leading indicator as it moves before other indicators. In January the ISM was at 51 and hit a low of 41.5 in May, which was the lowest level since 2009. In June it strengthened to 43, which was a nice positive, and could indicate that we’ve hit the low in economic activity for this downturn.

One reason why I like this indicator is that it has a high correlation (moves together) with the S&P 500. Since 2010, the correlation between the ISM index and the year-over-year change in the S&P 500 is a high 76%. Generally a strong or improving ISM is good for stocks and a weak or declining ISM is bad for stocks.

We can’t get too excited just yet as 43 is still a weak level and below 50 indicates contraction in the US manufacturing sector. But this indicator shows: 1) we may have hit the low of economic activity in May; and 2) the US economy could be turning a corner. Now I would like to see a rebound in consumer confidence and jobs in the coming months.

S&P 500 Is Strongly Correlated with the ISM

Source: Bloomberg, Turner Investments

One reason I believe the markets have rallied significantly is all the Federal Reserve stimulus. The Fed has taken interest rates to 0.25% and is buying over US$2 trillion in government and corporate bonds. The combination of the deep recession and the Fed’s aggressive policies have driven the US 10-year treasury yield to a ridiculously low level of 0.65% as of May 29. Basically the Fed is driving interest rates to stupid low levels to help drive asset prices (i.e., stocks) higher.

Currently, the S&P 500 is offering a dividend yield of 2%, which is 135 bps above the US 10-year yield at 0.65%. This is an all-time high spread of US large-cap dividends to US government bond yields, and one important reason why stocks look relatively attractively. Too often investors focus on an asset prices in isolation, but not in relative terms, which is very important.

I believe until the Fed turns to a tightening bias (i.e., hiking interest rates), these low interest rates will be bullish for the equity markets.

S&P 500 Dividend Yield At Record High to US Treasuries

Source: Bloomberg, Turner Investments

And finally some potentially positive news on the virus, a leading Italian doctor said over the weekend that the virus is losing its potency and becoming less lethal. According to the doctor, “The swabs that were performed over the last 10 days showed a viral load in quantitative terms that was absolutely infinitesimal compared to the ones carried out a month or two months ago.” This has not been substantiated by others yet, but it is coming from the frontlines and a respected source.

We need more of these small victories or silver linings, given everything we’ve been through in the last few months. Hopefully better days are ahead and a more prosperous and less scary 2021.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

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Pandemics are temporary. They pass. Demand is delayed, not destroyed. Stay invested.

Yup, that was the message here yesterday. And since March. It was correct. A 40% rise in equity markets was the best 50-day rally on record. Now look at what’s happened.

Markets surged again Friday on the latest jobs news. In the US an astonishing 2.5 million people started working after almost 21 million lost their incomes in April. The unemployment rate fell, when expected to spike. Labour participation swelled. Economists were left with pants around their ankles after forecasting 7.5 million more jobs would be destroyed and the jobless toll would hit 19%. Trump did a jig in the bunker.

And in Canada? Despite the headline shocks from Air Canada and Bombardier, employment is rebounding. Last month 290,000 more people found work when analysts has expected 500,000 would lose their jobs. “Changes in the labour market represented a recovery of 10.6% of the COVID-19-related employment losses and absences recorded in the previous two months,” said StatsCan.

And look at this chart. What an exciting little erection down there.

Employment declines come to a halt in May

Source: Statistics Canada

More good news: three-quarters of all the jobs recovered last month were full-time. Way more people started looking for work, instead of staying home on the CERB, fighting with the cat and snorfling Netflix. Now, combine this with the arousals detailed here yesterday (US airline traffic, oil prices, bank inflows, mortgage apps) and no wonder investors are frisky. Normal may be years away. But the crisis is passing.

Now, let’s talk about social conflict, the wealth divide and growing tensions on a certain pathetic blog. Here’s a comment summarizing the simpering angst and smouldering bitterness of people who are clearly not investors…

The sycophants here spend all their time harping about how the housing market is detached from reality but cheerleading a stock market approaching all time highs with double digit unemployment, large and small businesses failing, airlines not flying, cruise ships docked, movie theatres, restaurants, malls shuttered, etc.

Let’s try being honest now, it’s all pogey, and you guys only have a problem when working people take it.

Let’s try being honest. When you’re rich, white, sitting at the computer clicking stock purchases, scamming the system, and benefitting from governments propping up the stock market — you’re a hero. When you’re a worker who has lost their job and relying on EI — you’re a bum, a loser and a problem. WHY?

It’s true. Wealthy people own. Other people borrow. The virus has rendered the gap worse by exposing the dangers of leverage, real estate lust, over-borrowing and living paycheque-to-paycheque. Those without resources, savings or investments are clobbered when they’re also without income. They’d like everybody to suffer equally. But, tough.  Massive government and fiscal stimulus has propped up markets, rescued corporations, dropped financing costs and lubricated credit. Markets love it. Pain’s been transferred from the economy to the taxpayers. So as the pandemic crests then retreats investors come out whole while employees stagger towards the distant light.

Rail against it all you want. But accept it. The banks will continue to thrive and pay dividends to investors, for example, who profit from your mortgage payments. If real estate values fall because CMHC changes the rules and curbs credit as it did yesterday, the lenders (and shareholders) won’t feel a thing. The indebted will. Their equity may fall. Their mortgages will not.

This is a financial blog. (Well, canines, too, with forays into auto mechanics, animal husbandry, sexual tension and epidemiology.) It dispenses advice on how to improve your situation. It’s not here to change the world, bridge the wealth gap, foment social justice, dis white people, decry privilege or elect anybody. That’s what the NDP’s for.

Detailing what financial markets are doing, and why, plus the impact on portfolios is not bragging. Owning ETFs, a bond or some REITs is not scamming the system. Investors risk their capital every day. They lost a ton of it in March. They regained much in April and May. Most of the money’s in retirement savings, pension plans or TFSAs, and the majority of investors have jobs – which is where they got it. Thinking everybody with more than you is just “sitting at the computer clicking stock purchases” is puerile. Grow up.

It’s a shame millions must live off the government’s largesse when they cannot survive eight weeks on their own. That some abuse this is indefensible. That people defer mortgages or refuse rent when they could pay is a mistake. That we’ve built a condo economy so dependent upon selling each other inflated houses with borrowed money is dangerous. That we whine and snipe at the gains of others is diminishing. If we don’t regret such things already, thanks to Covid, that day is coming.

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If you’ve spent the pandemic with your butt in sweatpants and you money in cash, don’t feel too proud. It’s time to put on your pants.

From hitting a virus-induced low on March 23rd, stock markets have just had the best 50-day run in history. Like, ever. The gains have been 40% or better for the Dow, the S&P 500, Nasdaq and even Bay Street. And while investor confidence has been brimming, fear has been tanking. During its worst Covid Moment, the Vix topped out at 83 – the scariest reading since the 2008-09 credit crisis. By Thursday it sat at 25. So while stocks are up 40%, volatility’s down 70%.

Remember when this blog talked about a V-shaped recovery, back when the steerage section was dressing in hazmat and telling us a billion people would die? Well, does this look like a V to you?…

Of course it does. And this may well continue. There’s a sense markets will actually finish 2020 in record territory (unless Trump loses the election and starts a civil war). Just look at the latest news:

• The Bank of Canada’s shiny new boss took over the reins this week, saying the feds will start throttling back on stimulus spending because the peak of the virus impact has passed.
• Financial ETFs saw $123 million in net inflows last month. Investors have pumped almost half a billion into the banking sector this year, taking advantage of a plop in values that came after the virus arrived. The Big Banks have won huge gobs of confidence for the responsible way they dealt with the bug and have retained 100% of their dividend payouts. The worst is in the rearview.
• Jobless claims in the US are awful, but about as expected. Unemployment numbers on Friday morning will suck large, but are expected to represent Peak Virus.
• The European Central Bank just shoveled another 600 billion euros into markets, bringing the total since March to 1.35 trillion. (One euro = $1.53.)
• US mortgage applications are up 62% and approaching all-time highs.
• American Airlines will boost flights by 74% in July as demand from travelers swells much faster than expected. Load factor of just 15% in April surged to 55% in May.
• A new Nik Nanos poll finds 30% of Canadians who lost their jobs to the virus are working again. “Research suggests that the initial shock of job loss and fewer working hours is wearing off as some Canadians’ job prospects start to brighten,” says the pollster. “It is too early to tell whether this trajectory will continue to a recovery or flatten into a new more depressed jobs normal.”
• And look at oil. Traders had to pay people $30 a barrel to take the stuff off their hands in April. Now a barrel costs $37 US for the West Texas stuff. That’s a price recovery never experienced before, and my suspender-snapping fancy portfolio manager buddy Ryan is call for $50-60 crude next year as economies, and demand, spring back.

Is all this at odds with what you see around you at the mall, walking past shuttered eateries and in the historic stats about lost jobs, economic decline and millions on the dole or unable to pay their mortgages?

You bet.

At first it makes no sense. How can financial assets, commodities and portfolios roar when the real economy was chewed up so badly by the pandemic? Why is there such a disconnect between Bay Street and Main Street?

Well, as this pathetic blog has pointed out, the rich hold assets and the rest hold debt. Those assets have been massively supported by central banks and governments at all levels who chopped interest rates, spent trillions buying up negotiable securities like government and corporate bonds, plus dumped trillions more into the hands of consumers and businesses to replace money lost in wages and profits. Meanwhile all of the consumer and mortgage debt remains to be paid. Just deferred. Still owed. The lenders will be made whole.

When Covid came we told you pandemics are temporary. They pass. Demand is postponed, not destroyed. Since then the economic rubble has been huge and public spending without precedent. Now the curve has flattened. The health care system was not overwhelmed. Deaths were fewer than anticipated and eight in ten were among the elderly or compromised. (94% were people over 60, and who cares about those old hippies?) A second wave could come, of course. Society could re-open too fast. Freaked-out citizens could balk at returning to their old habits, or even wanting to work. Lots could go wrong.

But facts are facts. Anyone selling into this storm got whacked. Those who let the headlines and the politicians guide them went over a cliff. Moving to cash as the pandemic unfolded was a disastrous strategy. Forgetting the lessons of Nine Eleven, Y2K, the credit crisis, the Asian Contagion or Black Friday meant making paper losses real. Sitting on the sidelines, trying to time the market instead of staying invested, was an amateur folly.

It wasn’t different this time. Because it never is.

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“I am stunned by the number of agents who think things will return to normal by year end,” says a grizzled old GTA realtor who risks it all by reading this blog. “Condo rentals are everywhere. Some estimates as high as 10,000 for the entire GTA. Needless to say rents are dropping.”

Buyers in retreat. Airbnb collapsed. Covid cooties lurking in elevators. Lenders tightening credit. The jobless rate at 13%. CMHC in a funk. Eight million on the dole. A million mortgage deferrals. How can we be surprised?

“The real estate board has a massive online meeting Thursday,” he continues. “They will vote to defer the annual dues from June 30 until September 30. The brokers are worried many agents will not renew their membership.” By the way, there are 56,000 realtors in Toronto, representing 70% of that entire species in Ontario.

Meanwhile the latest official Frankenumber stats from the nation’s largest house-flogging organization are just peachy. Pandemic? What damn pandemic? “On a month-over-month basis, actual and seasonally adjusted May sales were up substantially compared to April,” says the real estate board. “Actual May 2020 sales increased by 55.2% compared to April 2020.” And here’s the report on values: “The average selling price for all home types combined was up by three per cent compared to May 2019 to $863,599. On a seasonally adjusted basis, the average selling price was up by 4.6% month-over-month compared April 2020.”

There you go. Sales up 55%. Prices up 4.6%. The market’s torrid, baby! And look, the media just fell for it…

Now the facts. Last month 4,606 sales took place in the GTA. This time last year there were 9,042. Hmm. That appears to be a decline of 4,436, or 49%. As for prices, it’s worth remembering the average detached house in 416 – now worth $1.42 million – is selling for $149,000 less than it was three years ago. In fact when you add land transfer cost to the price of a house purchase, then deduct the standard realtor commission for selling, the loss on a SFH in urban Toronto comes to $280, 400, or 17%, over a three-year ownership period. If you bought with 10% down in 2017, then sold in 2020, you’d have to bring a cheque on closing day.

Oh, and add in the property taxes, maintenance, financing charges, insurance and reno bills along the way. Clearly owning a home in Toronto – the premier real estate market in this house-lusty land – was a losing proposition over the last few years, compared to renting. In contrast, a balanced financial portfolio has gained (even with the virus attack and the late-2018 market plop) 16% since 2017. Hmm.

But enough of the immediate past. What about the future? The next year or two? Are all those realtors correct in thinking things will be normal by Christmas? Or are they stoned on hopium?

Economists worried about real estate values have been lining up for a few weeks. This week RBC’s Robert Hogue joined CIBC, Moody’s, CMHC, Scotia and others in forecasting a tough autumn for house values. Benny Tal at the Commerce says the unemployment rate will be at “recessionary levels” for years. In fact, watch the stats on Friday when US jobless numbers could reach for 20%. We will follow.

Additionally, remember the deferral cliff that federal housing boss Evan Siddall is vexing over. About a million Canadians stopped making payments on $180 billion in residential mortgages in the last 60 days. How are they going to resume when many lack stable income? When the CERB’s gone? Meantime CMHC is lobbying the Trudeau cabinet to double the minimum down payment for insured financing to 10%. Imagine the impact.

So here’s the prediction: as the lockdown loosens and life creeps back to normal sales volumes will increase. Given low inventory, this will raise prices in June, July and August. The real estate board will have an orgasm, media will trumpet a new housing boom and industry pundits will label Evan Siddall bilious. But it won’t last. The Main Street economy’s just too hobbled for a sustained real estate recovery to take place.

Too many jobs have been lost. Too many families owe too much with too little in reserve. Too many small businesses have been hollowed. In our post-pandemic world credit will be harder to get, borrowers more scrutinized and lending requirements more stringent. Down payments will likely increase, and so will property taxes and transaction costs. Now that the banks have seen almost a fifth of their borrowers opt out of payments after only two months of income stress, you can be sure lessons were learned.

Of course, that won’t stop people from being idiots. But if it did, this blog would end.

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A year ago it looked like the guys running Canada would spend $20 billion more than they raised. Not good. Now that’s $252 billion more. Ooops, wait. We forgot the emergency money to cities, off-reservation native folks, pregnant women and… well… you know. Plus what happens when the CERB ends and a few million people are jobless but can’t live on their EI?

Odds are the deficit will be $300 billion, or six times the worst Harper year. That would increase the federal debt by half. In one year. A record. And still there’ll be an army of unemployed and many shuttered businesses. Revenues will fall. Social spending will rise. If the Trudeau gang decides we need a UBI, it all gets a lot worse. Meanwhile – OMG, Becky – look at this…

Where does it end?

With taxes, of course. The need for cash will be insatiable. And enduring. Some believe we’ve crossed the Rubicon, thanks to this virus. Now we all get a pony.

Well, this is a profound problem. These days four in ten households pay no net federal income tax, thanks to benefits like the cash-for-kids program. That leaves the other six to fund it all. But most of them (90%) earn less than $81,000. Hmm, so the top 10% of us – anybody earning $96,000 or more – currently bring in a little more than a third of all the income but already pay 54% of all the taxes.

Let me repeat. Ten per cent of Canadians pay 54% of the income tax. Of those, just a sliver are ‘rich’. The top 1% (earning $235,000 or more) number only 271,000. (Of those, 120,000 live in Ontario.)

This is why ‘taxing the rich’ won’t work. We don’t have enough to milk. Already the top tax bracket is 54% in a majority of provinces, while the few uber-wealthy families with billions have most of that money invested in businesses employing hundreds of thousands.

However most little beavers don’t know this. Or believe it. And now that the government just found $250 billion under the couch to give away during a crisis, there’s a giant expectation income support programs should stay in place, and ‘the working wealthy’ should finance them. In order to retain power, the prime minister (inheritor of a trust fund) and the finance guy (inheritor of a family business) plus his wife (inheritor of a food empire) agree. So bend over.

If you’re unfortunate enough to earn a few hundred thousand or have a couple of million in assets there will be an illicit group hug behind my bank building at four. Be there. Be strong. In the meantime, and in anticipation of what the next budget may well bring, consider this…

Capital gains. If there was ever an excuse for the feds to goose the inclusion rate, it came with the virus. Currently half the profit made on investment assets (properties as well as ETFs or stocks etc.) is taxed as income. That reduces the maximum capital gains tax to about 26%. T2 may give in to yet another NDP demand, and increase inclusion to 75%. The effective tax rate would be 40% – a huge jump.

Solution: you might wish to crystalize some accrued cap gains this year. Before the deluge.

Retained earnings. Despite all the yadda-yadda, we-love-small-biz talk from the feds, they actually hate you. Especially those entrepreneurs and professionals using corporations to earn income, distribute dividends and retain earnings in a lower-taxed environment. Two years ago Bill Morneau launched an attack on PCs, backed off under negative pressure, but is likely to reengage.  So expect the threshold to fall on the amount of passive income a corp can earn before hitting the tax wall.

Solution: take salary, not dividends to max out RRSP contribution room. Repay after-tax shareholder loans, borrow money from the corporation, use the funds to expand or find other means to drain capital before fed fingers filch it.

New tax bracket: Remember when Trudeau created a special hoovering for people earning over $220,000? He said the money would pay for a middle-class tax cut equaling $8 per family (on average). It didn’t. But he will try again. Accountants that I skydive and luge with tell me they expect yet another bracket to emerge from the budget – somewhere around the $650,000 mark, which is what 0.01%ers average. Unfortunately there are only 27,000 of them, and they all read this blog.

Solution: Time to look at establishing a family trust and shifting investment income to less-taxed offspring. Also consider a hefty spousal loan, moving capital into the hands of a less-taxed partner so s/he can earn investment returns that won’t be attributed to you (plus deductible interest). Proper estate planning is a must, with secondary and tertiary wills if you have multiple assets (and your province permits them), proper beneficiary and successor-holder designations, a trust structure and an institutional executor.

Or, the Libs could just be fair about things and increase the GST. Tax spending rather than gutting income. Combine that with a flat tax and give everyone a condo. How is any of that hard?

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Three months into the Great Mortgage Deferral and just 90 days to go now before… the cliff. On a call with analysts last week CMHC’s head economics guys had this warning: “Something has to happen to avoid having these deferrals escalate into foreclosure.”

Whoa. This is a seriously meaningful statement, coming from the federal housing agency. If even a small slice of the can’t-pay-won’t-pay people end up walking away from their houses, we have a major property plop on our hands.

Here’s the latest: the banks together have allowed forbearance on $180 billion worth of mortgages and HELOCs. CIBC, for example, deferred payments on $36 billion in loans (16% of its portfolio) and RBC has waived the monthly on $47 billion in residential mortgages (18% of its total). That’s not all. The banks are also allowing payment holidays on credit card balances and loans, bringing the aggregate to $300 billion in debt not now being serviced by households and borrowers.

At this moment about three-quarters of a million families aren’t paying, representing 15% of all home loans. This is expected to reach 20% by September. And in October, the deferrals end. Or can they?

Let’s be realistic. Unemployment of 13-17% now (depending on methodology) will not be 5-7% in 90 days. It could actually increase. So if households needed mortgage deferrals to stave off insolvency in May, what will have changed in November? Is this massive problem of over-borrowing, uber-leveraging and house-horny over-buying not just being kicked down the road? Is this why the Big Five banks just set aside $11 billion to cover bad loans in the coming months? Is that even enough?

Remember it took only 8% of American homeowners to run into financing problems in 2005-6 to crash US average real estate values by 32% and plunge the world into a credit crisis. Canada’s too middling a place to cause any global issues, but a wave of foreclosures or a surge in listings by people in financial distress would be more than enough to tip markets. Bottom line: now could be a horrible time to buy. A good time to sell.

There’s more.

Rents are falling and amateur landlords are in a vice. Since the virus came to town, rental rates in the big cities like Toronto have steadily snaked lower. Last year an estimated 40% of condo owners with tenants were in negative cash flow, but anticipating capital gains on their units. No more.

Now condos are rapidly falling out of favour (germy elevators, yucky garbage rooms, suspect common areas), while lease rates are fading (2.7% so far). Losses-per-month are piling up for all those thousands of people (12% of Toronto homeowners also have rental units) who bought concrete sky boxes, usually with big leverage against their houses.

Yup. More listings coming as many of these sad, deceived and delusional people exit an asset class whose time has passed.

Says Toronto housing analyst Ben Myers: “This pandemic could have a real impact on the supply of new housing in the GTA in the long term, as missed payments by tenants and lower rents could have many investors rethinking future pre-construction condo purchase.”

Real estate can go down. Pandemics happen. Tenants can be schmucks. Who knew?

There’s more.

Mortgage investment corporations (MICs) are blowing up. You know the ones – those investment vehicles which sucked in GIC refugees with 8-10% annual returns ‘guaranteed’ because they held ‘secure mortgages on residential properties.’

This blog has warned for years that anyone investing in baskets of mortgages rejected by the banks were fools. The MICs typically hold garbage loans made at high rates to people you’d avoid in a gas station restroom. Yes, that’s an awful and elitist thing to say, but when it comes to retirement assets (most MIC investors are older and looking for yield) these are not the folks you want to finance.

The virus is crashing real estate values which has resulted in many MICs halting redemptions and may result in insolvency. Losses could be substantial enough to entirely wipe away years of income – or worse. Yup, additional properties coming to market.

There’s more.

Did you catch CBC’s big expose  this week on a bank ripping off some hapless (single mom) homeowner with a giant mortgage pay-out penalty? About a year-and-a-half into a 5-year home loan the lady wanted out, so the bank calculated an IRD of $30,000. (The penalty is standard at three months interest or the difference between existing rates and the loan rate on the principal owing over the time remaining – whichever is greater.)

The back story: she’s a realtor. The 905 house was financed based on two tenants living there plus an Airbnb suite. So when her income dried up, the renters left and no tourists arrived, she was facing financial ruin living in a giant house with $600,000 in financing. She listed and sold. And the bank wanted its due. Now the realtor (and the CBC) cry for the government to interve

There will be more forced sales in the months ahead. More households in distress after pushing their problems into the future. More listings. More condos vacated. More defaults and foreclosures. More sob stories. More calls for bail-outs, hand-outs, deferrals, extensions, reprieves and forgiveness as the sins, greed, avarice, speculation and property lust of the last few years find their inevitable harvest.

This has only begun.

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