Category: Accounting tips

“I’m a fan of yours,” Barry says, guaranteeing my fatuous attention. “I’d like to know your thoughts on what might the Canadian economy do once CERB runs out.”

And he nails it. That’s the question. The pandemic will end. The virus will leave town. A vaccine/therapy will be found. We’ll have a long time to decide if the medicine matched the ailment. Was this a public health triumph which saved millions of lives? Or a Biblical overreaction lasting years which savaged a perfectly good economy?

Beats me. We’ll know in a decade. Meanwhile, to Barry’s point, how much of a mess are we walking into as the torrent of government money ends?

In case you missed some of the $300 billion in federal largesse, here’s a little reminder of what the federal government has done (with money it didn’t have). The Liberals have just taken a disturbing deficit run up by overspending in good economic times, and multiplied it ten-fold in a crisis. Yes, that’s what governments are supposed to do. But paying people not to work after you’ve told them they can’t be employed is a new thing. Will they want to work again, with the right to refuse? What about the jobs that are gone, gone? How does this fire hose of public cash get cranked off?

These are the major giveaways, now in full effect but scheduled to end.

The CERB. Two grand a month to anyone claiming (but not proving) they lost income because of the virus. Job loss or reduction, illness, quarantine, lockdown, disruption, fear of sickness, caring for a spouse, child or parent – it all qualifies. It started in March and ends in October and between those dates people can collect a total of $8,000, no tax deducted. Money can be received retroactively if applied for by December 2. Even earning just $1,000 a month working, qualifies for twice that amount if leaving that job. Once CERB ends, people can go on EI. Benefits are taxed as income.

Seniors get extra cash. If you’re over 65 the OAS received is topped up by $300. People on GIS get an extra two hundred. Plus withdrawals from RRIFs and pension plans will be taxed 25% less this year.

Students receive $1,250 a month if the virus affected them in any way by cancelling classes or making a summer job scarce. If they held part-time employment, they can claim the CERB. Kids with disabilities get $2,000 monthly until August. People who volunteer will receive up to $5,000 more.

Employers are being paid money to give to employees for not working. The Canada Emergency Wage Subsidy (CEWS) covers up to 75% of payrolls, maxing at $847 per week per person. To qualify businesses must prove a 15% drop in revenues in March and 30% in May. There’s also a wage subsidy program for non-qualifying businesses. Employees who share jobs can collect wages and also EI at the same time, for 76 weeks.

There’s rent relief for businesses, too. The Canada Emergency Commercial Rent Assistance provides forgivable loans to cover 50% of three monthly rent payments during April, May and June. The mortgaged property owner must agree to reduce the tenant’s rent by at least 75% under a rent forgiveness agreement, which will include a pledge not to evict the tenant while the deal’s in place. The business covers only up to 25% of the rent.

Don’t forget the loans. The feds put $65 billion into a fund (CEBA) to give businesses $40,000 each, of which ten grand is a gift. This is for companies with or without employees (including sole props), with other loan programs available to help major corporations.

Got kids? The T2 gang is sending you an extra $300 per child in CCB payments this month. The average family will collect $550. No tax. GST credit payments are being increased by $400 for singles and $600 for couples. And nobody needs to pay any income taxes owing for 2019 until the beginning of September.

In addition, people with mortgages can defer payments for six months. Astonishingly, 20% of everyone with a home loan is expected to ask for forbearance, which will ultimately increase their debt and payments. Renters are being subsidized by some provinces (like BC) while in most places governments have outlawed evictions, giving tenants the ability to live rent-free if they so choose.

The federal benefits will amount to between $250 and $300 billion. The mortgage forbearance is worth $4.2 billion. Nothing approaching this level of household, employee or business support has ever occurred in Canada. During the height of the 2008-9 financial crisis Ottawa shelled out a little more than $50 billion. That amount is now being spent monthly.

So what happens when it stops?

“I think if there’s a vaccine that is widely believed in and Canadians have widely received it, that’s a potential catalyst that could help, but by no means does that resolve all the challenges that may be experienced as a result of this,” says Bay Street economist Craig Alexander (I respect him). “I think ahead of that, it’s going to be really hard to see if we’re getting anywhere close to where we were pre-pandemic.”

Unemployment will be 15% or so by the end of the summer. A million families will have to make mortgage payments again. Five million folks will stop getting $2,000 in CERB each month. Small businesses will have to earn money to pay the rent, or fold. The economic numbers will be dramatically better, but only in comparison to the lockdown.

Barry, expect structural unemployment with double-digit joblessness well into next year. Government deficits will be obscene for a decade. Tax increases in the 2021 budget (following the election that Trudeau wins) could be stiff. Some form of UBI is likely. One viable airline, if we’re lucky. Real estate will pop back to satisfy pent-up demand, then plunge. GICs, bonds and cash will pay nothing. Tourism, hotels, eateries, sports, concerts, conventions, food courts, festivals – kaput for a year or two. Big flow into equities. The wealth gap will widen. It’s a recipe for social unrest and political activism. Look at Saturday night in America.

The virus turned out to be a killer. With accomplices.

About the picture: “I am a long time reader of your blog, and am in the construction business,” says Don, in Vancouver. “I am currently at project on Vancouver Island. On out-of-town projects tradesmen often bring their dogs to the sites, and they are accustomed to handouts from the lunch buckets we pack. I took this photo to show my wife and she suggested that I send it to you, for possible use.”

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  By Guest .Blogger Doug Rowat

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The dividend cut-parade has begun.

Plagued by the devastating coronavirus lockdown, more than 40 S&P 500 companies have cut or suspended their dividends so far this year. In almost every case, it’s unsurprising the companies that are doing the slashing given their coronavirus-sensitive business models: Carnival, Boeing, Schlumberger, Walt Disney, Delta Airlines and Marriott International to name but a few.

But regardless of how well-telegraphed these dividend cuts may have been, investors who rely on their portfolios for income are going to have to reconcile themselves to getting less of it. Not owning these stocks specifically doesn’t mean that you’ve escaped a reduction in your cash flow. More dividend cuts are coming and dodging all the cutters will be like dodging raindrops in a thunder storm. Also, most of the companies that have already cut are widely held by both mutual funds and ETFs. Vanguard Group, for instance, is the largest holder of Boeing, Disney and Schlumberger. So, if you own any kind of broad-based investment vehicle your income stream has probably already been dinged. No income investor is getting out of this coronavirus crisis unscathed.

So, how bad could it get?

According to a recent research note from Morgan Stanley, the market is currently implying a 15% drop in S&P 500 dividends this year. And if we examine our most recent economic catastrophe—the 2008-09 financial crisis—the S&P 500 saw a massive 27% decline in dividend payouts from peak to trough. So a dividend decline of between 15% and 30% this time around is a reasonable assumption.

S&P 500 dividends per share – long term

Source: Bloomberg

However, there is a silver lining.

First, the Morgan Stanley note argues that expectations of a 15% decline in dividends may be overly pessimistic: “we suspect many management teams will be reluctant to cut dividends and be willing to use some cash on hand to support dividends.” Morgan Stanley further states that “companies will always do their best to protect dividend payments and there is substantial empirical data on the strong signaling effects of dividends and stock prices.” In other words, senior executives, who understand the importance of share price performance in relation to future equity financings (not to mention their own compensation) will bend over backwards to protect those dividends.

Second, the 27% drop in dividends during the financial crisis was very short lived. The entire dividend decline spanned only about 9 months (July 2008 to March 2009). Companies then immediately began to raise dividends, returning to pre-crisis highs within three years. Now, it can be argued that the coronavirus crisis may last longer than the financial crisis, but it should also be noted that the rise in dividends following the financial crisis very closely tracked the recovery in the broader equity market. This is always the case. And in case you’ve been under a rock, equity markets have been skyrocketing since their March 2020 lows—surely a good sign for dividend outlook. Indeed, the Morgan Stanley note goes on to add that “if investors believe dividends will only fall 15% in such a terrible economic year, it should make them feel better about this stream of dividends in the future.”

And finally, if you’ve prudently built a balanced and diversified portfolio with multiple asset classes and various sector and geographic exposures, you have even less concern regarding a reduction in your income stream. US treasuries, Government of Canada bonds and even most high-quality corporate bonds are in no danger of default. Further, if you have diversification within the equity component of your portfolio, the effect of broader market dividend declines can be further mitigated.

Every portfolio, for instance, should have Canadian bank exposure. Reliable dividends are critical to the reputation of our big banks making it extremely unlikely they will ever cut. Indeed, none of the big five Canadian banks has cut dividends in at least the past 80 years (National Bank, the sixth largest, cut its dividend in 1993) and none cut, of course, during the financial crisis:

S&P/TSX Canadian Bank Index dividends per share (white line) vs S&P500 dividends per share (orange line) – Canadian banks held steady during the financial crisis.

Source: Bloomberg

But if for some reason you have no confidence in the payouts of our Canadian banks, you might find comfort in other sectors such as US health care. Many of the largest US health care companies (Johnson & Johnson, Pfizer, etc.) have actually RAISED dividends this year.

Regardless, the point here is that diversification is always the key to limiting your dividend downside.

So, more dividend cuts are coming. Brace for it. Fortunately, these cuts are likely to be short lived and can be ameliorated through proper portfolio diversification. However, if you’re taking income from your portfolio, you may simply have to temporarily adjust to a more modest lifestyle. One thing this crisis has taught us is that we’re all going to have to make sacrifices.

Think you’re above doing that? Tell that to a frontline worker.

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

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The news was enough to freak Amy out. Like she needed more of it.

The economy’s shrunk faster than a dude in a lake – 8% in March (and half of that month was pre-virus). This is Great Depression stuff. Imagine what the April and May numbers will be. Ugh. Also a bank just cut its dividend. So are things starting to unravel?

Here’s her situation, and her fear.

I have been reading your blog for years, and while I was in a relationship, had my money invested jointly.  When the partner parted I moved to a self directed brokerage (TD Waterhouse) and that worked well for me over the past five years.  I have since retired, living on CPP, OAS, GIS and dipping into my TFSA dividends to make ends meet.  I rent an old apartment in Hope BC; after a lifetime in Victoria, I couldn’t afford to retire there.

Before COVID my portfolio (maxed TFSA & RRSP) was at $100k, not much to speak for, but two divorces and 16 yrs of being a single mom, has been devastating financially.  Given the present global situation, my portfolio is down 35%.  I am prepared to ride it out, however a close friend is impressing the “inevitable ” on me, meaning now the banks will fail and I should sell off my investments and buy silver and gold.  I can’t afford to get this wrong.  Your thoughts?

First, Amy, the ‘bank’ cutting its dividend is more like a glorified credit union. The Laurentian Bank has been lackluster for years, forced to pay off staff and close 50 branches in Quebec. Total assets are $35 billion, which sounds like a lot. But the Royal Bank is worth $1.5 trillion, and probably has a few billion lying around for pizzas-&-beer on Fridays.

So, none of the Big Six will be cutting, suspending, trimming or otherwise diddling with their dividends. No bank will fail. Never will there be any bail-in provisions triggered. Your bank-held assets are safe and dry.

Now, this does not mean the bankers aren’t sweating a few bullets, thanks to Covid. These ae testy times on Bay Street, which is why bank stocks shed about 20% of their value since the virus came to town. Eight million Canadians are on the dole and almost a million can’t/won’t pay their mortgages. Tons of small business clients are going paws-up over the next few months. Defaults on home loans are expected to increase, as are consumer bankruptcies. HELOCs, car loans, business LOCs – lots of debt will sour.

In response, the banks have set aside almost $11 billion to cover these anticipated loan losses. Doing so has crashed their profit numbers, but it was the correct action. Says TD’s chief financial officer: ““What we’re living through here is an unprecedented shutdown of large segments of the economy, which is impacting consumers and businesses and customer activity in unprecedented ways. We’ve looked at our provisions and applied a good measure of prudence to make sure that we are prepared to weather this pandemic.”

Amy, babe, worry about something else. Not the banks. They’ve got this handled.

So, about your portfolio. Let’s start there. If it tanked 35% you’re not balanced, not diversified and had way too much equity exposure for a wrinklie (or anyone else). A B&D portfolio shed far less than stock markets  and has steadily crawled back since then. With a hundred grand in two registered accounts, you should have just a few positions – balanced ETFs with exposure to North American and international markets plus some bonds and REITs. If you have no preferred fund, this is the time to get one. Cheap. Six per cent yield.

The worst possible move would be to go to cash, then buy a bunch of rocks. Gold and silver are purely speculative, highly volatile, pay no interest, no dividends, no income. You can’t easily trade this stuff (especially in rural BC), nor can you chew off a hunk to buy groceries with at Save On. Bullion is the emotional crutch of the prepper set, and goes nice with semi-automatics, sheep manure and the Old Testament. But it has no place in the modern portfolio of a retired, single woman who needs dependable cash flow.

Now, will things get worse?

Of course. What happens when the CERB, the mortgage deferrals and the emergency business loans/rent subsidies end? More contraction. Many business failures. Household distress. Forced property sales. Just what you’d expect when the jobless rate stays north of 10% and the free government money ends. This is the scenario the bankers are readying for with their eleven billion in bad-money reserves.

At that point anything can happen. The T2 gang might keep the benefits going, ensuring that your grandchildren’s offspring are taxed mercilessly. Or maybe the virus sneaks back. And what about the US election in November? How does that possibly end well?

All of this you cannot know, Amy. Nor can anyone.

But this is not our first disaster. And pandemics are temporary. You may think it’s different this time. It is not.

Even if it were, fretting over events you cannot control only wastes what matters. Without time, nothing has value. Even in Hope.

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Some years ago, when this blog was still pithy (instead of just pissy) we summed it all up this way: the rich hold assets. The rest hold debt.

Well, the virus sure has underscored that piece of news. Since hitting a panicked low in the third week of March, the US stock market has careened higher 39%. In nine weeks. Stunning. In fact if you went to sleep a year ago and snoozed through the entire global pandemic mess, awakening this morning, you’d think equities just had a great 12 months – up 11.2%.

Balanced and diversified portfolios have restored most or all of their value, despite crashing interest rates hurting fixed income returns and the virus rattling REITs. Oil prices have come back from the grave. Commodity prices have revived. Volatility, as measured by the Vix, has cratered by more than half. So the gauges of fear are being turned off while the measures of confidence are soaring.

This is Bay Street. Wall Street. It’s not Main Street. One thing we told you Covid would do is widen the gap between investors and borrowers, between those who own real assets and those who hold financial ones. Endless buckets of liquidity from governments and central bankers have flooded capital markets, created demand for tradable securities, floated the bankers and backstopped corporate woes. As a result, stocks are up. ETFs based on them are peachy. Credit is flowing normally. And all the grief the virus brought has been dumped on the shoulders of others. Deficit-addled governments. Millions of newly-unemployed. Hundreds of thousands who can’t pay their home loans. Besieged small businesses. And, soon, mortgaged homeowners.

This week an interesting war’s played out. Re/Max marketing dudes on one side. The country’s housing agency on the other. The realtors insist housing markets will revive fast from Covid, that prices have so far held steady and a limited number of new listings will keep it that way as buyers stream back from their social distancing. CMHC boss Evan Siddall is warning talk like that’s irresponsible, dangerous and misleading.

“Some vocal real estate advisors have labelled us ‘panic-inducing and irresponsible,’ saying essentially that house prices don’t go down. They’re whistling past the graveyard and offering no analysis,” he Tweeted. “Please question the motivation of anyone who wants you to believe prices will go up (yes, up) with our economy in slow motion, oil being given away, millions of Canadians on income support and a greater % of mortgages not being paid than we’ve seen since the Great Depression.”

Yesterday this pathetic blog listed some of the reasons Siddall makes sense, and Re/Max blows smoke. When the people who have given up are counted, the jobless rate is 20%. Almost a million families can’t, or won’t, pay their mortgages. The savings rate is below 1% and four-in-ten households went into this mess living paycheque-to-paycheque. Unemployment is not going back to 5% by Christmas. Or even next Christmas. And look at bank earnings reports this week – one after another the big guys are setting aside massive amounts for bad loans while revealing a crash in profits. The appetite for risk is falling by the hour. People who can’t pay their mortgages are credit risks.

The Main Street economy is in dogawful shape thanks to politicians who killed it, then paid people not to work. Jobs won’t coming back soon. A third or more of all small businesses will not reopen. Restaurants can’t survive on 50% social-distancing capacity. The tourism season is finished. Hotels dying. Convention hosts, hockey players and rock stars living under bridges now that the audiences are gone. And how many part-time gigs disappeared when the Calgary Stampede, the PNE or the Ex in Toronto were scrubbed?

What Siddall is saying is that those who claim real estate’s immune from this are delusional. Or worse. They’re lying. Houses sell to people who have (a) jobs and (b) access to credit. With unemployment likely to stay at double-digit levels for a long time, and the banks under historic pressure to reduce risk and cleanse their loan portfolios, how are we going back to peak house?

Sure, seriously reduced supply and greater-fool demand will keep prices aloft for a while, but the yellow flag is out. CMHC issued a special warning in the last few days for first-time buyers. If prices fall – even modestly, it said, the indebted will be creamed.

But we already knew that.

Source

Source: The Canadian Press

The virus is an agent of change. The transformation of society’s happening a lot faster since the pandemic came to town. Who knew a bug could do this? Look at the headlines…

The country’s biggest newspaper – in fact a company with real estate, presses, 4,000 employees, half-a-dozen dailies and 70 weeklies – just sold for pennies. Plunging revenues, crippling debt, social media carnivores and social distancing have finished off Torstar. Dead. Kaput.

Hertz is gone. Air Canada is at 5% capacity. Porter stopped flying. Most hotels are shuttered. Airbnb is toast. Uber is crippled. The pandemic ended global travel. Concerts. Conventions. For years, maybe a generation. The stay-at-home mantra changed everything. Netflix, not planes.

RIP the office. Millions may never return. Not only are elevators now death traps and the subway a mortal threat, but open work areas are impossible. So long as the virus lives, employers may insist on masks, temp checks and plexiglass screens to limit workplace liability. And who wants to toil in an ant farm? Work is now Zoom.

Shopping? Pfft. Have you seen the lineups to enter Costco? The grocery place? How can traditional department stores survive when people have to walk in one direction and stay six feet apart? They can’t. Neiman Marcus went broke. So did J Crew, and JC Penny. Pier 1. Reitman’s. Aldo. Victoria’s Secret. Lots more coming. Online or nothing.

This is but a taste of the reset. Some of it we saw coming. Some was a surprise. Evolution’s become revolution. The pace of this is dizzying – just two and a half months of Covid have destroyed business models in place for decades, and permanently wiped out of millions of jobs. Pilots used to be big shots. Concierges were condescending. Publishers were powerful. Hockey players and rock stars mattered. Now the FedEx guy reigns. Bezos is king.

And how long can government or the banks finance the change? Eight million households are on public benefits while a million property owners miss mortgage payments. What social morass awaits us when the CERB ends and home loan deferrals are gone?

Canadian unemployment goes ballistic.

How do we expect the traditional real estate market to function when unemployment stays at double-digits and lenders flee risk? Look at RBC. Our largest bank this week is setting aside almost $3 billion to cover bad loans – up inconceivably from $400 million just three months ago. Its core banking business shrank 66%. And how do you think the Royal will feel about giving your daughter 95% leverage to buy her first condo?

Many can see the changes fomenting around us. But so much more looms. Be careful.

A real estate reset is also at hand. How could it be otherwise now that 20% of all the families with mortgages have stopped paying and face a big, perhaps insurmountable, hurdle in a few months? Seven in ten of those households have scant equity in their homes, with loan-to-value ratios of 90 to 95%. Credible forecasters (CIBC, Moodys. CMHC) say property values will decline over the next year – no surprise given the destruction of jobs and employers now taking place. Obviously that means lots of souls – hundreds of thousands – will be in negative equity by this time next year. Maybe by Christmas.

Will RBC (and the other guys) happily renew mortgages for people without equity? Who stiffed the banks for six months worth of income? How many households will decide it’s far batter to sell and erase debt than suffer home ownership costs while on reduced income? When the direct deposits from Ottawa are over, what then?

Already, says analyst Dane Eitel in Vancouver, the writing is writ large. “CMHC’s announcement of a 9%-18% drop from current data points basically follows my forecast I have offered for years,” he says. In his latest YVR condo report there’s only one message – get the hell out.

“We forecast a prolonged downtrend of lower highs for the reaming months in 2020 and a further decline in 2021. Ultimately the condo market will test a threshold which hasn’t been seen since 2016. Signalling that 5 years of investment will have netted an investor zero increase of equity.

“The 2015 investor with a zero equity increase will be the envy of all those who invested during the market frenzy of 2017-2018. Every Condo purchased during these times will technically be under water in the upcoming years. Investing in real estate is not for the feint of heart. I vividly recall in 2017 the line ups for presales and the amount of complaining that occurred from those who didn’t get a chance to purchase because some investor bought multiple units. Thank your lucky stars those investors. Now it is them on the hook instead of you. In the upcoming months as those pre-sold buildings are completed you can purchase that same unit at a discount. Crazy how life works out.

“We do not advise any investment purchases or even owner occupied purchases in the current market. We would prefer buyers wait until prices are much lower as the inventory increases. Supply demand factors cannot be ignored. As for the investor owners who are about to be caught in this chaotic market, our advice, sell in May and go away… for years.”

Let’s review. Canadian households entered the Covid world with record debt. Half of us lived paycheque-to-paycheque. Unemployment is now at 1930s-levels. Huge numbers cannot, or chose not to, service their mortgages. House prices are inflated. Incomes are crumbling. Leverage is extreme. Savings are scant. A payment cliff looms. So deferrals will likely become defaults, as CMHC has forecast. Real estate values, no longer supported by full employment, must decline. Sales have tumbled.

And, yes, we’ve allowed real estate to become a major pillar of the economy, as we sell each other digs at ever-greater prices with bigger loans. At least, we did.

Think about that as you walk to the corner to get a paper. Oh, wait…

Source

There was panic in the PR department over at Re/Max and Royal LePage last week. They might even had a picture of bad dog Evan Siddall on the wall, with a few bullet holes in it. (Okay, dart punctures, maybe.)

Used to be that the fed agency, CMHC, was just a big squishy, real estate-friendly fluffy media puppy for the major property floggers. For decades the people running it were industry veterans who saw their job as promoting housing. But no more. Mongrel Evan ended it all.

“Homeownership is like blood pressure,” he famously told MPs. “You can have too much of it.”

Yikes. Now everything changed. Says Re/Max spokesguy Chris Alexander: “A statement of this nature is panic-inducing and irresponsible.” In fact the company rushed out one of its famous ‘reports’ this week seeking to prove CMHC is full of fascists, malcontents, anarchists and yellow vesters who can no longer be trusted to make credible statements or forecasts. Like Re/Max.

What did Siddall do to inflame the realtors so?

He stated the obvious. We’re in a pandemic which is carving 30% from the economy, has swelled the jobless rate to 30%, put eight million people on the dole and could take a few years (if ever) to forget. Unemployed people living on pogey and unable to make rent or mortgage payments don’t buy houses, he said. Thus, there will be consequences. And he listed these:

• Household debt, now at 99% of the economy, will swell to 130%  – enough to torpedo growth and job creation.
• Property values across the country could drop by up to 18%.
• A ‘deferral cliff’ is coming in September when mortgage payments have to resume and yet joblessness is still rampant, This is serious because…
• …by September 20% of all mortgage households will not be able (or willing) to pay their home loans.

So the CMHC boss indicated he’d be suggesting to the Trudeau gang that the minimum down payment be doubled to 10% and other lending practices be modified to reduce demand for homes and spare new buyers from falling into a trap. “We feel we need to avoid exposing young people to the amplified losses that result from falling house prices. Unless we act, a first time homebuyer purchasing a $300,000 home with a 5% down payment stands to lose over $45,000 on their $15,000 investment if prices fall by 10%.”

Poop, says Re/Max. Prices will not fall since, “sellers simply won’t accept that kind of discount on their listings.”

“CMHC doesn’t seem to understand the sheer number of sellers that would have to accept this kind of price reduction, in order for average housing prices to plummet to this degree in such a short time span.”

The company says there’s zero evidence of a declines in Toronto, for example, where multiple bids continue, demand is high, and offers continue to be made despite social distancing and the terrifying sight of realtors in pale blue spandex. So while sales activity has plunged by about 70%, prices have held firm. Thus, Re/Max concludes, it only gets better from here. Now Shaun Cathcart, senior economist at CREA, the national real estate outfit, agrees. Uppa, uppa.

   Not so fast. Sales may have fallen, but so have listings – dramatically. Last April there were 17,600 new offerings in Toronto, and this year that crashed to 6,100. So fewer buyers were chasing diminished supply, which is why prices have held steady – despite a sick economy and galloping unemployment. What Siddall is saying is simple. Expect a change. When mortgage deferrals end (and people are still out of work) there could be a tsunami of new listings as indebted families bail.

And let’s not forget the Airbnb factor. When the pandemic came to town there were more than 21,000 short-term rentals in the GTA alone, a lot of them condos bought for exactly that purpose. No more. That business has collapsed. The company has spent $250 million to offset the losses of hosts due to a barrage of cancelations, cancelled its IPO and laid off a third of its staff. Just peruse the condo listings, and you can see the extent of the carnage. Many more of these ghost hotel units will be coming on stream as the year progresses.

There ya go. Logic says housing will be infected by the virus. But along comes new evidence showing sales in the first half of May were much stronger than the month before, even as the job situation deteriorated. So could it be that Re/Max logic will win? Are there enough greater fools roaming the streets to keep real estate alive until a vaccine arrives?

As always, buy a house if you need one and can afford it without gutting your finances, jeopardizing your retirement and family or enslaving you to debt. Alternatively, you can invest in rising financial assets, collect your CERB, rent a beautiful place for peanuts and stop paying your landlord. Tough choice.

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First, the good news. Every little shred helps.

The blue bank is telling its customers not to worry about extra interest that will accrue as they defer their mortgage payments. “BMO will be refunding any additional interest accumulated on your deferred mortgage payments for the entire deferral period.” It says. “We will credit this refund directly to your mortgage within 90 days once your deferral period has ended.”

Not a big savings – on a $300,000 loan at 3% it amounts to about $50 after six months. But fifty bucks is fifty bucks. Of course all of the money you should have paid over those months will still be owing. Your lender might increase the monthly, or add it to the debt. But it’s not going away.

Speaking of deferrals, half the homeowners in Canada who have decided they cannot/will not make their payments because of the virus live in Quebec or Alberta. And the deferral rate is twice as high for those with non-prime mortgages – at about 30%. So, connect the dots. An inescapable conclusion is there will be a lot more houses coming up for sale this autumn when the deferrals end, yet the jobs have not returned. If you’re housing-hunting, wait.

Now, speaking of not paying, it would appear the Government of Canada is confusing the withholding of rent, which is a form of theft, with a ‘Covid benefit’ like the free money it’s dishing out by the billions. In fact, it seems Ottawa is condoning – if not encouraging – people to stick it to the owners, now that the virus has shut down landlord-renter tribunals across the country.

Just visit this simplistic web site to see for yourself. If you indicate the virus stole our job and you’re now having trouble paying the landlord, here’s what you end up with:

2 results
Based on what you’ve told us, the following help is available:
* Apply for the Canada Emergency Response Benefit (CERB)
* In most provinces and territories, you cannot be evicted for not paying rent

Apply for the Canada Emergency Response Benefit (CERB)
* $500 per week
* Up to 16 weeks if you keep meeting the eligibility criteria
* First payment within 10 days of applying

In most provinces and territories, you cannot be evicted for not paying rent
* Provincial governments are in charge of rental housing rules.
* In most provinces and territories, you cannot be evicted for not paying rent.

“Among benefits the feds tell you about is the advice to not pay rent,” says blog dog Scott. “This is crazy, from an official federal government site.” You bet it is. The T2 administration is not only informing you that screwing your landlord is an officially-sanctioned action, but that this constitutes a right, similar to the CERB cash.

On that note, this well-traveled blog whisks you to Vernon, one of the jewels of the Okanagan, where a young female doctor has just learned all about being a landlord. She rented out her rural property while in residency, and now wants to move home. Tough, says the tenant.

Here is her tale of woe, as reported in the local online rag:

“She states that I have no rights to my home during the state of emergency and I cannot evict her. Unfortunately, she is correct. I have called to discuss the situation with the BC Tenancy Board, who stated ‘your concerns fall on deaf ears’ and suggested that I take this up with the politicians who created this legislation.”

“The tenant has proceeded to conduct multiple and recurrent breaches of contract, including housing two cats and two dogs in the home – the lease states pet free. I had to enter the mechanical room in the basement and noticed literal actual piles of garbage and rotting food and animal excrement in the basement. Finally, this tenant smokes inside and on the deck of a log home on a wooded acreage, both a breach of contract and dangerous –which the Tenancy Act says is not dangerous enough for eviction.”

“I have tried to file for eviction with BC Tenancy Board, and it has been denied. I am sure there are others that are suffering financially and personally by the complete unfair and ridiculous BC Tenancy Act. It is named appropriately ‘Tenancy’ act as it really only serves and supports tenants and discriminates against landlords and our homes.”

“This is becoming all too common,” says Barb, our OK correspondent. “The principles here, if they can be called that, are nothing short of anarchy – like the ‘Keep your Rent’ guy on your blog. Indeed, it is just shy of being criminal.”

But, but, but… Not paying rent and stealing accommodation because nobody can evict you during a pandemic is now a Covid benefit, Barb. It’s okay. Mr. Trudeau said so – “you cannot be evicted for not paying rent.” Therefore not paying is the same as paying, because both of those things are, like, allowed. But only one is called a benefit, which is not paying. So it’s better. How is this hard to grasp?

Sheesh. Boomers.

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  By Guest Blogger Sinan Terzioglu

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North American equity markets are down ~13% from all-time highs set in February and the US market is up year-over-year.  Many wonder how this is possible given the current environment.  A client recently asked me:

“Do you think it’s a good time to invest, after such a strong 30% bounce from the lows.  The economy’s a disaster and I don’t see much to be excited about over the next year, especially with a second wave of the virus coming in the fall.”

I hear this a lot.  Yes, there’s uncertainty right now.  Clearly, 2020 earnings will be down substantially but companies (and the equity market as a whole) shouldn’t be evaluated based on a single year’s numbers.  Investors should be modelling at least the next several years of cash flows and discount them at an appropriate rate, to derive a fair value.  The equity market has discounted the sharp contraction in earnings for 2020 and is now looking forward to 2021 and beyond, expecting a return to growth.  As in 2008-2009, the enormous amount of monetary stimulus being injected by the global central banks has brought back a lot of confidence.

“Warren Buffett didn’t actively buy stocks in the turmoil and his cash pile is over $130 billion,” another client says. “ Isn’t this bearish – he expects another significant pull back in the market?”

Sure, but Berkshire Hathaway is far more than just an equity market investor.  Buffett’s company is one of the world’s largest insurance businesses and owns dozens of companies in many industries – Geico, Dairy Queen, Duracell, Benjamin Moore, See’s Candy and the second largest US railway company BNSF Railway.  The value of these privately-controlled businesses totals hundreds of billions and when combined with the ~$200 billion equity portfolio the cash pile doesn’t seem as significant.  In fact, Berkshire Hathaway can be viewed like a balanced and diversified portfolio as it holds growth assets, safe fixed income assets (preferred shares, bonds) and cash/cash equivalents.

Berkshire is exposed to a lot of risk in its insurance business and various operating businesses so it must always keep a fair amount of cash on hand.  A number of years ago Warren Buffett said he’d always keep at least $20 billion in cash, just in case of catastrophic events and potential insurance claims.  Now that Berkshire is much larger the minimum cash balance he wants to keep is likely higher.  Also, over the last few years Buffett has said that he is looking for an elephant sized acquisition and recently indicated that he would happily spend $50+ billion if the right deal came along now.

During the 2008-2009 financial crisis I read a lot of Warren Buffett’s shareholder letters.  My favourite came in 1994:

We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen.  Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.

But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles.  Nor did they render unsound the negotiated purchases of fine businesses at sensible prices.  Imagine the cost to us, then, if we had let a fear of the unknown cause us to defer or alter the deployment of capital.  Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak.  Fear is the foe of the faddist, but the friend of the fundamentalist.

A different set of major shocks is sure to occur in the next 30 years.  We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results.

In the last 26 years we certainly have had shocks, yet the greatest businesses in the world continued to grow and become stronger.  Markets have endured the bursting of the tech bubble, the 2001 terrorist attacks and the 2008-2009 financial crisis.  Despite the roller coaster ride they recovered from losses and went on to make new highs.  As Buffett said, there will be more shocks over the next 30 years so we shouldn’t let a fear of unknowns delay investing our capital.

Our Canadian ETFs hold Canada’s largest banks which along with the market have come under a lot of pressure lately.  The banks have been paying dividends every year since the 1800’s – through both world wars, the Great Depression, countless recessions and all sorts of economic shocks they have never missed a payment on their common shares.  Our US ETFs own the world’s most profitable corporations such as Apple, Amazon, Microsoft, Alphabet (Google), Facebook, Visa, MasterCard and Buffett’s Berkshire Hathaway.  Most are still growing at above average rates which is incredible given their size.  Both Amazon and Alphabet were started out of garages a little over 20-25 years ago.  Alphabet now generates more than twice the revenue of IBM.  These sorts of companies are benefitting from the new normal and represent a large chunk of the US markets. The digital transformation is still in its early stages and many new companies will emerge and grow to become market leaders over the next number of years.

I was recently asked to speak with a few young adults about investing and where to start.  I asked them: “if I offered you a job for the next 30 days and you could choose between receiving $100,000 daily, or being paid $0.01 for your first day and doubling your pay each subsequent day, which would you choose?”

Earning $3,000,000 in a month sounds like a no brainer especially when one considers that option two would only result in earning $5.12 on day 10 and $5,243 on day 20.  But, when you look at the earnings of $2,700,000 on day 29 and $5,400,000 on day 30 the explosive growth is evident.  I believe you can make a world of difference for younger generations by teaching them about compound growth early on and ensure they focus on the long term.

Equities are the only asset in which a portion of your return is automatically reinvested for you.  Basically, companies do the heavy lifting for the owners.  As they earn, a portion is reinvested in the business, resulting in a rapidly compounding gains especially if a company is able to earn an above average rate of return.  Coupled with a lot of time and patience, this is what made Warren Buffett one of the wealthiest people in the world.

Approximately 80% of the gains in the S&P 500 over the 20th Century resulted from the collective earnings of companies in the index being reinvested.  Many think changes in valuation played a big part but if you bought the S&P 500 around the time the Spanish Flu started in 1918 during its lowest P/E multiple of 5.3 and sold it at its highest P/E valuation of 34 in 1999, the compound annual return would have been over 10% (including reinvested dividends).  Less than 3% of that came from the substantial increase in valuation while the remainder flowed from the reinvesting of retained earnings.

In October of 2019 Bank of America said 60-40 portfolios are dead.  The thesis was that because bonds yields are so low, portfolios would need more stocks exposure to make up for lower returns.  The report highlighted that there were over 1,100 global stocks paying dividends above the average yield of global government bonds.  Many of these high yielding dividend stocks are in the energy sector which has obviously come under significant pressure resulting in dividend cuts.

We argued then that we don’t hold bonds to collect interest but to protect investors. Clearly the market turmoil in March highlights why this approach works.  The most important thing in investing is risk management.  Balanced and diversified portfolios have this built into them and while they are not immune to periods like this they hold up much better than all-equity portfolios.  Like we said then, why mess with an approach that has always worked.

The world will move on and the global economy will grow again.  Keep your focus on your long term goals, continue investing when you can, ignore the noise and most importantly don’t be distracted.

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

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   By Guest Blogger Ryan Lewenza

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I’m a big baseball fan having played it for years when I was a young punk. As an extension of this, I love watching baseball movies like Bull Durham, The Natural, Major League, and my all-time favourite, Moneyball. I think that one’s my favourite since it combines two of my passions – baseball and statistics.

One particular scene from that movie that resonates with me right now and that is germane to the pandemic and recession, is the scene when Billy Beane, the coach of the Oakland A’s, and played by my doppelganger Brad Pitt, repeated over and over to his ballplayers that “it’s a process, it’s a process”. He was trying to get his team to buy into his new strategy and kept hitting home that “it’s a process”, and that his players need to be patient and wait for their pitch or opportunities to come to them.

Well, this pandemic and global recession is going to be a process too, and just like every other recession before, this one too shall pass. The only question is when and how meaningful the recovery be.

Today I review this process of how economies move from recession back to recovery, and outline my expectations of this process over the next 12-18 months.

To understand why recoveries are a process we need to start with a review of the business or economic cycle.

The business cycle tracks the changes in economic growth or activity over time. Specifically, it tracks fluctuations in things like production, trade and economic activity and essentially captures the evolution of an economy from boom to bust. In my opinion, it is one of the most important things to track as it has huge implications for economic growth and the financial markets over time.

There are four basic phases of the business cycle. First, is the expansion phase and is characterized by rising employment and GDP growth, and generally, rising prices. Second, is the peak, which is the highest point of the cycle and where the economy is operating at full capacity. Third, is the contraction phase (where we’re currently in), which is where the economy contracts, job losses mount, and deflationary pressures come out. Finally, the last phase is the recovery phase, where the economy has bottomed and is beginning its next upswing. Then rinse and repeat over time.

The Business Cycle

Source: Model Investing

While every recession/contraction is different, the three main causes of economic recessions are rising interest rates, the end of credit/asset bubbles, and exogenous shocks such as wars and oil spikes. The current recession was brought on by a historic global pandemic, which would fall into the category of exogenous shocks.

Our focus, however, is now on the recovery and how economies transition from contraction to recovery. The key factors that help lead to a recovery are lower interest rates/stimulus from central banks and rebounding confidence among consumers, investors and the business sector.

I can’t stress enough how important improving confidence is to a recovery. Take right now for example. In March we were all scared senseless, focusing on TV and media headlines regarding COVID and the steep declines in the stock market. But now people are starting to feel a bit more at ease. As the economy begins to be re-opened, and infection rates peak, confidence will slowly start to recover, leading to ‘animal spirits’ coming out and a recovery.

Now it’s not a straight line and there are going to be setbacks along the way as it takes time for confidence to be repaired.

Below are some interesting charts to help hit home my point. The keys to every recovery are new jobs being consistently added and improving consumer confidence. If people are more confident and they have a job they spend more. If on the aggregate, consumer confidence is low then they save more. That’s exactly what’s happening right now.

So in the charts below I chart those two indicators in the US (total people employed and consumer confidence) for the last four recessions. The time period for each recession measures from six months before the start of the recession, and the subsequent two years after each recession.

While every recovery is different, the charts clearly show that over time you start to see rebounds in employment and consumer confidence. In 1981 for example, the recovery in both were fairly quick following the recession. And in 2001 the recovery took a bit longer, but the outcome is always the same.

As I said before, the question is not if the US/global economy will recover from this global pandemic and recession, but rather when, and by how much.

I believe the second quarter will be an absolute disaster for economic growth, but that this could represent the low in this contraction phase. Then as the economy begins to be re-opened, we should see a bounce back of activity in the second half of this year.

I’m not sure if it’s going to be a V, U or W-shaped recovery, but I believe strongly there will be a recovery and that by 2021 the US/global economy could be well went into its next expansion phase. Why? Well, this is how recoveries work. It takes time to rebuild confidence and see a rebound in the labour markets. Second, the central banks around the world are injecting unprecedented stimulus (in the trillions!) into their economies, which I believe could help lead to a stronger recovery then many people are currently anticipating.

Yes it’s going to be a bumpy ride, and were not through this contraction/recession yet, but try not to lose the forests for the tress and recognize that we’ll get through this tough time as history has clearly showed us time and time again that we do recover from these downturns and that its just “part of the process.”

US Economic Recoveries Following Recessions

Source: Bloomberg, Turner Investments (Click to enlarge)

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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What lessons did the virus give us? Did we react calmly, correctly?

Tom’s a contractor with a small crew in southern Ontario. Four trucks, usually eight guys. Just four now. The others asked to be laid off, to collect the CERB for four months. Tom told them to get their damn butts on the job site. They quit, and took the benefit.

Linda runs a women’s clothing store and was planning to reopen last week, but decided against it. “The wage subsidy program is just too much to give up,” she said. And the federal rent money is due soon. That’s lost if the store opens again, she says.

Across Canada 70% of small businesses remain closed. Hearing such stories makes one wonder how irreparably we’ve altered the economy. Paying people – eight million of them – not to work has consequences. The damage to federal finances could take a generation to fix after Ottawa threw more than $250 billion at Covid-19. (Another $75 million yesterday for indigenous people living in cities.)

As I mentioned last week when writing about Lunenburg, I’ve been in NS during the pandemic. Here are the virus stats for the province: the total number of cases is 1,046. Recoveries are 959 and deaths 58 (almost all at one long-term care facility, Northwood). Nine people are in hospital. Thus, there are 20 active cases in the province, of which 19 are at Northwood. That leaves one person.

Was this really a pandemic? Most cases were mild. Recoveries are increasing faster than infections. Several provinces have few active cases at all. The health care system was not overwhelmed. No bursting ICUs or run on ventilators. And yet thousands of elective surgeries were halted and care denied to sick patients. Dental offices were shut. The young mom I met in the park last week was devastated her 18-month-old toddler had been unable to receive scheduled vaccinations. Clinics shut. BC says it will take two years just to catch up on medical procedures that were postponed.

So there are two schools of thought.

On one hand we overreacted dramatically. Politicians let doctors take over the economy. They closed too much, idled too many, spent too freely and destroyed too widely. Public finances are a ruin. Paying people not to work was unwise. We could have achieved the same result with social distancing and sheltering the vulnerable in those retirement homes, without nuking society.

On the other hand, decisive action, emergency measures and draconian stay-at-home measures saved countless lives. Flattened the curve. We prevented an historic disaster from unfolding. The pathogen was defeated. And our guard cannot be dropped, lest there’s a second wave. This was a public health triumph.

Well, guess which story will be told, regardless of the outcome? Perhaps history will judge. But clarity will not be forthcoming anytime soon.

Meanwhile investors who did not panic, sell into a storm, go to cash or believe everything they read in the mainstream media, have done just fine. Balanced and diversified portfolios performed as they were designed to, blunting the decline and joining the recovery. By the end of 2020 it’s reasonable to expect this will be another year of positive returns.

Hopefully, after all we’ve gone through this decade – Y2K, the dot-com crash, Nine Eleven, the great Credit Crisis, the US debt ceiling debacle, the 2015 oil price collapse, Brexit and now the coronavirus – one thing is evident. It’s not different this time. It’s never different.

Allow me to give you an example of why humans screw up. We flatter ourselves that the times we inhabit are epochal and our lives are therefore remarkable. We exaggerate, lose perspective, drift to the extreme and sink into an emotional quagmire. It leads to bad choices.

When the virus came to town, this blog tried to adopt a reasonable, non-hysterical tone. We’re probably not all going to get infected and die, it said. And we didn’t.

I leave you with some of the comments, emails, texts and threatening messages I received in mid-March. They were not published. Now you know why.

Garth, you do not have a crystal ball, so stop your nonsense. Your wild claims about how the international response to COVID-19 is somehow overblown exudes a hubris based on a wilful blindness to what is happening. By the time this is over, several million will have died, the world’s healthcare systems will have collapsed, and the global economy may well have contracted by 50% or more. Try to lay off the smarminess and read what the epidemiologists are writing, because the real ugliness is yet to begin. – Jimmy, March 21

I estimate 60 to 80 percent of people worldwide will be infected over about the next year. Outbreaks will come and go but the end result will be 6 to 8 billion people infected and about 500 million deaths worldwide. This little virus will kill more people than all wars in history put together. Disruptions in daily life will be massive and prolonged. Many mega companies will be bankrupt. The stock markets will linger at levels around 30 to 40 percent of current levels for several years before recovering to be robust, maybe five,six,seven years from now. Sorry to ruin your day, Garth, but this is what really awaits us.  – Rob Klein

How many go to the grave parroting your dumbass comments about this being nothing to worry about? Shame on you, old man. Smarten up! This is not a topic you are qualified to comment on and you are actively harming people with your ignorance. Try reading about mortality rates, R0 values, herd immunity, and what happens to populations when exposed to novel viruses- all stuff you conveniently left out in your comments. This stuff is actual science, not just opinion from some ancient dolt flogging mutual funds. You’ll sound less ignorant if you at least partially grasp these concepts. – Pacificqa

A lot of people are going to die – millions upon millions across the globe, and majorly in the USA due to their incompetence and hubris and total lack of regard for human life. This is no time for your normally appreciated wit. We need you to get on the bandwagon and show some understanding of the seriousness of this dire situation, and also show some compassion & empathy. Money & investing is not on the priority list for most in such dire circumstances. There will not be a short term turnaround. The economic & supply chain disruptions are just starting. This is real, and the widespread implications are unfathomable. It is f’ing serious and deserves a f’ing serious response! – Janice Todd

Garth, are you still in denial of this? Still holding by your “millions will not die” claim? I too want to be optimistic but it is tough to accept your statement without any logic behind it. I hope soon enough you will explain your conviction in more detail. – Dimitry

Hubris Garth. You remind me of the giggling vacationers in Phuket in videos of the 2004 boxing day tsunami. It starts with them watching some big waves coming in. Then they realize it’s serious, then they turn to run right when it’s too late. – Faron

Wuhan Virus Mortality Rate: Assuming 3% mortality and 50% infection rate in Canada (37.6M) we would experience approximately 564,000 deaths and over 2.5 million (15% of those infected) hospitalized as this unfolds. – Jager

F-n stawk and ‘balanced portfolio’ shill shilling for you buddy leaches ‘driving Ferraris’. Well, guess what, marketing blog genius, many of the people, including your clients shilled out of their money won’t need their portfolios anymore b/c they will be dead of the virus soon! Arrogant prick. – Alexei Yur

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