Category: Accounting tips

The dichotomy continues. The market goes up. The economy goes down. A lot of folks, understandably, don’t get it. They want black. They want white. Some even hate me

Like Matty, who sent this anguished note after yesterday’s post on some of the things to expect post-virus:

It’s actually incredible the amount of two-faced garbage you spew sometimes Garth. One day you make it seem like the pandemic is a temporary blip then you show how much of a fear mongering, view-grabbing blog poster you are. I’ve followed your blog religiously for the past several years, and while you’ve given some great advice, your approach to navigating this pandemic has been dismal at best. If you can’t see for yourself how conflicting your posts have been, I’m not sure anyone will be able to convince you otherwise.

Well, there’s a reason. This blog is a daily version of history. If we were dealing with something static, defined and distasteful, like a Drake video, analysis would be easy. But this is a virus. The first global pandemic of our lifetimes. And we have a questionable crop of leaders feeling their way through it. Suddenly the economy is being run by doctors while politicians are trying to be public health officials. The future’s messy. Nobody ever before has turned off the entire economy. Or tried then to turn it on again.

But Matty boy is right. When talking about financial assets, markets and portfolios, this blog has told you to be confident, hold tight and expect a reasonable result. When it comes to the economy and its impact on most people, it’s a far different story. So, why?

On one hand, the world’s a mess. There are now 30 million Americans on, or applying for, government largesse. The true number of unemployed is believed to be copiously higher. This is approaching 1930s Grapes of Wrath levels. In Canada, as noted, eight million are out of work and on the dole – which is unprecedented. Shut companies, idled workers and locked-down shoppers are gutting government revenues, as public spending soars. The Parliamentary Budget Office on Thursday confirmed the federal deficit will be the largest in history. By miles. Over $252 billion – ten times the pre-bug prediction. Mr. Trudeau will go down in history for that alone.

More mess. Only one in ten small businesses apparently qualify for federal rent relief, and four in ten will not reopen. By the way, mom-and-pops employ about eight million people, or 70% of the Canadian workforce. The GDP may decline by 25% in the second quarter of 2020 and unemployment in both Canada and the States will hit 15% or greater. Some say 30%. Corporate earnings will be ugly. Analysts estimate S&P companies will see profits decline by 34%. That’s double the last estimate of a couple of weeks ago.

We could go on. Dairy farmers are suddenly hit because all the restaurants and hotels are shut. Movers are idled because people aren’t buying and selling houses. People with Airbnb properties, hotels, tour companies, cruise lines or fishing lodges, are freaking out. Distributors are being crushed since there’s little demand for jet fuel. YVR just laid off an army of people. Shell has cut its dividend for the first time since the Second World War. Oil companies are bleeding big. Former deputy PM John Manley, a major Lib insider, says it’ll take ten years to get over Covid.

There’s no point sugarcoating any of this. It sucks. The longer things stay closed the longer and more difficult the recovery. Much will never be the same. Less bank branches. Hoardings along Main Street. Way fewer flights (and more costly seats). Structural unemployment and deficits along with tax increases.

In the new world many people won’t work again. Some companies will blow up. Whole sectors will shrink. Offices will close. Cities change. The points made yesterday were not to monger fear or grab views, but to probe how an unknown event might rock our world. If nothing else, the virus has exposed how vulnerable and victimized a nation of house-lusty, over-leveraged and financially illiterate grasshoppers we are. No savings, no reserves and no ability to last just a few weeks without a paycheque. Did you think so many lived so close to the edge? Is it not time to change?

But as all of the above unfolded, Mr. Market has held another theme. That gauge of fear, the Vix, has collapsed by 60%. The gauge of confidence, the equity market, has jumped 32% from the lows of late March. This despite the virus carving a hole in the economy and corporate earnings while hobbling governments and throwing millions out of work.

Investors with balanced and diversified portfolios saw a plop of 15% or more when the pandemic bit, but have regained most of their losses – now off just a few points. As tough as it might be to grasp when looking at the social carnage, markets absorbed and reflected Covid’s impact and now anticipate recovery. Pandemics are temporary. Like Kevin O’Leary or Svend Robinson they just go away if you wait long enough. Better things emerge.

And, of course, markets are being buoyed as never before by runaway fiscal and monetary policy. All those trillions in government spending and bond purchases along with crashed interest rates pour liquidity into the economy, make financing cheap and bail out corporate losers. This week the Fed boss said the central bank’s “full range of tools” would be used to prop things up and, “we will do it to the absolute limit of those powers.” So this is why the S&P is ahead 13% in a single month.

More to come. There will be volatility. Expect some brutal days. But those who ignore their properly-weighted portfolios will do just fine, even as the virus tortures millions and tears down their standard of living. This is the reckoning many thought would someday come. It’s here. In the loins of a germ.

As with the rest of life, the outcome is unfair.

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Jon’s a heart doc, transitioning from a small regional hospital to the Big Smoke. His new gig in the cardiac unit of a major Toronto medical centre starts Friday. “Huge promotion,” he says, “and now that Covid is moving offstage there’s a serious backlog of elective surgeries to handle. I will be busy.”

The good news: Jon’s owned a downtown condo for the past five years, where he’s planning on moving his small family. The bad news: he can’t.

“Two months ago I told the tenants I’d be coming back into my old place,” he says, “and they have refused to move out. Now I can’t budge them, and we have no place to land.”

Jon offered to give the tenants a payment equal to three months’ rent. No dice. He found them another, similar, unit downtown. Nope. He said he’d pay their moving expenses. Forget it. While he has the legal right to displace them for his own family, there’s no mechanism to do so. The Landlord and Tenant Board is shut. No tribunals. No judgments. In fact, as in several provinces during the virus crisis, there’s a no-eviction policy in place in Ontario. If a tenant refuses to leave, or even to pay rent, too bad.

Moreover when the board resumes operations, the backlog will be Biblical. It’s estimated the wait will be at least a year before a case is even heard. Meanwhile Jon’s condo is his property in name only. He’s scrambling to find a place for a family of four, plus beagle.

These are tough days to be a landlord. About a fifth of tenants paid no rent in April, thanks to the virus (and some bad attitude), and the situation may worsen this Friday. Things are even more dire for commercial property owners, since 80% of all small businesses are shut without revenue. More than 40% are expected to fail if the lockdown goes past the end of May. The feds’ business rent relief program just started taking applications (10,000 on the first day), and in order to get any revenue LLs have to agree to a 75% reduction for a few months. When you’ve got a big mortgage nut and property taxes to pay, that can be brutal.

Meanwhile Airbnbers are freaking out. A flood of condos is poised to hit the market since the vacation rental market evaporated and leasing to a residential tenant is guaranteed to lose money.

Amazingly, more than 15% of all the households in the GTA own rental property. About half of all new, pre-con condo sales have gone to speculators, investors and amateurs landlords. Of those who have rented to long-term leased tenants, 40% are believed to be in negative cash flow – and that was even before the virus made it perfectly okay for tenants to stiff you.

Clearly small-time investors have banked on (a) Airbnb cash flow or (b) year/year capital gains in the value of their units. Currently, both are pffft. And with the virus believed to become a semi-permanent feature of urban life, high-rise, DT condo living is a lot less glam. Just look at all the ‘touch-‘n-toss’ tissue boxes now riding around in elevators. Now think about the door handle into the garbage room. Yucko.

This landlord misery, political intervention, germ reality and tenant rentier class warfare could change real estate tastes and values over the next few years. In fact it might already be happening. Early pandemic numbers out of the US show a big surge in homebuilder activity, as buyers migrate away from the urban towers to suburban dirt.

That makes sense. Especially if this Covid thing morphs into a recurring seasonal flu-type plague. Why would young families not want a nice backyard to self-isolate in, a safe garage to disinfect the minivan inside of, real earth to grow cootie-free veggies and enough house space to safely socially distance? Try doing any of that on a balcony on the 50th floor.

Besides, who needs to go downtown anymore?  2020 has taught us that whole organizations can function with people at home, working remotely in their underwear. All you need is a strong Wi-Fi connection and a pooch to keep your feet warm. Screw the cublicle! And especially the commute!

Could this mean a suburban renaissance? After all, real estate is cheaper the further you migrate from downtown – or, at least, that was the pre-pandemic reality. Maybe in the new world order that’ll be reversed. Let’s wait and see.

In any case, detached will become the undisputed gold standard of housing, leaving condos for the unfortunates. By the way, if you need a good cardiac surgeon, I know of one living under a bridge.

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Stocks up again. Volatility down. Portfolios restoring. Man, this drives some people nuts.

Not a day passes without a renowned macroeconomist wag or savant quant analyst in the steerage section telling you, ‘markets will make new lows,’ or ‘the worst is to come.’ But it’s not happening. It’s done. Mr. Market hit the bottom in the third week of March. If you’ve been waiting with cash to jump in, you probably waited too long.

But, but, but, how could it be? This very blog has detailed the blood-and-guts status of the economy. Retail slaughter. Eight million on the dole. Oil heading back to ten bucks. Record household debt. Real estate Armageddon. Missed rents. Mortgage mayhem. Intestines and oozy juices everywhere. How come rich people with financial assets are getting a free ride? The over-leveraged, under-capitalized, no-savings deplorables demand blood!

It’s true. Stocks cratered 35% or more when the virus invaded. Since then there’s been a serious retracing. The S&P has zipped higher along with Bay Street. Fear’s gauge, the Vix, has plunged. Balanced and diversified portfolios took a tumble of 15% or more, then quickly reversed. Soon it may be as if a pandemic never happened, leaving investors whole while so many others in society are whacked.

So, yeah, why?

Markets retracing in a V pattern

First, as this pathetic blog has said repeatedly, pandemics are blips. They pass. This mess is not the result of a structural failure. Banks are not wobbling nor big corps failing. Politicians turned the economy off and artificially curtailed demand in order to deal with a health emergency. It was shocking, disruptive and hurtful, but also temporary. Markets and investors get this. Growth will be back in Q3, when I can finally get a haircut and stop looking like the lead guitarist in Black Sabbath.

Second, the response by central banks and governments was overwhelming. The Fed and the Bank of Canada crashed interest rates within days, then started buying up securities by the vanfull. The system is awash in liquidity. There’s no credit crisis of the kind that killed us in 2008-9. Governments followed this with the greatest amount of public spending since WW2. Trillions. Everybody is getting a cheque of some kind. It’s astonishing.

Third, we went into this coronavirus hell with a relatively strong economy – certainly in the US. Unemployment at a 50-year low, corporate profits robust, trade barriers coming down, record high consumer confidence, rising real estate markets, peak stock values, low inflation, cheap rates and a pending American presidential election. A lot of big companies report earnings this week. Prepare to be surprised.

Fourth, Covid didn’t kill us. Yes, many perished, sadly, and by the time things are done there may be two million infections in the States. But Canada has largely escaped. The curve flattened. The health care system didn’t buckle. Restrictions will be slowly lifted here, as is the case in Italy, China, New Zealand, several US states and elsewhere. What was believed to be a massive shortage of ventilators in the States turned into a surplus. Most of the fatalities have been among the aged, or those with underlying medical conditions. Society as a whole is not threatened. And when therapies or a vaccine emerge, CV19 will be just another thing. Remember measles used to kill. Diabetes was fatal. Markets are saying this is the beginning of the end, not the end of the beginning.

So as the economy turns back, on corporate earnings can restore, taking the place of government and central bank stimulus. This would suggest the bottom was a month ago. It does not mean stocks won’t have some brutal days ahead. But it does signal a brighter future. Hope. The way out.

However, there’s bad news, too.

Remember this blog told you Covid would make the wealth gap grow? Yup. Happening. People with financial assets are emerging relatively unscathed. Gains beckon. But folks with big debts, no savings, no reserves and (for a while now) no incomes, are even more pooched. Says Deloitte economist Craig Alexander: “One of the great legacies of the current crisis is that after the pandemic has passed, we’re going to have more indebted households.”

The other big deficit is confidence. Wall-to-wall pandemic coverage by the Coronavirus Broadcasting Corp, and other MSM outlets have parroted the message of governments anxious to control and modify behaviour. History will tell us if they went overboard or the message was justified. But polls suggest a majority are quite happy to collect pogey instead of a paycheque and are terrified of being infected and quickly dying. That the number of active cases of the virus today (26,800) amounts to .007% of the Canadian population seems moot. Folks don’t care. They’re scared

Worried people are not risk-takers. They eschew investing. They buy condos, instead, using big leverage – which is perfectly safe because the bank gave them the money. They don’t trust financial markets, believe the government will look after their retirement and get new vehicles with 84-month loans. Household debt explodes. That’s understandable (if risky) when the economy’s firing on all cylinders. When a crisis hits, disaster. If a legacy of the virus is falling house values, business failures and structural unemployment (all likely), the chasm grows. The rich hold assets. The rest hold debt.

Which are you?

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   By Guest Blogger Ryan Lewenza

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Often our clients can provide great insight on the economy and markets. Case in point, a client quipped to me once that he finds it amusing how people will rush out to the malls in great numbers and haste to buy some 50 inch flat screen TV or a new pair of khakis during marked down sales events, but when the stock market goes on sale, crickets!

I spoke to this in a recent blog post on investor behaviour. During bear markets stocks fall dramatically, thus “going on sale”, but it’s hard to convince investors that these events often represent the best long-term buying opportunities. I believe one of these opportunities is surfacing in Canadian real estate investment trusts or REITs.

Since the market peak on February 20th, REITs have been hit hard, declining over 30%, far worse than the TSX at -20%. With the global pandemic effectively shutting down the global economy, investors are concerned that many of the REITs will be negatively impacted and that dividend payments could be cut. Commercial building REITs have also received a thrashing as many expect this pandemic to cause more people to work from home. While I agree with these concerns, I believe REITs remain a core long-term holding and the recent weakness is creating an opportunity.

Canadian REIT Returns since Feb 20th

Source: Stockcharts.com, Turner Investments

First, the long-term strong performance of REITs is undeniable. The 10-year cumulative return of the S&P/TSX REIT Index ETF is 100%, almost double that of the TSX at 58%. And this doesn’t even include the dividends, which is one of the main reasons you buy REITs.

REIT Returns since 2010

Source: Stockcharts.com, Turner Investments

Speaking of which, with the big drop over the last few months, the REIT Index dividend yield has spiked from a 10-year low of 4% in January to now near a 10-year high of 6.5%. The concern is that many of these REITs will cut the dividends and I would not be surprised to see this happen to a few of them, but that’s why you buy ETFs. Spread the exposure across a number of different industries and companies.

REIT Yield Has Risen to 6.5%

Source: Stockcharts.com, Turner Investments

One critical driver of REITs are interest rates and I illustrate this relationship below. As interest rates have declined over the last 10 years, REIT prices have continued to rise. This negative correlation simply means low interest rates are generally good for REITs. This stems from two key reasons. First, REITs utilize debt to run their businesses and grow, so low interest rates result in lower borrowing costs. Second, REITs and their dividends look more attractive when interest rates are low, which we expect to continue for some years. I continue to believe that interest rates will stay low for long, which supports REITs in a number of ways.

REITs are negatively correlated with interest rates

Source: Stockcharts.com, Turner Investments

Finally, with the sell-off in prices, valuations for the sector are looking attractive. There’s a few different ways to look at REIT valuations – prices to funds from operations (P/FFO) and prices to net asset value (P/NAV). On a price to NAV basis, the Raymond James REIT analyst calculates P/NAV at a record 33% discount, even worse during the financial crisis when they traded at a 25% discount. Admittedly, the near-term outlook is uncertain but a lot of that looks priced in already. Yes things look cloudy in the short-term, but people are going to shop again and go into the office.

Canadian REIT Sector P/NAV

Source: Raymond James Ltd.

Life is highly uncertain right now, which can help obscure the long-term value of assets. But I believe there is value surfacing in the REIT sector. Timing this stuff can always be difficult in the short-term, but longer term, value usually delivers good returns for patient investors. Until then, clip those great dividend yields.

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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Normal is gone. At least until the autumn. Then you can get a haircut, jog through the park, grab a beer, see the dentist, buy shoes, pick a new iPhone, or (like me) visit the gym for a four-hour workout to tone up your glistening abs.

But some things will be odd for a long time. No Raptors or Flames games to watch in person. No Stampede or CNE. No Drake or Adele concerts (there is a God…). No packed airports plus emptied hotels and economic mayhem in places that depend on visitors or foreigners. (Tourism added $90 billion to the economy last year and employed 1.7 million people. Yikes.)

Real estate? Forever altered. No more open houses. Wary sellers. Predatory buyers. Thousands of realtors leaving the industry. Virtual appraisals. Less, tighter credit. Falling values in most places. Condo slaughter in others. (We’ve allowed real estate to become 24% of Canada’s entire economy. Ouch.)

As for government, the virus has also bent the future. Every day that T2 walks to a podium and pledges more billions (this week Ottawa announced it’s paying students not to work, and footing the bill for businesses that can’t honour leases – instead of letting them open and pay their own rent), things darken. The deficit will soar to $200 billion and beyond. It will expand the national debt by a third, adding a huge interest burden to federal finances. In turn, more taxes – on an economy with less activity.

So yesterday we mused about what this might mean. Deflation, this learned blog suggested, could be one outcome. The bond market is tilting that way. Lower prices, lower wages, less employment, business contraction (it’s now estimated 50% of all indie restaurants will never reopen), low rates, low growth, structural unemployment and a government desperate for tax revenue to keep the pogey spigot open, now that millions are supping.

Deflation is bad for real estate. Worse for debtors. Great for buyers with cash. Good for investors with liquid assets and cash flow. And, yes, it widens the wealth gap – since Canadian households have never been this indebted, and legions of them would struggle if deflation arrived. Incomes would fall along with the value of their one, big asset. So much for the strategy of selling a house to fund retirement.

But, wait.

Some people fear the opposite – a world of economic insanity in which government spends wildly, trying to inflate problems away, borrowing with abandon, destroying the value of the currency and creating a hyper-inflation to save real estate and wash away crippling debt. In this world cash is trash. Real assets rock.

And this brings us to Mike’s problem. His wife. And the above.

Garth, I’ve been following you since your time in Ottawa. Strange times. My wife and I are both physician (I’m front line) so took only a small Covid-related income  hit.

What keeps me up at night? We just completed the sale of our Vancouver home and are currently renting a beautiful estate home. We pay barely over twice the property taxes in rent. Dirt cheap. Luxury rentals have plummeted in the last couple of years. So while we have some diversified investments, we now sit on almost 2mil cash In part because of the house proceeds.

She grew up in Romania and lived through the 1989-90 hyperinflation there. She thinks our cash will inflate away in no time. While she loves our rental, she would like to get back into the housing market ASAP for fear of inflation. Problem is we can’t afford the house she wants because I don’t want a mortgage. I’m 45. I’m done with debt.

Am I being foolish here? How long would the deflationary period last before we get rapid inflation?  We’ll be in partial lockdown for many months to come. I don’t see business as usually for a while. Curious to get your thoughts in the timing of deflation/ inflation.

Well, Mike, she’s wrong. There’s no hyper-inflation in the cards – not with most businesses shut, seven million on the dole, corporate earnings whacked, oil prices in the ditch, planes not flying, empty highways and a long, dry stretch ahead before government even lets people feel normal. Our GDP is in freefall, exports have tumbled, hotels are closed and the border shut – and the pandemic has been with us for barely five weeks. Just imagine where we’ll be in a few months. Deflation may not come. But we are far closer to that end of the OMG scale.

Buy a Van house now?

Analyst Dane Eitel thinks you’re nuts. “Prices will be coming off with gusto in the upcoming months,” he says. “We anticipate the market to correct a total of 23% from the peak and down 16% from the latest data point. The ugly truth is the possibility of the market going even lower is tangible. An additional 28% decline from here is possoible.” Eitel says he fully expects detached prices to be $500,000 less than they are now. Seems deflationary to me.

So, Dr. Mike, buying a honking big doctor-appropriate house at this point would be a bad move. Stick with the rental, and let the current owner lick his wounds as equity slides. As for the two million, why would you not use the cash to invest in financial assets which have been beaten down? The ride back up over the next couple of years as the economy slowly re-opens will be fun (if volatile), and since most docs don’t have pensions and work through professional corporations, it’s important for you and that inflationary squeeze of yours to have significant personal assets. Rest assured Mr. Trudeau will be gunning for your PC again soon.

Will inflation ever return?

Sure it will. But this is not Romania. Here we just nibble and lick you to death.

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Fear and loathing in Calgary yesterday.

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Tom’s a Westjetter. A pilot. He married April, whom he met at the Calgary airport six years ago. In Starbucks, Concourse D. She works the cabins.

So now they’re both out of a job, despite Ottawa’s payroll subsidy plan. The airline laid off most of two thousand pilots a few days ago, as it sinks deeper into the abyss. Most routes cancelled. US flights suspended. Passenger loads down 95%. The new owner, Onex, says it has enough cash to keep its 36 businesses afloat through the pandemic, but many people (Tom’s one of them) doubt if normal will ever return.

Not just Westjet, of course. Air Canada has cut 90% of its routes. Travel has been decimated. In downtown Toronto the upscale King Edward Hotel, owned by Omni, was running at 100% occupancy six months ago with rooms starting about $700 a night. It’s shut now. Everybody, from the uniformed doorman unloading limos to the kitchen staff and lowly room cleaners is laid off. The flagship Royal York Hotel is collecting food donations for its furloughed staff. Hotels in Halifax, the cruise ship capital of Canada, are closed. There will be no ships this year. Hotel Vancouver is shuttered. So is the Chateau Laurier, perched elegantly beside the Parliament buildings.

We need to think about such things, in case they portend an altered future.

This is why a barrel of oil became worthless on Monday, and remains in the dumps. Transportation consumes 60% of the world’s crude, and oil has been our nation’s largest export. But when Tom isn’t flying, when the hotels are closed and the highways are empty, demand collapses. So do commodity prices. Now Airbnb is essentially kaput, putting added downward pressure on real estate values. Economies hobbled by the virus have cut energy consumption by a third in just a month. There are now 26 million Americans collecting jobless pay and seven million Canadians are on the dole. Never happened before, so deep, so fast.

As of this week, 80% of all small and medium-sized business in Canada are shut, or barely operational. Estimates are that tens of thousands of them will never open again. Jacob knows. He opened a hair/spa business in Vancouver a couple of years ago, and told me this week that revenues fell from forty grand a month to zero. All cash flow went to employees, overhead and debt repayment. Now he has seven years left on a lease costing him $11,000 every four weeks. “I’m done,” he says.

Add in climate change and the political pressure mounts to never return to the way things were ‘way back when – in February. Oil locked into the earth. Parked planes that never fly. Employees working from home, emptying the roads. A global economic and environmental reset, brought on by the most unlikely force – cooties.

If this becomes our future, change will engulf us. Our resource and real estate-dependent economy will be impacted. Cheap oil and falling asset values are disinflationary at first (Capital Economics now says inflation will tumble below zero), then possibly deflationary.

There’s no guarantee this will occur. Hopefully it will not. In the best case scenario, the planes will start flying again (in a limited way) in June, hotels will edge back into operation and people may start planning business trips and vacations for 2021. Restaurants could recover – or patrons may balk at servers in masks and tables set metres apart. Large corporations may conclude it’s cheaper to have people pay personal mortgages and rents and supply their own toilet paper at home than to warehouse them in expensive towers. So no commuting. Fewer new cars. Less fuel. Lower insurance. Gas taxes fall. Commercial lease rates, too. Vacancies. Municipal revenues decline. Fewer workers. Unemployment becomes structural.

In a deflationary world prices go down, not up. Incomes also decline, so things don’t get more affordable. Just the opposite. Debts remain and become harder to pay. This can be fatal with real estate, where the value of the property fades with demand, but the financing upon it remains as a legacy of the pre-pandemic world. Rents drop. Landlords earn less. Condos take a hit.

In the midst of deflation pulling economic activity south, governments are faced with supporting the permanently unemployed. Coming off a pandemic where politicians opened the floodgate and spent as never before in history, amassing epic deficits and debt, can the spigot be turned off? There will be pressure to raise taxes, but without the economic activity to support those levies. Either public debt builds wildly, entombing the next generation, or benefits fall.

Now, once again, let’s make it clear deflation is not on the horizon and Mr. Market fully expects an economic rebound to come. Pent-up demand will have people out shopping again. Factories will be running overtime to make up for lost months. Families will still want holidays, new clothes, haircuts, pizzas, toys and houses to live in. The world in September will likely not be the dystopian one we now inhabit.

But, but, but. Will there also not be change?

If you believe so, be careful. Deflation is the enemy of property. Having the bulk of your net worth in one real asset, especially when ten-times or 20-times leverage was used to buy it, could be financially fatal. Deferring six months of mortgage payments now, only to have all that debt added to your principal later, could be a bad decision. Hanging on to a rental condo with its nebulous (or negative) cash flow could be a big mistake if values falter. Owning four or six units bought as short-term or vacation rentals could be a serious income drain. Holding real estate in regions where resource industries reside could yield sustained losses.

In such a world, cheap debt helps. Refinancing old loans at post-pandemic levels would be wise. So would be selling property where the income stream’s in doubt. In a world of deflation, owners pay and tenants rule. Try evicting somebody for non-payment, and find out.

The greatest defence in a deflating time? Liquidity. Assets that can be sold quickly and easily, while generating dependable cash flow. That does not include your house.

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Turning off the economy has killed demand for energy. So oil tanked. That crashed bond yields. As a result mortgage rates are cratering. But so is the housing market. And thus, we’re in a vicious virus circle.

Remember these days. They’re historic.

A five-year government of Canada bond has never paid less than now – below a half of one per cent. A barrel of oil never before traded for less than nothing, as it did Monday. The longer that economies are hobbled, the more profound the impact will be.

Here’s some evidence from the nation’s heartbeat housing market, where prices and rents have already started to descend. The average Toronto property fetched $931,788 in the early weeks of last month. By last week that was down to $819,665 – a decline of $112,000, or 12%.

Sputtered the real estate board: “Home buyers and sellers have concerns about the economy and indeed their own employment situations. On top of this, many buyers and sellers are avoiding any type of in-person interaction.” The realtors have added that things will likely get worse (or better, if you’re a buyer), thanks to the naked fear that’s been ingrained into society.

Downtown broker Stephen Glaysher gives us more. Sales from March until now have fallen 85%. Condo sales have crashed 73%. Leases are off 69%. Prices and rents are both fading.

“Listings have also slowed during this same period, but sales have fallen faster. Now we are starting to see a build-up of listing inventory. Buyers are sensing that prices will soon fall. How far prices will fall depends on two factors: how long will the stay-at-home mandate last and how long can some owners keep their properties? We are not medical experts, but our guess is that one should plan on mid-June for a limited opening. The second question is harder to guess. If owners have enough equity in their property, then lenders will be happy to defer or restructure payments and add them to the back end of the mortgage balance. And with courts being closed, for now, any foreclosure or power-of-sale orders are at least a year away.”

How sad is that last comment? This realtor also says a lot of tenants will miss making their rents over the next couple of months, which will squeeze landlords – many of them already in negative cash flow. And there is no recourse. “It is true that tenants can stop paying rent and not be evicted. The Rental Tribunal and Small Claims Court have been suspended with Covid-19 and with the back log, our guess is that the catch up will take a year.”

As discussed here yesterday, the debate now is between those who think governments are correct to keep people at home until Covid goes away or a vaccine emerges, and those who fear long-term economic destruction and wish to manage their own risk. After all, they ask: if Costco can open without everyone getting infected, why shutter all those other businesses and offices?

Well, the answer is above the pay grade of this pathetic blog. But the question needs to be debated. Sadly, we have a dearth of politicians with the courage to do so. As stated, this is historic.

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Part of that history is understanding how something the whole world needs and consumes can become worthless. The oil crash and what it means was a focus of the call that my fancy, suspender-snapping Bay Street buddies (and weekend bloggers) Doug and Ryan and I had with clients last night

You might be interested. Here it is.

Turner Investments Client Call, April 21, 2020:
.mp3 Audio Format – OR – .m4a Audio Format

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Finally, this.

On the weekend a monstrous man shot, burned and slaughtered his way through rural Nova Scotia, in the guise of a trusted RCMP officer. The rampage took hours. During this dark time there was no emergency alert put out by the NS government telling people to take cover. As a result of not knowing about the gunman, lives were apparently lost.

The province, however, issued an alert during Easter weekend, setting off mobile phones everywhere with an urgent message about social distancing.

Total deaths in NS from the virus: 12

Deaths in NS by shooter: 23

Have we lost our way?

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The terrified, the prudent, the father-knows-best crowd want the economy to stay shut. Polls show most Canadians, scared and pliant, agree. But a vocal minority cry the vulnerable should be protected, the health care system bolstered and adults allowed to assess their own levels of risk. In other words, turn the thing back on.

Both views have been expressed here. The debate will intensify. Meanwhile it’s becoming clear just how pooched our population is.

We know six million people applied for government emergency income support – about a third of the entire workforce, unable to survive a single month without pay. And we know that as of two days ago, Ottawa had already shipped $20 billion out the door. Never happened before.

But evidence is emerging a huge number of homeowners are unable to carry their properties, living paycheque-to-paycheque, and now just kicking their debt Waterloo down the road. If the virus hangs around for, oh, six months, real estate is in serious trouble. Obviously a lot of people own properties they could not actually afford.

Check this out:

• Over half (54%) of homeowners have asked their lenders for mortgage assistance, like payment deferral, according to a Forum Research poll. Says mortgage broker/blogger Rob McLister in response: “Given 60% of homeowners have mortgages, that’s the majority of people with mortgages. It’s hard to wrap one’s head around that high of a number given most people have jobs and fallback resources…But suffice it to say, a lot of people feel they’re in need of mortgage help.”
• Six per cent of people have already missed a mortgage payment, while 14% of renters couldn’t pay their landlords. (Over half of all renters asked for relief.)
• Somewhere between 600,000 and a million homeowners have requested, and received, six months of payment deferrals. This is costing the banks close to $1 billion in monthly cash flow, and all of that money is being added to the debt that families will have to finance.
• One bank alone – CIBC – has approved 250,000 deferrals and payments on $20 billion worth of home loans, credit cards and LOCs. The woman in charge of banking operations is frank. She calls it “toxic.”

“We do have a highly indebted Canadian consumer that we’ve been talking about for quite some time, and just under half of Canadians live paycheck to paycheck,” said Laura Dottori-Attanasio. “If you add that people are no longer working and generating cash flow, I do think it makes for a toxic combination that’s going to be much more difficult to overcome the longer this takes to resolve.”

There is little doubt the combination of sudden, virus-inspired unemployment and irresponsible personal debt poses a structural risk to the Canadian economy. Add in oil – this week worth nothing, or close to it – plus the public’s reluctance to allow businesses and workplaces to re-open, and things darken more.

You cannot blame some schmuck with a house, two kids, a mortgage and no pension for losing his job to Covid-19, but you can hold him accountable for having no savings, resources or resistance plus a steamy pile of debt. All those warnings about 50% of people living within two hundred bucks a month of insolvency were apparently correct. When the inevitable shock came, they folded.

Now it’s all about timing. “The length of this crisis,” says the bank exec, “is going to be probably the most important determinant in terms of what things look like in the future.”

All true. And this is why leaders need to make choices. Quick ones.

Complicating it all is oil. What a disaster. Prices were negative Monday and barely positive Tuesday. What cost $50 just a hundred days ago is now changing hands for a few bucks. Cars are garaged and gas demand is down 35%. Air Canada just parked all is US-bound planes for a month. Porter hasn’t been flying for weeks. Factories are shut. The world is using a third less energy thanks to the virus, and there’s no place left to put all the oil.

So what?

This is deflationary. So is the virus. So is the fact hundreds of thousands have stopped making mortgage payments. Or buying houses. Or earning an income. Or spending money in stores. Canada’s GDP will crash 14% in the second quarter, says Capital Economics, compared to a -12% decline in the States. The bounce-back will be impressive when it comes – but with most Canadians wanting the lockdown to continue into autumn, the trauma will probably worsen.

Who survives deflation?

People with money, not debt. Oh boy.

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It’s hard to imagine anything losing 40% of its value overnight. But that happened to oil. What a mess. And while that was sending Alberta’s premier into a raging Tweetstorm, people in NS were trying to understand a mass murder. On top of a pandemic.

These are not easy times. I thought about that as the SAVD (Self-Anointed Virus Cop) who lives beside the park yelled at me again when I walked Bandit along the edge of a deserted field. ‘Go home,’ he screamed. ‘And stay there.’ I ignored him. Bandit, too. He’s deaf now. We walked on.

Did you see the poll today?

While angry protests against lockdowns, quarantines and empty businesses erupt in the US, Canadians are reacting in a far different way. Is it our cautious nature? Or all the new money Ottawa is sending households? Look what the Angus Reid survey found: close to 80% say it’s too early to open stores or workplaces. Almost a third believe we should stay locked at home until sometime between July and October. And even if restrictions were officially lifted, most would choose to continue self-isolation. At home, in their yards. Yelling at guys walking dogs.

Source: Angus Reid

Our political leaders and the media did a fine job of scaring the crap out of us. Polls found that by two weeks ago 70% of adults believed they’d get the virus and 60% felt their symptoms could be severe. So far 0.094% of Canadians have tested positive and of those 4.5% died. Most have been the aged, with about half being nursing home patients. Globally 96% of folks who get the bug experience mild symptoms. But the fear of death has apparently reached 100%, so the economic consequences may be more profound than we all suspected.

The virus has shackled economic activity, crushing the demand for energy and leading to oil prices that hit $10 US, then went into free fall – to less than zero for futures on Monday (crude was over $50 a few months ago). Negative oil. Astonishing. It’s ugly for Canada, where the black stuff remains our biggest export. No wonder Jason’s head is imploding. But an even bigger component of the economy now is residential real estate, and that’s where Monday’s poll really bites. The oil-house combo suggests Canadian economic recovery could be a lot slower than that of the States, where authorities (and citizens) seem more willing to let the virus spread through the herd. That may be logical. It may be suicidal. Time will tell.

What do these things mean for investors?

Social pressure’s likely to keep Canada shuttered until well into the summer. Maybe longer. The odds of a pile of small businesses not opening again – despite Ottawa’s payroll subsidy and zero-interest, partly-free loans – are 100%. If the restaurants and bars do swing open, customers may be too chicken to flock back. Theatres, concerts and sporting events are toast. This will be a year without vacations, condemning Airbnbs, festivals, hotels, tourist destinations and artists. The cruise business is kaput, which hurts both coasts. Airlines will stagger back, but the restoration of lost routes will depend on demand – which is based on public confidence (and as of today everybody must wear those damn masks).

In short, in an economy where two-thirds of all GDP is dependent on consumer spending, what people believe, matters. So when 77% says, ‘keep ‘er shut’ you have an idea of what to expect.

Given this fear – valid or not – how do you invest?

First, look at this gauge of consumer confidence in Canada. Yikes,

Source: Nanos Research, Bloomberg

When so many are fearful, the world brims with opportunity. That should go without stating. But people too afraid to go out of their houses to earn a living are unlikely to be astute investors. Hence anyone looking to buy a house from a virus-motivated vendor will probably do well. People on the market now are highly motivated. Capital Economics said Monday houses prices in general will fall 5% during the pandemic. That’s probably light – but still means $75,000 off the average Toronto pile.

In terms of a financial portfolio, look at the beaten-down energy sector. Amazing. Given the economic contraction in China and the big hole coming in US GDP (maybe 30-40%), demand has crashed. The oil supply depots are full. It’s not worth digging the stuff up. The decline is historic. We were back to prices of 20 years ago on Monday morning. By afternoon the stuff was worth less than nothing.

This will change. The economy will rekindle, and the world still runs on oil, despite Mr. Musk. My fancy portfolio manager and analyst buddy Ryan says crude at $50-60 a barrel in 2021 is a definite possibility, once the surplus inventory is burned off. “I believe we’re close to the bottom.” So when something everybody needs loses 100% of its value in four months, guess what you should do?

There’s more. Look at poor REITs, pummeled because of the virus’ impact on commercial landlords and office towers empty of cubicle slaves. That will change. The world may have more online shopping and remote workers going forward, but this prime real estate will continue to pump out income. And then there are the poor preferred shares, yanked lower in terms of market value by central bank interest chops. The yields are delicious (near 6%), and it’s a certainty rates will gradually augment as economic activity resumes over the next two years. Tax-efficient capital gains happen when you buy low and sell high. This is low.

Will most people miss this stuff? You bet.

Will they stay home, scared? Yup.

Will they overstate risk? Guaranteed.

And they shall reap what they sow.

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