Category: Accounting tips

“For the first time in 65 years,” the note read, “we are being forced to close.” It could have added, ‘so pray for us.’

Just another piece of paper in another shop window. I have no idea when the place where I buy my shirts and socks will reopen. Or if it will. But I know the guys who own it – father and son – and this week agreed to give them some money against future purchases – cash flow – trying an ensure the doors will swing back open in May. Or June. Or July.

Unfolding is a modern tragedy. Last month our nation lost 1.01 million jobs, double the estimate and eight times worse than ever before. The unemployment rate went up 40% in four weeks. There are now four million people signed up for emergency government support, which is a fifth of the entire workforce. Just the start. April will be worse. Way worse. It’s a certainty Ottawa will have to find more billions.

Almost all losses are (of course) in the private sector. Few government workers have been impacted as Ms.Virus decimates the economy. The labour participation rate has plunged. Far more women than men are seeing their wages wiped out. Youth unemployment’s popped 63%. Most of the destruction is in the service sector, and among people in our society who can least afford adversity.

So why did the stock market gallop higher by hundreds of points, continuing a rally that’s wiped away the sting investors felt?

First, the virus threat may have been overstated. The US just cut its estimates of Covid-related deaths in half. Things are stabilizing in Europe. Canada is flattening the curve. Yes, we are months away from any semblance of normalcy and all deaths are tragic. But that scary talk of 30-60% of the population being infected seems more absurd now than when the federal health minister causally and shockingly tossed it out. Nowhere in the world has this occurred. Why should it happen here?

Second, massive job losses and the systematic dismantling of the economy will bring even more government and central bank cash flooding in. In just three weeks almost 17 million Americans have applied for pogey. Last week alone 6.6 million filed jobless claims. In Toronto last week condo sales crashed 80% and detached home sales were off 69%. Prices have already started to slide – down 9% for houses. More to come. And in the States, a growing real estate crisis is taking shape.

Only 69% of renters have paid landlords for April. About 15 million homeowners are expected to miss payments if the economy stays shut for two more months. In Canada almost 600,000 families have applied to have their mortgages deferred for half a year, even though it inflates their debt load. Meanwhile people trying to obtain or renew mortgages are being rejected by lenders if they’re employed anywhere in the service sector – hotels, car sales, food, mining, oil.

This is a mess spiraling out of government control. Rest assured it will result in gobs of new stimulus. There’s an expectation central banks will consume huge amounts of publicly-traded financial securities as well as injecting more liquidity into the system, buying up additional billions in mortgages, taking loan costs to nothing and in the process throw gas on the markets.

Remember what I said about the crisis augmenting the wealth gap? The poor, low-wage hourly restaurant or hospitality worker loses her only source of income, yet the portfolios of privileged people like me are fully restored.

Where’s the justice in that?

There is none. It’s the legacy of governments who have purposefully idled and disadvantaged those among us who can least sustain the damage. Yes, it was done for a noble reason – to limit illness and death. To save the health care system. Because we were all freaked.

But here are the results, with more troubling ones to come. It’s worth noting, by the way, the emergency order shutting my neighborhood men’s wear store – like all the provincial, municipal and national dictates that have trashed the economy and cost a million families their livelihood – was not voted on. No provincial legislatures approved them. The House of Commons is not sitting. Opposition leaders are self-gelded. The most significant individual economic acts in Canada’s history, and the greatest level of expenditures ever seen, just kinda happened. Because of a virus that has so far taken 462 lives. This compares with 8,511 deaths last year from the flu. And we shut nothing then.

Do not construe this as diminishing the impact of the virus. Not my intent. Polls show two-thirds of Canadians are terrified of being infected, and expect it will occur – when this is wildly unrealistic. Fear is the most powerful emotion. And some is wholly justified. For the families who have seen loved ones stricken and perish, job loss and failed stores matter not. Nor should they.

But once Easter weekend passes, it may be time for questions.

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Did you ever think Easter/Passover would end up this way? Me neither. It’s one for the record books.

Thursday we get jobs numbers for March. Ouch. Expect at least 500,000 fewer people working, mostly those who can least afford to lose employment – hourly folks in the service sector. There’s no working at home (or pretending to) for cooks, cleaners, hotel staff or hairdressers.

They form part of the four million souls who have thus far applied for emergency cash from the feds. There will be a few million more by the time this thing is finished. We will never have experienced this level of joblessness. The pain and distress is real. Feel lucky if you’re a teacher on full pay with no students, retired with a pension or still drawing a paycheque for remote work. T2 said Wednesday this will carry on for months, while announcing yet more spending and subsidies.

Many are mystified why stock markets can go up at a time like this. Mrs. Virus is still munching her way through the population. A new poll shows terrorist media and government have now convinced almost two-thirds of the population they’ll be infected. The Alberta premier yesterday forecast 800,000 cases (or 20% of the population), oil worth less than zero and a deficit the NDP would be proud of. There are cops stationed on the bridge between Ottawa and Gatineau, stopping cars. The real estate market, everywhere, has gone to zero. People are being arrested for walking through parks. And nobody will be in a church or synagogue this year.

And yet the Dow has gained 27% in three weeks. Bay Street is ahead 24%. This seems entirely at odds with 1930s-style unemployment, a drop in economic activity of 30%, millions of people subsisting on government handouts, closed borders and untold numbers of businesses than will never re-open. The boss over at RBC warned this week that normal will not be normal again. And he’s right. High-rise office towers, cruise liners, collaborative work spaces, packed airplanes or subway cars, bidding wars for condos or double-digit interest rates – all poof.

Next?

This could herald an exodus from cities. Maybe a renaissance of the suburbs, with built-in social distancing, backyards for veggies (plus kids and canines), a shift from transit to personal EVs, no sticky elevator buttons and professional-grade home offices for remote employment. More take-out, Netflix and online shopping. Perhaps families won’t trip to Disneyland or Cuba. Maybe cocooning and small-town life will be embraced or more folks prepare for the next pandemic by paying down debt and beefing up assets. How much will we take away from the current mess, and use it to change our lives?

A lot, I’m guessing. If governments maintain current intentions and political postures, emergency orders could be in place for months. The prime minister started spreading that meme on Wednesday. Social distancing and work-from-your-couch will last “many more weeks,” he said. Actually getting back into the office or the store will be allowed “only in a measured, graduated way.” That could be staggered over many additional months. Meanwhile, school is pooched for the entire year. Child care will be a nightmare. Lots of small business, especially those relying on the tourist trade, travelers, diners or business and social events, will be toast by July, let alone September or October.

As this sad episode in our lives started to unfold a month ago, this blog commented it would end up making the wealth gap even wider. People with liquidity, investments, plans, diversified assets, balanced portfolios and tax advice would be better. Others (the majority) with debt, no reserves, poor savings, lousy pensions, job-dependency or all their net worth in a house would not.

It’s the new un-normal. For a while, anyway. You can be sure that an engorged government coming out of the pandemic will lead to seriously more tax, a universal basic income, forced retirement savings (more CPP changes coming), travel restrictions, big real estate changes and fewer civil liberties.

All thanks to a bat.

Well, time now to change from your sweat pants into your jammies and cue up the freaks on  Tiger King. But first, listen to this…

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Below is audio of the call my fancy portfolio manager buddies and I had with our clients across Canada last night.  During the conversation Doug discussed why REITs are so whacked right now and probably pose a giant opportunity. Ryan looks deep into his charts and reaches this conclusion: it ain’t over yet. This is why we look so damn serious. Yet fetching.

Turner Investments Client Call, April 7 2020:
.mp3 Audio – OR – .m4a Audio

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There are 19.1 million employed people in Canada. Well, they used to be employed. Until Mrs. Virus came to town.

On Monday a million of them applied for Trudeau bucks, the two-grand-a-month bailout fund. That was just the January-March crowd. People born in later months get to submit the rest of the week. Maybe three million more. Plus the 2.7 million EI claims since the middle of March.

Grand total? Perhaps seven million people. But wait. That would be an unemployment rate of 36%. Compare that with 8.3% back in the depths of the 2009 credit crisis. In fact, the highest rate in modern history was 13.2% (the early Eighties). And the Great Depression? The jobless in Toronto amounted to 17% in 1931, and by 1933 had hit 30% nationally, with one in five Canadians was living on government pogey.

So we’re obviously in historic times. Does that mean you should freak out, hoard noodles, ammo and cash or move off-grid into a cabin past Tofino? If you like bugs, moose and the wrong kind of cougars, okay. But otherwise, chill. This is temporary, not structural.

The emergency benefit payment is for 16 weeks. Four months. Until August. The people who can’t pay their mortgages get until September. Renters stiffing their landlords will be lucky to receive 90 days’ grace. The expectations are for the pandemic to be over, or vastly dissipated (or we just get used to it and go back to work) by Canada Day.

The big stock market rally – which has lifted equity values in general by more than 20% – is a preview of the future. As stated here yesterday, Mr. Market could have a serious setback and race back down for a while, but since recovery is a given there’s no reason to sell anything good out of your portfolio. Fiscal stimulus (government spending – as Trudeau is doing so spectacularly) plus monetary policy (central banks slashing rates and buying assets) are incredibly powerful when working together. Moreover, all countries are doing it. Japan’s the latest.

Things are bad with people out of work because governments artificially turned off the economy. It did not die. It was murdered. Emergency orders in every province forced offices, stores and factories to close. Demand went from bustling to zero. Real estate was slaughtered. The supply chain broken. Retail is a smoky hole. (Last night Dorothy’s fav little lefty bookstore down the street threw in the towel – and kept her $500 gift card money. She’s pissed. So much for the moral high ground of the literati.)

As fast as that demand was extinguished, it can be re-established. That’s the point of a $200 billion stimulus package and 75% payroll subsidies. The same dudes who sent you home are trying to keep it together. The cost will be an immense burden on the next generation, but the choice has been made.

So there are two things likely to happen.

First, the economic data to be published by the end of April and into May will be beyond ugly. Unemployment at 1930s levels. A collapse in the GDP. Miserable corporate earnings. Widespread business failures. Already more than 4,000 hotels across Canada have closed. Over 800,000 food service and hospitality workers are out. Manufacturers expect layoffs to top 70,000. Real estate sales, says RBC, will “slow to a crawl in most markets across the country in April and for as long as social distancing and lockdown measures are in place…. We expect property values to come under increasing downward pressure the longer restrictions persist and the deeper the recession gets. Super thin activity also makes the market prone to erratic price moves.”

Fugly.

But temporary.

The second certainty is recovery. Already there are signs the virus may have peaked in Italy and Spain, as fatality rates level (or fall) and authorities consider easing some lockdowns. In the new epicentre, NYC, deaths spiked this week but have shown signs of a plateau. The White House is ramping up plans to re-start the national economy.

Says the CEO of the big green bank (where dividends will not be cut):

“The health crisis has meant parts of our economy are in a forced lockdown and that’s why the numbers are going to be pretty bad. But as lockdowns get lifted, people go back to work, then of course the economy will come back It will be interesting to see how steep the V- recovery is, but I certainly expect good growth coming out of the crisis.”

As for the markets? Well, remember that comment a few weeks ago (when stocks crashed) about trimming bonds and nibbling stocks? Here are some words from long-time Wall Street smart guy Ed Yardeni: “In our opinion, we are in the midst of a Great Rebalancing away from bonds and into stocks… the market’s recent action suggests that investors are betting on an economic recovery starting during Q4 and continuing through 2021.”

Maybe these guys are right. Maybe they’re high on hopium. We won’t know until we get there.

But we will arrive. Be patient. It’s coming.

About the Picture: Says blog dog David, in Vancouver: “This photo was taken at Whole Foods on Cambie Street today by an acquaintance. I don’t think it’s a belated April Fool’s joke by the person in costume.    We must be close to the bottom. Thanks for the wonderful blog – appreciated.”

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As the U of Pittsburgh announced a Covid vaccine Monday (!) the Trudeau-bucks portal opened, and was utterly swamped. No surprise there.

This not-a-virus-blog can’t tell you if the new treatment will work at keeping the bug at bay, but the evidence continues to mount that people went into this crisis with their pants around their ankles. So far (three short weeks) about 2.5 million have claimed EI payments. Another two or three million will scramble after the two-grand-a-month benefit. And we know more than 500,000 homeowners have besieged the banks looking for mortgage deferral relief. That’s a staggering 11% of all home loans currently held by the Big Banks, and the number is swelling. This is shifting more than $650 million per month from payments, to an increase in the amount these folks will owe. And they think they’re getting a deal…

The dismal state of personal finances, the panic, the despair, the fear and the spirit of defeat and retreat so evident among the sad posters on this site may be swell news. Could this be that moment of utter capitulation, when most people think recovery will never come, depression is certain, capitalism will fail and we’ll all be huntin’ squirrel and boiling bark? Sheesh. Look at the public mood. It’s ugly. Social distance warriors everywhere.  Renters stiffing landlords. Politicians yelling at citizens. Travelers being shamed. Asians hated. All amid a cacophony of pandemic predictions which have shocked and stressed the masses.

But, wait. Lo, what’s this?

Look at volatility on the financial markets – the fear gauge of investors called the Vix. After spiking madly to a level greater than 2008 just a few weeks ago, it’s plunged by almost half. Why has the measure of market anxiety dropped so fast even as the economic damage of turning off the economy builds?

And have a gander at the stock market, as measured by the S&P 500.

This is a proxy for the entire American economy, currently headed for a jobless level of maybe 30 million, and a collapse in corporate profits as planes don’t fly and people sit at home. But, yikes, this market has added 20% since late March and soared, giddy, on Monday. (The Dow gained 1,627 points and the S&P grew 7%.)

So, huh? What’s going on?

The key thing to remember about equity markets is that they’re forward-looking. Leading indicators. Investors care a lot more about where we’re going than where we are. That’s exactly why the Dow, the S&P and Bay Street crashed by about 30% in mid-February even before the emergency orders went out, the ICUs started filling with patients or the WHO declared a pandemic. Trouble was coming. It was gonna be bad. Head for the cellar.

Of course it takes average people a lot longer to smell fear. They start to react strongly when governments tell them to go home, stores close, jobs are lost, the toilet paper hoarding starts, cash flow disappears and the media brims with non-stop, cover-to-cover virus porn. As the news gets more grim, fear becomes panic, then desperation and finally to the point where some random guy yells at me to ‘go home and stay home’ when I’m walking my dog. That would be now. Capitulation. Be careful, or we’ll all die. A recent poll found that 50% of Canadians fear they will get the virus. So far it’s 0.04%.

So what does Mr. Market see?

More volatility, of course. That’s a given. And there will be many bad days to come with assets losing value. But recovery is inevitable. Daily deaths have leveled off in Europe. Falling, even. Public health officials think the apex may have arrived in New York City. Social distancing, hand-washing, cancelling events, remote employment – it all seems to be working. At least that’s the perception. That the pandemic would end was never in doubt. The issue has been one of timing. And it now seems closer. At least the end of the beginning.

Meanwhile some great companies look cheap. Central banks and governments are spending historic amounts to fluff asset values, finance the unemployed, inject liquidity into the system, bail out distressed industries and protect the capital markets. This is the moment of truth for fiscal and monetary policy. It was TPTB that shoved the economy into a medically-induced coma, and it will be the same guys who breathe the life back into it.

Of course, none of the above means markets cannot retest lows or that your corner Chinese restaurant will ever re-open. Millions of people have received a big whack on the head – folks who thought debt didn’t matter and caching was for chipmunks. Large swaths of the population will be hurting for years to come. Much of it will be self-imposed. Some of it very unfair. But that’s life. And the death rate is still 100%. Sucks.

So, you can wallow and vex with the nihilists in steerage. Or you can prepare for what’s coming. Whatever. Just don’t yell at me.

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Jesus. I look just like him now.

Or, given my physique, more like Dog the Bounty Hunter.

“You actually remind me of Bandit,” Dorothy said. “Get a haircut.”

I wish. But the barbershop closed under Emergency Order the day before I could get there and it looks now like it’ll be May, maybe June, before my locks can be lopped. No doubt the demand will be large – as for everything else we can’t buy, hire, access or consume right now.

It’s spring, too. New car season. Imagine in a few weeks when there are motivated, freshly-rehired sales guys. Zero-down, zero-financing rates. Dealerships desperate to unload 2020 inventory. The deals should be epic and the buying, too, when a new vehicle can be yours for what feels like free – no money down, no interest, awesome price and a set of free floor mats.

Economics is actually pretty simple. Supply and demand. In a society where two-thirds of all activity of the result of consumer spending, what people want, desire and do ends up creating growth, jobs, incomes and wealth.

Lately, thanks to Mrs. Virus, demand has been squished (along with civil liberties and, in many cases, civility) by governments anxious to keep folks alive and the health care system viable. But buying lust hasn’t gone away. It’s merely abated. Growing, too. And it shall return with a frenzy once the immediate crisis has passed. Pent-up demand, relief and optimism will trump worries about personal debt, especially when money is so cheap. This is human nature.

The pandemic? It will fade, of course. Health scares always do. They’re not structural. This isn’t the end of humanity, nor the commencement of an economic depression. Yes, we’re all messed up at the moment. Politicians are spending horrible amounts of money. Some business models (like Airbnb or the cruise industry) are being crushed. Taxes will be higher. Hand-shaking rarer. Dependency on governments greater. Every big event (and this one’s global) brings change. Globalization just took a gut punch, for example. When a bat in China ends up sickening your gram in Kelowna, it’s time to reconsider a few things. We will.

But as far as the economy’s concerned, recovery is assured. And it will likely be here in full force by the autumn.

It’s useful to look back to the last time people swore a rerun of the 1930s was coming and it was ‘different this time.’ It wasn’t, because it never is. The actions of governments and central bankers – fiscal and monetary stimulus – brought sunshine where there had been despair and turned fear into shopping.

Look at cars, for example. Here’s what happened to US light vehicle sales during the 2008-9 credit crisis, and how government programs reversed the decline leading to economic recovery and a torrent of deals.

Real estate’s the same. In Toronto 2008 house prices cascaded lower by about 15% before recovering and surging. Same with new home sales, as you can see below in America. Demand gathered like water held back by a temporary dam, only to spill over and create a tsunami of buying. Shopping lust is a powerful thing. It sweeps away fear.

Well, this is what you have to look forward to. The world will be a little changed, but the fundamentals will remain. Folks still want clothes, cars, new iPhones, houses, vacations… and haircuts. We’ve all been dealt a setback, forced into a period of reflection, loss and – for many – isolation and loneliness. We’ll always remember 2020. Regret it.

But it also lets us appreciate what we had – the freedom, mobility, friendship, choice and plenty that makes this a good life. It’s coming back. Big.

Gotta go now. Dorothy’s sharpening the garden shears. This could be brutal.

                      Bandit                                                   Garth

(Actual photos, April 5th, 2020)

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  By Guest Blogger Doug Rowat

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It’s hard to write a financial blog and not occasionally quote Warren Buffett. I often resist because his quotes are used so frequently that they’ve become cliché. I’m sure baseball announcers struggle the same way trying to avoid quoting Yogi Berra.

But damn. Buffett’s quotes are sometimes just plain perfect. So, as the coronavirus wreaks havoc on financial markets and as I survey the pummeled ETF landscape, I’m reminded of Buffett’s old line, “only when the tide goes out do you discover who’s been swimming naked.”

And the coronavirus has revealed a lot of naked ETF swimmers. Mainly of the leveraged variety.

I’ve warned investors before that 1) ETFs frequently, and often unexpectedly, close up shop  and 2) leveraged ETFs, while performing as designed, can still overwhelm investors with their incredibly poor performances.

The events of 2020 have shown that these warnings were prescient. The Wall Street Journal recently cautioned that 2020 will likely see a record number of ETF closures (and its data doesn’t even include all of March) and, not surprisingly, ETF.com reports that a disproportionate number of these closings have come from the leveraged and inverse ETF space. In fact, ETF.com called what we’ve seen in this category over just the past few weeks a “bloodbath” as almost 30 leveraged products have been shut down, eight of them from Direxion alone. Rival ProShares has shuttered six.

An ETF closure is, of course, undesirable—funds must be redeployed elsewhere creating reinvestment risk and there may also be unexpected tax consequences—but this only amounts to a salting of the wound if the closure itself follows a stunningly rapid drop in value, which is what often occurs with leveraged ETFs.

It’s not that leveraged ETFs are performing in ways that are different from what’s fully disclosed in their prospectuses and, in fact, leveraged ETFs have been doing a much better job of stating their risks more transparently. Direxion, for example, highlights upfront in its fund descriptions that its products are “different and much riskier than most ETFs”.

However, the real problem with leveraged ETFs occurs when investors using them only see downside risk as an abstraction and become overconfident in their outlook. It takes a real market crisis, such as the one we’re currently experiencing, for the dangers of leveraged ETFs to really sink in.

First, let’s review leveraged ETFs and outline why they can be so problematic. I provided a few of the key risks in my previous blog post cited above:

So how do leveraged ETFs work? Essentially, they use mechanisms such as swaps, futures contracts and derivatives to provide investors with 200% [or] 300%…of the daily performance (either up or down) of an underlying index. The key term, however, is DAILY returns. These are products that don’t necessarily amplify returns over the long haul, rather just the returns over one trading day. Suddenly, the concept of ‘volatility drag’ enters the picture. …If [a] see-saw pattern [of market returns] continues, your [ETF value] will continue to diminish at a dramatically accelerated rate. The results can be devastating in a very short period…

Then, of course, there’s also the possibility that your market-direction forecast itself is entirely incorrect. If you’ve picked a leveraged ETF geared to favour an uptrending market and the market goes straight down, you can rack up even more significant losses also incredibly rapidly. In the past 10 years, the S&P 500, for example, has actually recorded a weekly decline of 3% or more 47 times, so it’s not as if meaningful short-term downturns are black swans—they occur constantly. And during the credit crisis there was even a week where the US market dropped more than 18%. Imagine how you’d fare with a…leveraged ETF during any of these stretches…

Well, proof that I was right about bad weeks occurring constantly for the S&P 500 has been provided by the coronavirus crisis. But let’s focus on my second point: getting your market-direction forecast wrong. If you’d felt a year ago, for instance, that things were as bad as they could get for the oil & gas sector and were certain that it was poised for an upswing, you may have made an investment in the Direxion Daily S&P Oil & Gas Explorers & Producers 3x Bull ETF (GUSH). Well, thanks to volatility drag and your incorrect forecast, you would have, quite literally, lost ALL of your money after only 12 months:

Direxion Daily S&P Oil & Gas Explorers & Producers 3x Bull ETF (GUSH) – one year

Source: Bloomberg

And, along the way, you would have been forced to become very comfortable with gut-wrenching 20% down-days. They occurred constantly. There was even one day recently where GUSH dropped by more than 80%. Again, that’s 80% in a SINGLE day.

Direxion Daily S&P Oil & Gas Explorers & Producers 3x Bull ETF (GUSH) – sample daily returns

Source: Bloomberg

In addition to closing eight of its ETFs, Direxion also announced that it was reducing the leverage on another 10 ETFs from 3x to 2x, including GUSH. So, your investment that gave you 3x leverage on the way down is now only going to give you 2x leverage on the way up. Further, though GUSH hasn’t officially closed yet, with a 75% decline in its market cap since the highs of last year, this remains a distinct possibility. Then your losses will become permanent.

Many overconfident investors think that they’re prepared for the risk and volatility that comes with using leveraged ETFs, but in reality they’re not. And many don’t fully understand the shockingly sudden consequences of an incorrect market forecast.

Or as Yogi might put it, leveraged ETFs teach you very quickly that if you don’t know where you’re going, you’ll end up someplace else.

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

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The fallout continues. More than a hundred thousand Canadians a day are applying for EI. Over 2.1 million so far, or 11% of the entire workforce. In the States 100,000 were expected to lose jobs in March. Over 700,000 did. And last month was but the start. It’s a mess. Turning off the economy to stem a pandemic has no good outcome.

A few more snapshots, then a look forward…

• Close to 300,000 requests for mortgage deferrals now. Each of the Big Five banks has been getting about ten thousand a day. It’ staggering how many folks bought houses yet survive paycheque-to-paycheque.
• Airbnb is disintegrating. In downtown Toronto (and Vancouver) scores of condos are hitting the rental market or being listed, even when there are no buyers. Nobody’s booking short-term rentals anymore. Cash flow is gone. It’s estimated as many as 7,500 units in Toronto alone could leave Airbnb and enter the rental pool, pressuring lease rates lower. There are few travelers and those on the road would rather stay in a hotel where management can afford cleaners and buckets of bleach.
• One towering condo building in DT Toronto now has 110 units on the market. “This,” says a seasoned 416 agent, “has never happened.”
• Realtors in Vancouver and Toronto just released March numbers. Gangbusters until the 15th, crickets afterwards. “Uncertainty surrounding the outbreak’s impact on the broader economy and the onset of the necessary social distancing measures resulted in the decline in sales since March 15,” says the Toronto board. “Sales figures for April will give us a better sense as to the trajectory of the market.” You bet they will. Wear a helmet.
• Don’t work in one of those industries or services the politicians have deemed ‘essential’? Then don’t bother applying for a mortgage. You won’t get one.
• RBC says the housing market across Canada will see a 30% sales drop this year, with lower prices.
• Have you seen what’s happened to Robson Street? This is Vancouver’s busiest drag, home to moisters and hipsters, once famously hosting a Starbucks every few hundred feet. “Community life that has been killed by high rents, expensive real estate, property taxes and now Corona,” says Joe. Here’s what he means

Well, there’s more, but you get the point. This is why governments have opened the floodgates, thrown out their budgets and are flowing tens of billions into society. Because so many of us are prevented from working, or even going outside, the personal financial consequences are dire. Thus we have an EI overload, the two-grand-a-month emergency benefit, 75% payroll subsidies, industry bailouts, mortgage deferrals and states of emergency across the nation. More to follow.

April’s jobless numbers will surge. So will the virus stats, especially in the US. The meme is growing that Trump miscalculated the pandemic, tried to politicize it, then was trampled by the consequences. It’s possible he’ll go into the November election with the same 10% unemployment rate (or more) that Obama inherited from Bush. Mr. Market is starting to fret about that, but relieved Joe Biden is the opponent, instead of that wild-eyed commie from Vermont.  Sigh.

Politics aside (the virus is also keeping T2’s minority government alive as Tories nix their leadership contest), what should we expect in the months to come? Here are some probables…

• There’s no way the Bank of Canada will raise rates in 2020 or 2021. Maybe the year after. So a variable-rate loan makes more sense now than it has in some time.
• Real estate markets in Toronto, Vancouver, Montreal and pretty much everywhere outside of Alberta won’t revive until the fall. Yup, six months. The Royal Bank sees a huge 40% surge in home sales in 2021.
• Airbnb is done. This should mean more rental units hitting the big cities long-term along with falling lease rates. Tenants are in the driver’s seat. Bad time to be a landlord, but April 1st showed you that.
• Condos are crippled. Added to the collapse of the short-term rental market is the ickiness factor. Memories of this virus will be long and indelible. Lots of people want nothing to do with germy elevators, communal living, common hallways and garbage rooms or exercise areas coated in bodily fluids. Values will fall.
• A federal deficit exploding from $24 billion to $180 billion is historic. But here we are. It could hit $200 billion if the economy stays turned off until, say, October. This will be the Mother of All Excuses for a suite of tax increases in the next two or three budgets. Start thinking about strategies now. This pathetic blog will have more to say on that in the days to come.
• Recovery? It’s a given. Only the timing is in question. Normal life may not be normal for a long while, but the pent-up desires will be huge, and take place in an atmosphere of public relief and historically cheap money. Governments at all levels will want you to spend your rear off in order to generate economic activity and sales tax revenue.
• Your portfolio will revive. Demand was turned off, and will be turned back on. Markets may plumb new lows and fluctuate dramatically, but if your stuff is balanced and diversified, the outcome is known. This is not the prelude to a depression. Turn off BNN. Definitely turn off CNN. Don’t even think about watching CBC. Virus porn.
• So, simple. You just need to stay alive until September!

In that vein, I now give you free access to all the infectious disease control experts, public health authorities, pandemic modelers and renowned epidemiologists in the comments section. Enjoy.

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Tens of thousands of Canadians are out of the country after vacationing. Most are stranded now. No flights. Closed borders. And a mess of them are running out of money. Maxed credit cards. No savings. No reserves. About to be tossed from hotel rooms they cannot finance.

Ottawa is bailing them out. The holiday folks are being given $5,000 loans to pay for lodging and food.

As detailed here yesterday, up to a million tenants have indicated they cannot pay rent. How many withheld payments yesterday is unknown. But May 1st won’t be any better. No savings. No reserves.

Governments are bailing them out with a $2,000-per-month CERB payment. Applications open Monday. The web site will be flooded, mercilessly. Meanwhile claims for EI have been at unheard-of levels. More than historic. Off the charts. People are desperate for money. No savings. No emergency funds.

In the last seven days alone over 60,000 homeowners besieged a single bank asking for mortgage payment deferrals. Multiply that by five and you can see what’s happening – a quarter million people a week who have houses but lack the money to pay for them. No savings. No contingency. No funds. Just debt.

This week came word half the businesses in Edmonton will soon fold. A major hotel in Halifax has reduced its staff from over 100 to ten. Occupancy in Toronto major’s hotels is less than 5%. Restaurant revenues have declined 100%. Says the Canadian Chamber of Commerce: “We are very concerned that without a significant increase in the assistance made available to businesses to keep their employees on the payroll, we are going to see massive numbers of layoffs and tens of thousands of small businesses going out of business entirely. It will mean that when we come out the other side of the tunnel there won’t be a business for employees to go back to.”

Government’s bail-out will cost $71 billion as it underwrites 75% of payroll costs. But businesses fret they cannot come up with the other 25% to qualify. There are calls for a hundred per cent subsidy. No retained profits. No cash flow, no business. No contingency.

The latest Nik Nanos survey finds one in five people are likely to miss a major payment this month – mortgage, rent or credit card. Among those under 34, the number jumps to almost a third. No rainy day or emergency fund. No plan. Paycheque-to-paycheque.

In response, government will be increasing spending as never before and is on track for a deficit of $180 billion in a single year – 220% above what Conservatives coughed up to get through the 2008-9 crisis. Almost all of this money will go directly to individuals. Opposition leaders say it’s too little, too slow. Parliament is coming back to authorize even more spending.

Yes, unprecedented times. Nobody thought two months ago the economy would be turned off. In fact a lot of us – perhaps the majority – believed adversity would never come. We were immune. There was no reason to be ready for it. So we were not. What we made, we spent. What we lacked, we borrowed. What we wanted, we bought.

Does it sound elitist, smug and unsympathetic to talk about debt and financial promiscuity at a time like this?

You bet. So not a single leader dares do it. Certain. Political. Death. Government’s avowed role now – after preventing people from working, paying their bills and supporting their families – is to paper it all over with borrowed billions. In the next three months there’s no option. Let ‘er rip. But the long-term consequences of our collective profligacy will be, well, Biblical.

Come September, Dog willing, we’ll all be back at it. Remaining stores and businesses will be open. A few more planes flying. Brave people traveling. Offices functioning. Houses being shown, bought and sold. Financial assets restored. Double-digit unemployment nibbled lower as the recession recedes. The subsidies, grants, loans, gifts and deferrals will be trailing away. But federal government debt will be higher by as much as 30% – in less than a year. Canada’s debt-to-GDP ratio will crest 100%. The next budget could usher in toe-curling ‘emergency’ tax increases. Ironically, those who had savings, reserves, emergency funds, retained profits or prudence will be in the crosshairs.

This episode’s painful. Scary. Terrifying. A virus 95% of victims recover from has nonetheless created public panic. Media has convinced the bulk of the population they’re at imminent risk of death.

Overwhelmed health care workers have emerged as heroes. Thank you, thank you.

May every deceased patient and their family rest in our thoughts and hearts. This is awful. Loved ones were swept from you in a storm. Undeserved and tragic.

But when this is done, Canada, we need to have a serious talk.

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“My local mechanic told me he might not make it, yet four weeks ago he couldn’t keep up with the work,” says Jeff. “For over 5 years that I’ve known him, he’s always been busy.  But now, a bump in the road that might set him back for 2 months is going to bankrupt him?  Makes no sense…he spent more than he made and now his future has come to collect. Garth, humanity is doomed because accountability is lost.”

The tide’s sweeping out. So many are naked.

Today’s rent day, for example. What a mess that may bring. Look what the cascading virus has brought crashing into our ill-prepared society.

As you may have heard, about a million tenants may not make their payments by sundown. After missing one or two paycheques, and before being bailed out by the feds’ $2,000 monthly payments, they’re tapped. Apparently all those blog posts and surveys here about half of folks being two hundred bucks from misery were correct.

Politicians are wading in, confusing many who believed rental real estate was a sure bet. The premier of Ontario has told renters straight-up that if it’s a choice between groceries and rent, they should choose food. That may be reasonable, but landlords also have to eat. Meanwhile several provinces (Ontario, Quebec, Alberta, BC) have nixed evictions and even shut down the dispute-resolution boards. In other words, non-payment of rent will have no consequences for a long, long time.

Big landlords, like residential REITs, have the financial reserves to withstand a no-rent storm (and several are trying to be empathetic). But the little guys may get crushed. Those who bought condos to rent out and were already in negative cash show (an estimated third of all leased Toronto condos, for example – ditto in Vancouver) will see real and immediate losses. There are mortgages to pay (the current bank deferral rules do not apply to rental units), condo fees, property taxes and insurance premiums.

About half all condo sales in recent years have gone to speculators, investors and amateur landlords. If tenants lose jobs, deplete savings, freak out at the shutdown of the economy, or just want to preserve their precious cash and withhold their rent, unit owners are powerless. They cannot collect. They cannot evict. They can’t turn off the water or the heat. They cannot appear before the landlord-tenant board, because it’s shut. They cannot get mortgage relief (unles CMHC-insured – rare).  They can only eat the losses.

Will government step in?

BC is giving tenants $500 a month. Ottawa’s CERB will start doling out two grand a month later in April, but no stipulation the cash is used for rent. Same with the EI payments claimed by almost two million people in the last few weeks. Face it – nobody has any sympathy for residential landlords. The impact this might have on urban real estate values is real.

Meanwhile, witness what Mr.Virus has done to Airbnb. Total collapse, to the point where the company is offering to pay some compensation to hosts whose properties are empty and will remain so. Bookings have evaporated along with travel, the value of airline stocks and the jobs of pilots. With hotel occupancy collapsing below 5% nationally, Airbnb operators are SOL. Those who bought properties solely to do short-term rentals are pooched – and at last count (before the pandemic) there were 22,000 of them in the GTA alone.

Suddenly the collective wisdom of holding income-producing real estate doesn’t look so wise. The costs remain. The revenue is gone. Gains from market appreciation are fully taxable. But the market has frozen, making a sale doubtful. The number of short-term rental units being listed is rising exponentially. Real estate’s Achilles heel – illiquidity – is kicking a lot of butts.

The same dilemma is unfolding with commercial real estate. Small businesses are in awful shape, with zero programs in place for landlords to get mortgage deferral consideration, or free money from the feds. Yup, T2 has offered to loan entrepreneurs up to $40,000, but that’s more debt and the process is complex. Lately even giant corps – like Canadian Tire and A&W – have been asking their landlords for six months of payment relief.

Meanwhile homeowners who can’t make their mortgage payment this month (or the next five) can defer it. But the costs are significant. Interest continues to accrue. There is then interest on that interest. All must be paid back later, in the form of an increased monthly or an inflated overall debt load upon renewal. And, by the way, mortgage rates have been going up.

In short, real estate’s no refuge. But a lot of tenants are about to live for free.

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If you’re interested in what my suspender-snapping, fancy pants professional portfolio manager colleagues are thinking this week about markets, investments and what’s to come, here’s the conference call we had with clients last night. Stay strong.
 
Turner Investments Client Call, March 31 2020:
.mp3 Audio – OR – .m4a Audio

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Eeeeeeeeow! What a wild ride.

The stock market careened lower from record highs in just a few weeks by a shocking 38%. But lately it’s zipped back up an impressive 22%. Mr. Market apparently doesn’t think the world is ending. So I guess he doesn’t read the comments on this pathetic blog.

(When I walked back from the office yesterday Dorothy was a wreck. ‘What happened?’ I asked, sweeping her into my manly embrace. Finally she admitted it. “I read the comments,” she whispered. It took three awful episodes of Father Brown to cleanse her mind.)

Back on Bay Street an experienced vet says this: “We’ve had the shock and awe. The institutions are buying again. Consumer sentiment may start to improve. The bounce is technical. The market is pricing in a “V’ shaped recovery. Everybody wants one.”

People with nicely balanced and diversified portfolios who leave them alone will probably do fine. But what about the real estate market? Could the virus attack of 2020 be the catalyst for housing’s Big Reset?

Things are going from uncomfortable to excruciating for the realtor species. In Toronto, for example, showings fell 59% last week from the previous seven days. Same story for sales. Year/year deals are down 40%. The number of cancelled listings has grown by a third and new listings have plunged 33% as owners decide there’s no way germy strangers are coming through to fondle their stuff.

RBC (the biggest mortgage lender) says property values will fall. “Surging unemployment and the market’s illiquidity will compel a growing number of tight-squeezed [home] sellers to make price concessions. We think the recovery will come in stages—taking buyers up to a year to regroup and rebuild confidence amid high unemployment. Based on these assumptions, we project home resales to dive by nearly 30% this year in Canada to a 20-year low.”

Way worse in Calgary and Edmonton, of course, as Canadian oil prices crash (more to come, it seems). Meanwhile cash-strapped homeowners continue to melt down the banks’ call centres. Over a quarter million families have now asked for relief, and the calls are coming in at the rate of 80,000-120,000 per day. Staggering. Add this to the maybe-1,000,000 tenants who have indicated they can’t (or won’t) pay their rent tomorrow.

Now, here’s another flea on the dog: failed closings.

Almost 66,000 properties across Canada sold in the first eight weeks of the year, and a ton of those deals have yet to be completed. For every transaction there’s a family selling and one buying, so in the middle of a pandemic with mass unemployment and growing credit risk, many folks have a lot to worry about.

For example, the appraised value of a house may have declined between offer day and closing, jeopardizing financing. The buyer might have suddenly, unexpectedly lost a job and be unable to proceed. The mortgage broker’s funding commitment might have gone poof. Maybe an investment portfolio that was intended to finance the deal faded. Or perhaps, like so many in the blog’s steerage section, purchasers turned into paralyzed puddles of gooey anxiety. Buyer’s remorse, fear and loathing. Perchance they even got the bug.

Lots of reasons now exist for buyers to consider walking from a deal that poses risk. It’s not that dissimilar from 2017, when prices charged lower and deals disintegrated into lawsuits. Expect more, since a mere global pandemic is no legal excuse for getting out of a real estate contract. Buyers who fail to close not only give up their deposits, but also stand liable to pay the difference between their offered price and the ultimate sale price of the property in a down market. Plus legals. Ouch.

So, if you bought a house you could barely afford with a job, and are now unemployed, too bad. Even having the bank pull your funding won’t allow a clean break from the deal. With almost 10% of the entire workforce having applied for EI benefits at this point, expect some chaos.

And speaking of legal stuff, agents now need this sworn statement before they’ll even show you a house:

• I have not travelled anywhere outside of Canada, or been in contact with anyone who has travelled outside of Canada, in the last 14 days.
• I have not experienced any of the following symptoms in the last 14 days: fever, dry cough, shortness of breath, or difficulty breathing.
• I have not knowingly come into contact with anyone experiencing any of the following symptoms in the last 14 days: fever, dry cough, shortness of breath, or difficulty breathing.
• I have not knowingly come into contact with anyone with a presumptive or confirmed COVID-19 diagnosis in the last 14 days.

If you lie, the brokerage can go after you. The homeowner might, too. The cops will arrest you for non-self-isolation. The Social Distance Warriors will shame you mercilessly on FB, Insta and maybe (if they can dance) on TikTok.

Remember back when all you had to worry about were bidding wars, rockstar realtors in Audis, greedy sellers, blind auctions, runaway prices and your mom’s failed expectations? Damn, miss those days.

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