Category: Accounting tips

Growing a hide is a key element of blogging. This site apparently gets millions of visits. There are 633,000 comments posted. Most people are okay. Some are despicable and their words never see the light. Others worm their vicious, flesh-eating way through my protective coating. Sometimes they even elicit a reply.

Today is one such (rare) occasion.

On the weekend, an oft-visiting A-hole left these words in response to a post about 2019 market returns: “Pretty sad. It’s x-mas time and every one bragging about how they made a killing on the stock market. How about bragging about how you helped out at the food bank or the salvation army. Pretty sad, indeed.”

So, here is a partial report on what my colleagues and I have been up to of late. No bragging involved. This is just what regular people do routinely while others are blogging about their moral superiority.

In Ontario we donated enough cash to fill this car with stuff that less fortunate, homeless and down-on-their-luck folks could use. (Note: not a Porsche.)

Loaded in there are 300 packages of new hoodies, winter gloves, toques and bundles of thermal socks. They were delivered to three shelters in urban Toronto – The Scott Mission, The Yonge Street Mission and New Hope. In addition another 400 pair of thermal socks went to a charity that distributes them to homeless people on the streets of that city. Here’s what one of the shelters had to say in response: “THANK YOU! Winter is always a challenging time, particularly for our newcomer residents who are often unprepared for the Canadian cold. Your efforts and kindness is truly appreciated and we are sure will be incredibly beneficial to our residents.”

Here are some of our Bay Street colleagues just before the packages were delivered. Nobody was required to support this effort. Everyone did.

In the east we donate money to a (unfortunately) growing food bank. A few months ago we footed the bill for plumbers to install fixtures that another food bank desperately required to deal with the needs of its clients.

For the past year several community groups have been provided with unconditionally free office and work space in our building to house staff and volunteers and carry out their valued work. One of them specializes in providing recreation and leadership guidance to under-privileged and indigenous kids from across the region and Canada. There’s a special focus on helping young women achieve their potential.

Finally, it might be worth mentioning the free financial advice (and canine appreciation) provided by a certain pathetic blog 365 days of the year. No ads. No sales pitch. The hope is that by empowering people to seize control of and manage their money, to understand what investing is, minimize tax and ensure their family is cared for, that they will advance. Then we all do better. More independence. More freedom. More joy. More success. Less struggling. Fewer assholes.

Amen.

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John’s a lucky guy. At 32 he’s got a $1 million house (no mortgage) plus $800,000 in cash and liquid investments. Yup, inherited. He and his fiancée are getting married in 2020 and with a combined income of $90,000, hope to save a third of it annually. No debt.

“Your blog is a national treasure,” he says. “Thank you for your insightful and colourful commentary.” And that MSU earns him our pre-Yule attention. Here’s the ask:

“I’m concerned about the everything bubble and it’s really hard for me to know what to do. I’m a value investing aficionado and voracious reader, and I have people coming up to me and asking for advice. I don’t know what to tell them because I’m unsure myself about what to do. There aren’t many bargains out there. I am in a very fortunate position and am grateful for everything that’s been given to me. But I don’t want to mess it all up. What do I do?”

Is this a dangerous time to be invested? Should a 30s dude with the better part of two mill just sit on cash for a few years until the future reveals itself? After years of big gains have we reached some kind of financial zenith? Is the reckoning or a big reset inevitable?

Well, wow, 2019 has been outsized. Global stocks added about $10 trillion in worth. Commodity prices jumped. Even bonds piled on the profits. American stocks have gained 30% when you include dividends. Toronto’s up about 20%. Emerging markets made bank. And look at the FANG stocks – Apple up 77%, FB ahead 57%, Google gained 30% and Netflix added 24%.

A boring, more predictable, lower-vol balanced & diversified portfolio added 13%. Lately every asset class seems to be on the rise, and right around the globe – even in China, Russia, Greece, Ukraine or Brexit-addled Britain.

Why? Rampant speculation? The last great gasp of greedy capitalism? Or is this all justified. A precursor of what’s to come?

Well, John. Look at some of the drivers behind the gains. Like Trump. He’s the most pro-business, pro-growth, pro-profit president in memory. His legacy might be high inflation, an increased wealth divide, climate change denial and a society more prejudiced, divided and dumbed-down than ever, but, man, he’s crack cocaine to investors. Lower corporate taxes, less regulation and beating up the Fed have all helped fuel markets and drive unemployment to record low levels. Consumer confidence brims, so in an economy where 70% of the GDP derives from household expenditures this is the result. Half of Americans love Trump. Half hate him. He’s a personal boor and impeached. But he sure makes people spend.

Speaking of the Fed, 2019 saw central banks turn on a dime from being hawks to doves. Rising benchmark rates, surging bond yields and that scary inverted yield curve thing ended when the Fed dropped the cost of money three times and decided to jam more stimulus into an economy that didn’t need it. Jobs were plentiful and markets at record highs, but the gas was poured on anyway.

Meanwhile corporate profits have continued to drive the price of financial assets. After a few years of record earnings, expectations were low – and they were shattered. When companies make money, stocks go up. Duh.

More stimulus came through fiscal measures (governments) at the same time monetary stimulus (central banks) was happening. China stepped up and took aggressive actions to mitigate the damage caused by Trump’s trade war, for example. Growth in that country next year is expected to top 6%. And speaking of that, the US president has done the inevitable, scaling back on his nationalist, protectionist, America-first rhetoric as he seeks more trade agreements prior to the November election. Witness the new NAFTA.

Meanwhile the uncertainty surrounding Brexit is lifting, following the thumping Tory election victory this month. More turmoil will ensue, but the rules are becoming clearer. Just what investors wanted. Together with the Washington-Beijing thaw, the two major clouds over the global economy are lifting, or at least brightening. And, as mentioned Mr. Market thinks Trump will be re-elected.

So, John, these are some of the reasons everything’s going up.

But all is not ponies and hugs. You may not be pickled in debt, but legions of people are. Governments can’t balance their books any better, either. Ottawa’s sliding deeper into the red and Trump will have a $1 trillion deficit soon. Global debt is at record levels, just like Canadian households. Rates that have been too low for too long have certainly helped inflate asset values and turn reasonable people (and countries) into loan-snorting addicts.

So the inevitable conclusions are (a) stay invested but (b) be careful.

It sounds like you’re now a ‘value investor’ who seeks out beat-up stocks to speculate on. Two words of advice: stop it.

You’re a teacher with an inherited wad of dough, not a financial analyst who – in a pricey market – shouldn’t be making those kinds of bets. Markets may be setting up for years more of eye-popping results, but along with that will come high volatility, emotional angst and the chance of making some spectacular mistakes. Besides, with a NW of $1.8 million at age 32, why would you be flipping equities, sucking up risk and looking for supersized returns? Just build a boring ETF-based portfolio with lots of balance and look forward to having $14 million by the time you retire.

She’ll love you even more for not being a cowboy. Trust me.

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By Guest Blogger Ryan Lewenza

As we’re just about to wrap up another year, I’m about to begin my year-end routine of reviewing all my different recommendations and investments that I made over the year to assess how I did. I started doing this about five years ago and would strongly encourage all our readers to do the same. By going back and analyzing your calls/trades you can see which ones worked out and which ones didn’t.

When I make a trade in my personal account or for our clients I always write down the key points of the investment thesis and then I go back to see if it played out the way I thought it would. While it’s great to review the winners and feel that accomplishment of being right, I believe it’s even more important to focus on the trades that didn’t work out, so you can learn from your mistakes and try to improve your results going forward. Quoting from one of my all-time favourite musicians, Johnny Cash, “I learn from mistakes. It’s a very painful way to learn, with without the pain, the old saying is, there’s no gain.” Who can argue with the “man in black”?

So today I’m going to review the main recommendations I made in these blogposts over the last year to assess how I did, and what I can learn from my mistakes.

Let’s start with our outlook on January 5th. The key calls from that post included:

• Trump and China would likely hash out a trade deal. From the post, “I think it’s going to be a bumpy ride with occasional setbacks but I am hopeful that a deal will be consummated this year.” Outcome: The US and China finalized terms of a Phase 1 deal and should be signed in early January.
• I predicted the US economy would slow but avoid a recession. “Sure the US economy is likely to slow from the roughly 3% growth seen in 2018, as the fiscal stimulus (tax cuts and increased government spending) rolls off, but we see the US economy still growing at a decent 2-2.5% in 2019.” Outcome: The US economy slowed from 2.9% in 2018 to an expected 2.3% (still waiting on Q4), bang in-line with our forecast.
• The Fed would slow the pace of rate hikes in 2019. “As such, the Fed is expected to hike rates only 1-2 times this year, which we believe is the correct path.” Outcome: The Fed cut rates instead of hiking them.
• Equity markets would recover and post positive returns. “When all is said in done, I believe markets will post stronger results in 2019 as investors realize the global economy is not falling off a cliff and the major headwinds in 2018 (Fed rate hikes and Trump’s trade war) will turn out to be important tailwinds for the markets in 2019.” Outcome: Global equity markets were up huge this year driven in large part due to Fed rate cuts and the US/China trade deal.

On February 16th I wrote a post called “Short the banks?!” where I pushed back against the famed investor Steve Eisman who was on BNN and in the media talking up his big short on Canadian banks. His thesis is that after a 20 year housing bubble it will inevitably burst, leading to huge write-offs for the banks and steep declines in bank share prices:

• In the post I concluded with, “We’ve written ad nauseam about our concerns over Canadian housing, buy don’t misinterpret these concerns for some deep seated worry around our banks. We don’t foresee a 2008-like US housing crash and, as we’ve laid out in this blog post, we believe the banks remain very strong and should be core holdings for long-term investors.”
• Outcome: As of December 15th TD returned 13.7%, BNS +13.6%, RY +16.5%, BMO +18.3%, and CM +11.7%. While the banks underperformed the broader TSX this year, they still delivered solid returns in 2019.

On April 13th I wrote a post on the merits of dividend stocks. I highlighted their great historical returns, their preferential tax treatment, and how low interest rates and aging demographics adds support for dividend stocks. From the post:

• “In summary we love dividend-paying stocks and it’s why they are an important part of client portfolios. Every one of our current equity ETF holdings in client portfolios pay a dividend and in fact we’ve been increasing exposure to dividend growers since that’s where you get the best bang for your buck.”
• Outcome: Our Canadian dividend ETF was our best performing Canadian equity ETF this year and it outperformed the TSX by over 2%, as of December 17th.

In my April 26th post “What comes next”, I reviewed the factors that helped push the equity markets higher and highlighted the improving US economic momentum and the better-than-expected US corporate profits. Additionally:

• “In summary, the markets have had a great start to the year and while in the shorter term we could see some consolidation, I believe the fundamentals (improving economy and positive earnings growth) could propel the equity markets even higher this year with the S&P 500 and TSX hitting new all-time highs. Here’s hoping!”
• Outcome: The TSX and S&P 500 are trading at new all-time highs.

Finally, on July 9th I predicted in “Divergence” that: 1) the Fed would only cut rates once this year, and 2) the Bank of Canada would not follow the Federal Reserve and cut rates. From the post:

• “Because I believe the US economy is in better shape than the market currently is pricing in I believe we’re likely to see just one rate cut from the Fed this year versus the three that the market is currently pricing. Given this I believe the BoC will be more patient and very likely remain on hold for this year.”
• Outcome: The Fed cut three times this year versus my prediction for one cut and the BoC remained on hold.

Below is a table summarizing my key calls for 2019 with the results. I am very happy to say that I went 7 for 9 this year on my major calls. I like to say to clients “that I’m not going to get every call right and that as long as I go 6 for 10, I can fairly confidently deliver a 6-7% return with a balanced portfolio”. This year I exceeded that, which is in part why our clients are having a record year.

Looking back at 2019 my one bad call was calling for “one and done” from the Federal Reserve with respect to the rate cuts for this year. Following this I went back and looked at previous Fed cuts during a slowdown and learned that the Fed cut three times in two previous instances (in the 1990s). Now I’ll know this for the future and maybe not make this mistake again.

So while you’re getting some much needed R&R with friends and family over this holidays break, take a moment to do what I do and review your investments and try to learn from the ones that didn’t pan out, in an effort to learn from your mistakes and be a better investor for 2020.

I wish all the blog dogs a happy holidays and prosperous 2020!

Results of Key Calls This Year

Source: Turner Investments
* Trade deal is not yet finalized but likely will become January

.

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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Scotiabank offers a “Power Savings Account” with a premium rate of interest. It’s 0.02%, but to gain that a balance of $5,000 is required. Under five grand on deposit, the rate changes to 0.00%. Chequing accounts at all of the banks, where most people cycle through the bulk of their income, pay nothing.

High-interest accounts? The best rate at any of the Big Six banks is 1.6%. The best bank GIC is 1.8% for a three-year lock (TD, RBC, BMO) while the top payer is Oaken at 2.7% – which takes your money and lends it out as high-ratio mortgages to people you hope to never meet.

The point? Cash is trash, it seems. Savers have been nailed to the cross of Accommodative Monetary Policy, as central banks keep rates low enough to spur economic growth. The latest inflation number for Canada is 2.4%, the highest in a decade and 25% above last year’s number. It also tops the Bank of Canada’s benchmark rate of 1.75%, which means we essentially have a negative interest rate policy.

The implications are legion. Mortgages are too cheap, encouraging rampant debt accumulation, pushing up the value of assets bought with borrowed money and hurting society as a result. What’s the benefit of owning an expensive house when you owe a fortune on it? Also, why pay off a 2.5% mortgage when the inflation rate is about the same? After all, it’s almost free money.

Dawn in Saskatchewan talked with me about that issue this week. Her home is worth $150,000 in a small community and she has $60,000 remaining at 2.39%. She’s been making accelerated payments and annual prepayments, doing everything possible to eliminate debt – at the same time she has zero liquid assets and is 15 years from retirement with no defined benefit pension. The money you’re using to retire a 2% debt could have made 13% in a balanced portfolio this year, I said. When the big R comes you’ll need income more than anything else.

Of course, the inflation numbers understate everything. Food, insurance, gas, home heating fuels, clothes, cars, drugs, kibble – it all costs more than 2% above last year’s levels. The carbon tax alone has impacted much. Savers are being crushed yet again. The old maxims of trashing debt and packing cash into things like savings bonds are junk. Those CSBs are actually gone. Now you have to trust some weird, online outfit with your savings just to make more than the cost of living. And meanwhile all interest is taxable outside a RRSP or TFSA.

A negative real central bank rate is a big problem as inflation rekindles. It’s surpassed the BoC’s target which means a rate cut in 2020 is not in the cards. That would just encourage more borrowing, more spending, asset inflation, a lower dollar and greater imbalance. But a rate hike – normal procedure to cool off rising prices – would be a bitter blow to those legions of Canadians who can barely make existing debt service payments, while corralling economic growth.

Meanwhile the US economy and markets are about to melt up as Mr. Impeached does everything possible to win re-election in November. That could include a China trade deal, more deregulation and quite likely a personal tax cut. The American deficit will erupt, equities surge, wages pop as labour shortages spread and commodity prices jump as the stimulus spreads globally in a post-Brexit world. Yup, more inflation. Washing over us. How will our bank handle it?

This is the big nasty that we’ve been warned about. A rate shock. Once inflation here moves above 2.5%, on its way to three, the Bank of Canada cannot maintain its current 1.75% level. So next year could contain exactly the opposite of what many people think – loan, mortgage, credit card, HELOC and line of credit charges that get fatter, not thinner.

Will that reward savers?

Nah. Fuggedaboutit. The big banks have been under profit pressure lately (check out the quarterly earnings). Higher rates will increase their spreads helping restore the bottom line. Besides, the bankers know they don’t need to give you interest on your chequing account or pad the HISA rate since your behaviour won’t change. When 80% of all TFSA money is in savings accounts and GICs, the die is cast.

Our central bank wisely resisted dropping rates when the Fed cut earlier this year. Three times. But the damage was already done. A nation pickled in debt has continued adding to its pile of obligations. Real estate values have been edging up again. The savings rate sucks. Families and households owe more money than the size of the entire economy. And now we seem to be approaching a policy crossroads.

Governor Poloz, the head banker dude, is gone in a few months. Trudeau will anoint a new one. Many will be surprised.

About the picture: Another pic from the latest version of the Vancouver Police Department’s dog calendar. It showcases members of the force’s K9 unit, who have also become Twitter influencers. Order your copy here for fifteen bucks plus shipping. And remember: dog cops don’t care what your excuse is. Grr.

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One year ago this blog’s comment section was overwhelmed with gnashing and moping as equity markets swooned. We were just days away from the bottom of the Santa Slaughter that carved 20% out of all-stock portfolios. By the last day of 2018 US markets had shed more than 6% and Bay Street gave up 12%. Balanced portfolios were off for the year by just 3%.

Lots of people gave up, despite the advice of a certain pathetic blog that it would go away. A year ago today (Dec 19) the Dow lost 358 points and closed at its lowest level in a year as the Fed raised its key rate and investors clamored to take risk off the table. It was the worst December performance since 1931, and came after a year of record highs.

Here were the eight rules we told you to follow as the blood flowed…

(a) Always have a balanced and diversified portfolio
(b) Never sell into a storm.
(c) Ignore volatility. It’s noise.
(d) Never exit an asset class.
(e) Don’t try to time the market. You can’t.
(f) Ignore those who tell you to (i) go to cash, (ii) buy gold, (iii) buy Bitcoin, (iv) buy GICs or (v) run screaming
(g) Invest in quality ETFs in the correct weightings, rebalance once or twice a year and ignore whatever the hell the Dow is doing.
(h) Never watch BNN. Like, never.

One reader with much money invested (four million) couldn’t take it, sold assets at a loss, went to cash and parked in a 2% GIC. After I told you that story, lots of comments rolled in supporting the decision.  Proof that fear is the greatest motivator.

Of course since then the Dow has swelled by 5,000 points, or more than 21%. When you add in dividends, US markets have gained almost 30% in 2019. Even Bay Street has roared back. Boring balanced portfolios are fatter by about 13% this year and the millionaire stuck in the GIC has paid a handsome price for getting the willies. The return was $80,000, fully taxable as interest, versus a potential $800,000 profit (tax-efficient) if left in the portfolio.

Now, let’s consider 2019. The bond market produced an inverted yield curve, meaning short-term rates were higher than long ones, suggesting investors saw a recession looming. But that didn’t happen. The Fed dropped the cost of money three times, which Chicken Littles said confirmed we’d have a storm. Nah, nothing. The Brexit crisis roiled. Hong Kong boiled. Wars in Syria and Yemen while Turkey went rogue and the climate change debate became an emergency movement. And Trump, jeez. He ratcheted up the trade wars and said the stock market would crash if he was impeached. Last night it happened. Investors yawned. The market hit a new high.

Huh?

Well, the last guy to get impeached said it best in four words: “It’s the economy, stupid.”  That’s what markets and investors have been seized with, not a political process which won’t remove the president, just sully him. Wall Street (and Bay) believes Trump will be re-elected in November. His expansionist, inflationary, deregulatory and pro-growth, pro-business, more-jobs agenda will continue. No pesky Democrats breaking up Amazon and Apple, forcing social responsibility upon corporations or saddling the economy with trillions in debt forgiveness and new social spending.

Meanwhile the economy is mocking the doomers. American unemployment is the lowest in half a century. Corporate earnings have beat expectations over and again. Three Fed cuts are adding stimulus. Consumer spending and confidence are at record levels, largely thanks to jobs. GDP growth is just fine. China trade tensions are easing and tariffs relaxed. Commodity prices are rising as the global picture brightens. Brexit will get done and stop being an uncertainty, fostering new investment. And Trump will do whatever it takes to get re-elected – using a booming stock market and economic growth as his proxies.

So, here ya go: no market risk from impeachment. Everybody’s had time to absorb this news and get over it. The Senate will not convict. Trump’s staying. For years. Economic growth, employment, corporate earnings, consumer spending – none of these things will be impacted. And although we’re now into the 11th year of recovery and growth after the last downturn, lots more to come.

Will there be more corrections, more wailing?

You bet. Like always. But remember more than 70% of the time markets rise because the world grows. Rarely do corrections of 10% to 20% lead to bear markets. And even when everything hits the fan, recovery’s assured within a relatively short time. The only losers are those who let fear take hold. Emotion is not your friend.

Remember the rules.

About the picture: A highlight of new year is always the latest version of the Vancouver Police Department’s dog calendar. It showcases members of the force’s K9 unit. Order your copy here for fifteen bucks plus shipping. And remember: when barked at, lie prone and still.

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Ottawa is such a riotous place that we have yet another report today on what may be about to shake the real estate world. But first, a glimpse into the wonderful world of amateur (and illegal) landlording, also from the nation’s capital.

This Kijiji listing has appeared, looking for a nice “professional working male” who is daft enough to move into some lady’s garden shed in the burbs. Gail writes:

SHORT OR LONG TERM STRESS FREE STUDIO/ROOM, NOT LOCKED INTO A LEASE. SEPARATE FROM MAIN HOUSE, FULLY FURNISHED. FRESHLY PAINTED, WELL INSULATED, HEATED & ELECT. INCLUDED. IMPECCABLY CLEAN & QUIET FOR A PROFESSIONAL WORKING MALE. QUICK ACCESS TO DOWNTOWN & HIGHWAYS. ALL CONVENIENT STORES AT YOUR DOOR-STEP. SNOWPLOWED PRIVATE PARKING & CLEANING SERVICE OF LINENS & VACUUMING PROVIDED. All you need is your suitcase ! Please communicate by phone. Reference is required
ALL INCLUSIVE_ COMFORTABLE NEW MATTRESS WITH QUALITY LINEN _ UNLIMITED WIFI , TV _ SMALL KITCHEN TABLE, FRIDGE, MICROWAVE, _ COFFEE MAKER, KETTLE , TOASTER, DISHES & UTENSILS _ COMFORTABLE WORK CHAIR AND DESK _ AMPLE SHELVES, DRESSERS< LARGE ITALIAN CLOSET & STAND UP COAT & HAT HANGER _ LAUNDRY FACILITIES INSIDE _ TENANTS PRIVATE PARKING _ & BACK YARD PRIVACY. IT COULDN’T BE MORE QUIET !
SHORT & LONG TERM RATES : NOT BOUNDED TO A LEASE
– $50. per night, minimum a week – $ 450. /2wks – $650.mo. 4wks _ $675. mo.4wks, Inclu. Private Parking

Of course if this were in Vancouver, Gail could sell it for $899,500. Anyway here it is, inside and out:

$     $     $

Yesterday regional finance ministers beat on Morneau for more money than the $81 billion Ottawa will transfer to the provinces this year. What will Bill do? Cave, of course. There are Quebec separatists in Parliament and Wexiters organizing in AB. Several provinces are suing over the carbon tax and every single government wants more health care cash. No doubt the Trudeau minority government will pony up more – then have to cover that with increased tax.

As we told you yesterday the federal finances are already deep in the red, suggesting the prime minister fibbed during the election. Just weeks after the vote we learned about a massive job loss in November (over 70,000 people punted) and a way bigger hole in the budget (another seven billion in deficit). The projections Morneau gave us Monday did not take into consideration massive new spending announced during the campaign (expanded child payments and the shared equity mortgage, among more), and certainly not the new billions provinces will get.

But does anyone care?

Well, this is interesting. It’s a poll done by Bloomberg asking the elitist, rabid, right-winger, capitalist, Porsche-driving overlords who populate that site to weigh in on the financial plan the government unveiled this week. They’re not buying it. Maybe you shouldn’t either. Man those tax shelters!

$     $     $

More Bill. The PMO gave our finance guy a mandate letter recently telling him to review the mortgage stress test to make it “more dynamic.” That’s been interpreted in real estate circles as a defanging of the rules which have kept up to 20% of young buyers on the sidelines, depressed sales and jacked the price of lower-cost homes. You may recall this was the Cons’ position during the election. Not their finest hour.

Details have yet to emerge on how the test will be neutered, but meanwhile comes news people may once again be able to mortgage $1 million+ houses with small downpayments. You may remember that dearly-departed F, the elfin deity, put the kybosh on this seven years ago as a way of cooling off the market. Prior to that buyers could finance a seven-figure house with just 5% down and a CHMC-insured home loan. After the change, the minimum deposit was made 20% and no taxpayer-backed mortgage.

Now, reports broker/blogger Rob McLister, Genworth has applied to the feds for permission to insure million-dollar-plus mortgage when a buyer has but 10% down on a property worth up to almost $2 million. The good news is that the buyers would have to pay their own loan insurance (costing maybe 4% of the face value), so CMHC wouldn’t cover. The bad news is this helps cause house price inflation.

The target market: young, highly-paid professionals (doctors, lawyers, dentists, people who publish free financial blogs) with fat incomes but little saved, who are happy to shoulder one mother of a big borrowing. Genworth and others see this as a beachhead for the creation of a privately-insured mortgage market in Canada, taking some pressure and risk off CMHC or the banks. Good thing, since taxpayers today are on the hook for the vast majority of all residential loans.

By the way, what do you need to buy a $1.75 million house in Toronto with 10% down?

Cash of $175,000 plus enough to cover land transfer tax of $62,950 and $6,300 for insurance, then monthly payments of $7,500 (plus insurance and property taxes), requiring an income of a bit less than $270,000. And that would buy you an unrenovated bung in midtown.

Or, you can call Gail.

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Not a chance, of course. In the summer of 1993 it was a slam-dunk that Kim Campbell would win the PC leadership contest and become Canada’s first female prime minister. Contender Jean Charest tried to unseat her from that throne. He failed.

Then there was pathetic me. Not a chance of winning, but I went through the entire, months-long, coast-to-coast process just to make a point. We were turning into a nation of debt slaves. Something must happen. Politicians had to care.

At the time the federal deficit was a withering $39 billion. Brian Mulroney had just brought in the massively unpopular GST, then walked out the door leaving voters to eviscerate his party, and Kim. (Of course, Jean Chretien kept the tax, blamed the Tories, and reduced the deficit to zero because of it.)

My contribution? I hauled a giant Debt Clock into the arena where the convention was being held, then gave a speech dissing my colleagues, Trudeau (the old one) and the party for being a bunch of grasshoppers. Naturally I lost. Big. As expected.

Well today the national debt is $700 billion. After climbing out of a massive deficit hold in 2008-9 thanks to the financial crisis, we’re back into deficits. On Monday Bill Morneau fessed up to a shortfall of $27 billion this year (seven billion more than stated in the election), which will be larger next year. This is even before new promised spending takes place.

But here’s the thing: nobody cares. Yet again.

In fact today politics has so changed that those seeking office brag about how much more they will spend and how much less they will tax. It’s as if we’re a clutch of morons believing money just appears when required. Why shouldn’t we have free education, health care, drugs and retirement plans, or a guaranteed annual income, money for having children and affordable housing? And a tax cut?

An idea called MMT – Modern Monetary Theory – is all the rage on the US political left. It’s been embraced and promoted by rebel Congresswoman AOC as well as heavyweight Dems such as Bernie Sanders and Elizabeth Warren. It says, simply, deficits are harmless, healthy and promote economic growth and expansion especially when interest rates and inflation are low. Governments can just print money, distribute it fairly and – voila – people will spend more and create prosperity. Sort of like that debt jubilee described here a few days ago. Money for nothin’, and the cheques are free.

So long as economic growth outpaces bond yields, the argument goes, governments can stay in the red, keep rolling over the growing debt and society will get richer. Obviously this is the new Trudeau/Morneau mantra. Our federal leaders have given no date for the budget to be balanced, refuse to answer that question, ignore the critics asking for a deadline and assume that you – the voter – couldn’t give a damn.

This is a departure. Harper got deep into deficit, but crawled out. So did Chretien and Martin. Even Mulroney and Mike Wilson were obsessed with balancing the books. But now, as we roll into 2020, crickets. More spending Fewer people paying tax. Don’t bother your pretty little head with the details.

Okay, so what can go wrong? How can the country behave in a way that would cause misery, penury, bankruptcy and serious spousal grief if it was you?

Well, it probably can’t. And MMT is dangerous, since its viability is based on unique conditions.

For example, if interest rates swell – even modestly – the cost of servicing a massive pile of debt goes up fast, eats into government revenues, creating a death spiral. Politicians can’t refinance maturing debt at rock-bottom levels, gutting budgets as debt payments crowd out social spending. The economy is whacked.

MMT contains endless risk. Growing debt levels mean the bond market demands bigger premiums, so governments pay more. If politicians just fire up the printing press to increase the money supply, inflation takes off, popping yields more. Annual deficits and growing debt ultimately fuel rates, making that debt unsustainable. Taxes inevitably shoot higher. That’s why deficit financing has been used historically only as a tool to boost a weak economy or get through a crisis, such as the GFC in 2008-9. When things recover, governments dial back and strive to have revenues cover expenses, or build up a cushion for the next bad patch.

But that was then. This is now. The economy’s fine (says Bill) yet the red ink augments. Deficits are tools no longer. They’re structural. Normal. Routine. During the federal election campaign, did you hear any leaders arguing for less, or promise to balance the books, to restore balance for the benefit of your kids and their spawn?

Nah. It was all about who could buy the most ballots. And that guy won.

Hopeless.

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The finance minister says it’s all okay. Canada will be a northern paradise. The best employment picture in the G7. Only Andrew Scheer will lose his job.

But Susan isn’t so sure. She’s not buying the everybody-gets-a-pony message in this week’s economic update. In fact as a banker, she’s scared. The finance sector layoffs have already started after a disappointing set of earnings for the Big Six. And, as you know, the banks want to dismantle their costly and elaborate web of physical locations, shedding front-line workers and forcing customers to find an ATM or go online.

  (This is precisely how I obtained my sweet little stone BMO branch – so there is an upside…)

Bank of Montreal just announced that 5% of its workforce, or more than 2,000 people, will be laid off. RBC’s chief exec is warning of a few rough years. The fintech industry is snapping at the bankers’ heels. And loan loss provisions are up sharply – more than 50% at the CIBC and a third at TD and Scotia, for example.

Susan has some serious questions, therefore. But wisely prefaces them with a MSU.

If it wasn’t for your wise advice, I would neither have saved the amount of money that I have, nor learnt anything about investing.  My savings rate is approximately 60% of my salary, but every year I earn the same amount as I save.  This would not have been possible by investing in GICs, and I’ve tripled my investment money in the last 8 years.

Here’s my question.  My industry, Finance, is laying off thousands in the coming year, both in the US and in Canada.  I fear a job loss in the next few months or weeks.  What do you recommend I do to prepare for it?

I’m particularly stumped at what to do about my DB pension.  While I want to break it out into a LIRA, I’m afraid I will lose a substantial portion of it to taxes as I have no RRSP room.

You save two-thirds of your salary? That’s deserving of an Order of Canada, or at least a life membership (and your own parking spot) at Costco. Hopefully you’ve been stuffing your TFSA (since the DB pension restricts RRSP room accumulation) and building up a nice non-registered account chock full of growthy ETFs and enough fixed income to let you sleep at night, should the axe fall. (Sounds like you might have been too aggressive of late, however – so dial it back.) We have no details on your personal life, but you gotta be a frugal gal. Perfect, when your employment’s dodgy.

The pension? Big decision.

If you leave the funds where they are, inside the plan, there’s little to fear in terms of stability. The banks aren’t going bust. Ever. They are systemically important, and federally essential. Outside of government pension money and your dog’s love this is about as secure as it gets.

But there are still valid arguments for commuting the pension, leaving the plan and managing this money on your own. For example, if you stay in, every payment received in retirement will be fully taxable at source. No way to mitigate that. If you don’t need the income, you must still take it. That could push you into a higher tax bracket, which sucks. On the other hand, if you take possession of the cash and it sits inside a registered fund, you can dip in whenever you want and thereby better control your own marginal tax rate in retirement.

Second, by commuting you seize control. Instead of relegating investment decisions to an unknown and unseen pension administrator, you make your own decisions. That can be immensely satisfying. Third, you can tailor the investment strategy to your own needs, goals and personality. Pension managers’ primary mandate is to ensure funds are available to meet future obligations, while you might be more concerned about growth and getting a Porsche (to drive to Costco). Fourth, when you croak the money belongs to your estate, not the pension plan. You can pass it on to spouse, family, friends, charities and pets.

Now, what about the tax hit when commuting?

Typically a portion of a commuted pension can be rolled into a LIRA (locked-in retirement account – just like an RRSP, but not cashable until you reach retirement age). The remainder is given as cash,  taxed in that year as income. The Hoovering can be cut if you have RRSP room available but, sadly, poor Susan has none.

What to do?  Nothing. Take the money. Pay the tax. Move on. Remember if you stayed in the plan 100% of every cheque for the rest of your life would be taxable, so all you’re really doing in commuting is paying it now. It’s also wise to optimize when the cash is received. Most employers will offer an option of taking it immediately when leaving the pension plan, or a few months later within a new calendar year. Obviously taxes will be lower in a year of unemployment.

The biggest reason people don’t commute is, of course, fear. They think staying inside the corporate womb is somehow safer than taking charge of their own destiny. In some cases, (like this) that may make sense. For the 2,000 GM workers losing their jobs in Ontario this week, for example, it makes none.

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This week Chateau Bill brings in his autumnal economic statement. Interestingly he will do it not in the House, facing catcalls and raspberries from the oppo benches, but in a presser opposite the comatose Parliament Press Gallery. So much for accountability.

Anyway, expect him to be rosy, upbeat and yammer on about “the middle class and those working hard to join it.” As you know, we now even have a Minister of Middle Class Prosperity, a member of T2’s 38-member Cabinet. (Each minister also has a Parliamentary Secretary with bonus pay and a preferred status. This means half of the entire Liberal caucus has been granted favours.)

Morneau will talk about growth, jobs, hope and ponies. Do not count on him to dwell on revenues or deficits. The Trudeau agenda calls for a slew of new spending and no balanced budgets for the entire mandate. But there will be new and more taxes coming in the winter budget. The good news for Ottawa will be a strong US economy and robust markets pulling us forward. The bad news is this collection of financial losers called ‘citizens.’

Despite ten years of expansion, rising asset values, the best job growth in decades and the cheapest interest rates in history, Canadians have been backsliding. Savings rates have slipped while debt swells. More people are retiring with mortgages than ever before. Four in ten families are $200 or less a month from default. Never before have more young adults lived with their parents, seemingly afraid to venture forth. The middle class is turning out not to be such a hot destination.

On Friday Stats Canada announced the household leverage rate hit a new all-time high. It’s just a hair under 15% of disposable income, the majority of it for mortgages. This may not sound like a lot, but when you remove renters (35% of taxpayers) and the people without mortgages (half of homeowners), and factor in lowly interest rates, this is a big number. It suggests enough people are in serious trouble to trigger issues for everyone. Indeed, it took only 8% of debt-pickled Americans to crash that country’s housing market and send the world into a financial panic.

Eight charts Bill will not be sharing with you.

Here’s an illustration from RBC showing how household leverage has crested, despite 2% mortgages,

And, by the way, the increase debt servicing costs is outpacing income gains, as you can see in this chart from TD Economics. Just imagine if the economy stalls (wages drop) or inflation jumps (rates increase). Pooched.

And here’s a more graphic portrayal from the alarmists at WolfStreet.com. It does a fine job of depicting what households have done to their finances over the past 20 years.

By the way, I forgot to mention the personal savings rate. So if you were wondering if more debt was okay because we’re just socking more into our TFSAs, RRSPs and non-registered investment accounts, well, forget it. In the 1980s we saved 20% of what we made. Now it’s 1%, and nearing historic lows.

And what about the economy? Will it save us from ourselves?

Chateau Bill will suggest exactly that. No reason to worry. Just move into the middle class and relax. But, alas, the economy is not what it used to be. Increasingly it is based on consumer debt, continued household borrowing and overspending on real estate. As this BMO chart illustrates, we are building a condo economy, in stark contrast to the US.

Nowhere in the world, according to the International Monetary Fund, have house prices jumped more relative to incomes than in Canada. In short, we are buying what we cannot afford.

And this is born out in the loans we’re swallowing to do it. This chart from Bloomberg shows household debt has returned to a near-decade level, even with the stress test and a plethora of other government measures in place to quell borrowing. Conclusion: they didn’t work.

Finally, debt in Canada is vastly out of step with the US experience. Americans went through a housing bust, deleveraged and have not resumed their bad habits – and meanwhile their economy blossomed. In Canada we escaped the real estate crash, kept borrowing and buying, never corrected our path, and have arrived at this point.

What does all this mean for you, the responsible GreaterFool reader who is not working hard to join the others? Stay tuned.

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  By Guest Blogger Doug Rowat

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Thank god my kids aren’t yet teenagers; however, my seven-year-old daughter is already asking for a cellphone, so I’m getting a sense of what’s in store for me. I’m probably doomed.

So, for those of you who do have teenagers I won’t presume to offer advice regarding how to talk to them; however, eventually all parents will have to have ‘the money talk’. And here I might be of service. Below I offer my best advice.

Explain to your teenager where money is really concentrated. Teens frame the world around their own interests and through their own social-media experiences. Therefore, they often focus on celebrities and music. Teenagers think that wealthy means Taylor Swift, or Jay-Z and Beyoncé. Point out that the real wealth is held in the financial industry. The below chart shows how much top-celebrity-earner Taylor Swift made in 2016 versus what some of the most successful hedge fund managers made. Needless to say, there’s no comparison. This doesn’t mean that you should point them towards a future in finance. Far from it. There are already too many of us in this business. The world needs more artists, musicians and poets. However, it’s still important that they understand where the real wealth lies.

Shake it off: Taylor Swift earnings vs hedge fund manager compensation

Source: MarketWatch, 2016 data

Teach them that markets sometimes go down. We have many clients who are inexperienced investors, which, of course, is fine—it’s our responsibility to educate them about market volatility. However, ideally, clients have already learned, long ago, that volatility’s a normal, in fact, expected, part of capital-market investing. Bad stretches occur every year, but the vast majority of the time markets end up in the black. Educate your teens that negative intra-year periods occur regularly, but that they shouldn’t become unsettled by this temporary weakness. The chart below from JP Morgan is a great visual to show young investors. Intra-year market drops for the S&P 500, the world’s largest equity benchmark, are a constant reality and sometimes they can be severe, but seldom do they result in the full calendar-year returns also being negative. Stay invested. Markets need to take breathers but virtually always move higher in the long run.

S&P 500 intra-year declines vs calendar year returns: despite average intra-year drops of 13.9%, annual returns have been positive in 29 of 39 years.

Source: JP Morgan

Questions on first investments? Suggest health care. When you’re a teenager you assume that you’ll live forever and you surround yourself with other young people, so it’s easy to lose sight of the fact that the world is, relative to a teen, a much older place and rapidly getting more so. If teenagers think about investing at all, it’s usually in the context of what they’re familiar with. For example, “I use Uber, so that must be a good investment.” (You might explain to them that Uber has, in fact, been a terrible investment.) Encourage them instead to think long term and to broaden their lens. As the chart below shows, the global aging trend has dramatically accelerated in recent years and will continue to do so. Health care is critically important to an ageing population. It’s no coincidence that over the past 10 years the S&P 500 Health Care Sector Index has returned 285% on a cumulative total-return basis, easily outstripping the still-impressive 248% gain of the S&P 500. More so than us parents, your teenager will fully benefit from the upcoming, multi-decade shift in global demographics. Over time, your teenager can (and should) continue to add more diversification, but health care is a reasonable first investment and it creates more interesting talking points than a plain-vanilla balanced fund.

Global age trend: health care makes for a reasonable first investment

Source: United Nations

Have them open a TFSA. You’re allowed to open and contribute to a TFSA once you turn 18. You don’t even need a job (earned income) to start contributing to one. Though the contributions made to a TFSA are not tax-deductible, the investment gains within a TFSA are not subject to capital-gains taxes. Tax deductibility isn’t a big priority for most teenagers anyways as they likely aren’t earning much and are probably in the lowest tax bracket. However, the tax-free growth is an important long-term advantage especially when you consider my next point below. The cumulative TFSA contribution limit currently sits at a meaningful $69,500.

Encourage them to start investing early. As my partner Ryan perfectly illustrated last week, through the power of compounding growth, if your teenager starts investing early and saves consistently they’ll have exponentially more money in retirement than their less-disciplined peers (see chart below). Now, I recognize that these initial savings assumptions are aggressive for a teenager, but the overall point is still clear: start early.

Investing early can have a dramatic impact on eventual retirement savings

Source: Turner Investments; Assumptions: saving $12,000/year at a 6% CAGR to age 65. X-axis represents years of investing.

You can, however, tell them that they don’t necessarily have to start this early:

And, incidentally, why this album matters more than any other will be my daughter’s next, non-financial, lesson.

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

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