Category: Accounting tips

Trump snorted and stocks got the shakes this week. Fresh from hitting record highs, equity markets shed hundreds of points. The issue? China. After  hinting a trade deal was at hand, Tariff Man reappeared saying he was in no hurry to sign anything. In fact a new set of levies may be imposed on the 15th. It’s a risk-off moment. Down she goes.

There are three points in today’s blog post. (A short quiz may be taken later.)

First, this has been a boffo year. Anybody cowering in cash and afraid to invest has robbed themselves or their clients. American equity markets have given a total return of more than 20%. Even Bay Street has been a star, despite energy woes and a silly federal election. Balanced, diversified portfolios are ahead double-digits, and the four-year advance has been more than 25% – despite the plop in 2018, Trump, trade wars, volatility, Brexit, inverted yield curves and the girls on Tiktok. It sure pays to stay invested.

Second, Trump could well trash the Santa rally. New tariffs in 12 days’ time, coming after the pro-Hong Kong, anti-Beijing message from Washington are enough to heat the trade war to a new boil. Obviously the wily but weird president wants to save the big détente for closer to the 2020 election campaign, so he can blow up the Dems. But it’ll come. That probably makes what’s ahead over the next month or two a buying opportunity, if you have cash. And guts.

Third, the storm is over. There’s no recession on the horizon for the US. No reason to hunker in cash or a GIC. The yield curve is the banana it should be. Central banks have been (like me) serious but  stimulating. Corporate profits solidly beat expectations. Unemployment in the States is at a 50-year low. Consumer confidence and spending are strong. Global growth is steady. And there’s big momentum.

“We find that the signs of a global cyclical recovery are firmly in place,” says Van-based equity analyst Cam Hui. “Both U.S. and non-U.S. equity indices have flashed long-term buy signals that have proven to be remarkably effective in the past.”

So, it’s a ‘buy’ signal, he says.

Global recovery firmly in place: ‘Buy’

Source: Pennock IdeaHub. Click to enlarge.

If you believe this, stay invested. Even if December, 2019 turns out to be a pale imitation of the final weeks of last year, when Trump again did his grinch thing. Everybody with liquid assets should expect markets to gyrate, vibrate and occasionally capitulate. It’s normal. Traditionally there’s a 5% plop a couple of times a year (a “pullback”). Meaningless. Once every three years or so there’s a market decline of between 10% and 20% (a “correction’). They’re short and shallow, normally regaining all lost ground in about four months. Most of the time a correction doesn’t signal bigger losses coming. Occasionally it does. A drop of more than 20% (a ‘bear market”) is painful – we had one at this time last year – but equities have always recovered. So the only people who are truly whacked are those who panic and bail.

Humans are consistent in their emotions. We fret over losses more than we relish gains. Fear has always trumped greed, but those two emotions are the primary drivers of all markets – from stocks to houses. Meanwhile logic and experience show us that investing, staying invested and investing more when everybody is freaking out, is an excellent strategy.

If all you did were to find a hundred bucks a week starting from zero, and stick it into your TFSA in assets pacing the major stock markets (through an ETF) for your working life (35 years), you’d end up with $784,000. That would provide a tax-free income of $47,000 forever without diminishing the principal. Add in OAS and CPP and that becomes an income of about $65,000, and no tax. Add a spouse doing the same thing and you have household income of almost $130,000. And a tax rate of about 9%.

To clarify: that’s without putting money in RRSPs. Never having a non-registered investment account. No corporate pension. No inheritance. No lottery winnings. No GoFundMe page. Not even any crime involved. Just one simple action.

So here’s another chart. The market advances are in green. The contractions in red. Over the last half-century you can see what happened. Those who let fear win, lose. Six words to remember.

Big bulls, little bears. The 50-year story.

Click to enlarge.

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Most of us outside AB don’t care about Wexit. But we will. Western alienation has the potential to create political chaos in Canada, send the feds into a tailspin, blow up the Conservative party and send a shudder through the national economy.

But Alberta isn’t going anywhere. Just like Quebec. And Jason Kenney, the current premier, is a fool if he continues to gently fan the flames of pissed-offedness in his realm. There is nothing but loss and hurt that flows out of thinking a hunk of the nation with a few million people in it can become sovereign. There is no legal path out. No exit is possible. No prime minister could grant one. Nor should any thinking cowboy want it.

Which brings us to Adam.

“I’ve been reading your blog since 2010 and sincerely appreciate the wisdom imparted. The financial advice keeps our family on track and lets our two dogs eat brand name kibble. You know, the good stuff.”

Fine. But this blog dog has a problem.

“We’re currently renting a house due to the continual year over year price declines here in Calgary. We also own a downtown apartment that we haven’t been able to sell.  Each year we have a realtor tell us the market price and put it on the market, only to receive no offers. Not even low balls. Meanwhile, market prices continue to decline. Should I start aggressively discounting the price or just continue to rent it? Rent covers expenses, mortgage interest and a little of the mortgage principal. What to do?”

Cowtown condo values currently sit about 17% below their peak. That’s worse than detached places, which are down about half that amount. Of course, higher-end Calgary real estate has been a disaster for most of a decade. That won’t end soon, and Wexit would send prices cascading lower.

Calgary (and to a lesser extent, Edmonton) inflated badly, saw a wave of speculative buying/investing fomented by shameless pumpers like REIN (Real Estate Investment Network) and flew high along with crude until the oil collapse. I remember visiting the city a dozen years ago and warning that prices could topple by 15%. The media was gobsmacked. Realtors flogged and ridiculed me. But I was wrong. The drop was  20%.

Lately sales have picked up, but only in the lower price brackets. “Employment has shifted in the city, with job growth occurring in our non-traditional sectors and often at a different pay scale. This is consistent with the shift to more affordable housing product,” the real estate board sad recently, acknowledging oil’s sorry state. “However, at the higher end of the market the amount of oversupply is rising, as supply cannot shift enough to compensate for the reductions in demand. This is likely causing divergent trends in pricing and preventing prices from stabilizing across the city.”

That’s putting it mildly. Calgary (and Edmonton) housing is cheap, struggling, and destined to plunge if the Wexit delusion continues to infect the minds of otherwise sound men. Evidence? Sure, it’s called ‘Montreal,’ a city of four million people where the median single-family house price is $355,000, thanks in large part to a legacy of political instability and wingnut sovereigntists. Compare that to Toronto, a five-hour drive away, where a detached now averages $1.323 million.

Of course, oil was once $140 a barrel and now it’s $55 on a good day. We all know the country’s bickering, indecision, and regionality has prevented building the pipeline infrastructure the oil patch needs, so the Canadian price has tanked. We know the Dippers in BC hate the cowboys, while the T2 Libs in Ottawa were blanked and shunned in the West. Meanwhile Alberta voters have swung from majority Cons to majority NDP and now majority super-Cons in the last three elections. The office vacancy rate in Calgary is ridiculous and the gleaming Bow tower stands as a semi-empty monument to bad planning, too much testo and wishful thinking. None of this inspires confidence. No wonder capital’s gone elsewhere. And now Wexit. The coup de grace.

So, Adam, you might want to dump this condo sooner than later. Sure, prices could increase, but they might also ride the separatist elevator to the basement. It’s possible the entire market could collapse. No sales. No offers. Why would anyone buy in a region destined for economic depression or political ostracism? As international capital flees instability, so would more jobs. The price of independence is prosperity. And opportunity. Talk of an Alberta pension plan, an Alberta revenue agency and an Alberta police force – all approved by the governing party on the weekend – means more overhead, cost, tax and aggrandizement for charlatan leaders.

Finally, look at others for guidance. Brexit has turned into a three-year nightmare for the UK. Trump is abandoning his trade wars and protectionism. Nowhere are nationalism or sealed borders making people wealthier or more secure. It’s the big fiction of our times.

Sell, Adam. Release all the equity you can, trash the debt and stay renting. Keep the car gassed, too.

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  By Guest Blogger Doug Rowat

Out of university I landed a summer job working the line at an office furniture factory. It was awful work—spraying industrial glue back and forth while standing all day next to an oven that kept the glue at a balmy 350 degrees. Fun stuff during the summer heat waves. It was also incredibly boring.

As a result, talking sports soon became the best way to relieve the boredom. One popular topic was “Name your best fantasy sports experience.” The answers ranged from the pretty cool (“Take some at-bats against Roger Clemens”) to the strange (“Take a punch from Mike Tyson”).

Up to this point if the veteran factory workers had any doubt that I was a nerd, my response removed that doubt: “Get a chess lesson from Garry Kasparov”. Suddenly, not fitting in at high school carried right through to the factory floor. I made the take-a-punch-from-Mike-Tyson guy seem normal.

However, my fascination with chess actually provided excellent training for when I ultimately ended up in the investment industry. Many of the skills that chess teaches translates well to portfolio management. In fact, it’s no coincidence that Kasparov has written a book about how chess informs successful decision making in other areas.

But Kasparov isn’t the only chess master to make this connection. Bruce Pandolfini, an author and chess teacher made famous by the movie Searching for Bobby Fischer where he was played by actor Ben Kinsley, has also highlighted how correct chess strategy can make for better business decisions.

In no particular order, here are a few of the Pandolfini lessons that I regularly apply to my own portfolio management:

• Don’t overextend. I wish I had the ability of Scion Capital’s Michael Burry, who famously made an all-in bet by shorting the US housing market during the financial crisis, but alas I do not. Nor do any of you. Therefore it’s important not to make concentrated wagers. For instance, if I like US equities, but don’t like European equities, should I abandon Europe entirely? Never. This year is a perfect example of how such a strategy could backfire as the French and Italian equity markets, for example, have both strongly outperformed the US. Similarly, if I like the outlook for China, I might increase my portfolio weighting by one or two percentage points but not by, say, 10 percentage points. Being caught wrong-footed happens frequently in chess as well as investing. Always minimize the downside risk.
• Seek small advantages. This is related to the above point. Winning chess is really a case of racking up more small victories than your opponent. The rule here is “slightly, slightly, slightly”. Small, winning moves accumulate and can result in the necessary overall advantage. Rack up enough small victories and you control the board or, in the context of portfolio management, enable your client to meet their retirement objectives earlier. Targeting small victories instead of massive wins also minimizes downside risk because the opposite becomes true—the number of big, costly errors are reduced. Capturing the queen is obviously desirable, but there’s absolutely nothing wrong with just winning a pawn.
• Don’t look too far ahead. Contrary to prevailing wisdom, chess masters typically only look ahead by three or four moves, not the 15 or 20 that many believe. Thinking too far ahead is a waste of time. Too many variables are likely to be introduced as the game goes on, which will thwart future planning. Clients frequently ask me how the economy will perform over the next year. I will make an educated guess, but I’m well aware of the limitations of forecasting. Forecasts are unreliable. The International Monetary Fund proved as much when looking at the remarkable inaccuracy of consensus economic forecasts prior to recessions. For example, the first plots in the chart below show the average forecasts for US GDP growth made in the year before the financial crisis followed by those made in the year of the actual downturn. Needless to say, overreliance on the year-ahead forecasts was a big mistake. From a portfolio management perspective, knowing the fallibility of forecasts should result in a sensible long-term strategy: to always maintain balance and diversification amongst asset classes. In chess, your opponent will often do something you didn’t expect. Same with the markets.

Forecasting is Problematic: Consensus Forecasts for US GDP (2009)

Source: IMF, early plot points indicate growth forecasts one year ahead of recession

Ultimately, however, chess teaches discipline. It teaches the importance of not only controlling risk but, equally important, controlling emotion. Director Stanley Kubrick, who was himself a competitive amateur chess player, put it this way: “Among a great many things that chess teaches you is to control the initial excitement you feel when you see something that looks good.”

In other words, chess forces thinking that’s methodical, restrained and emotion-free, which, of course, is also critical to investing. Emotion is the enemy of investors.

Bobby Fischer said the same thing a bit differently: “I don’t believe in psychology. I believe in good moves.”

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

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You can hide a million bucks in your RRSP, and escape the long arm of the CRA. You and your squeeze can shelter almost $150,000 as of January in your TFSAs, and Bill Morneau’s sticky singers will never touch. Your investments can earn fat capital gains and the tax bill’s reduced by 50%. Or collect tax-reduced income from dividends. You can even go to cash or (shudder) crypto and bullion to disappear.

But your house? Nah, forget being anon. There’s a target on it.

This pathetic blog has opined of late about how real estate is the next Big Thing for politicians to Hoover. Carbon taxes are hitting homeowners hard. Property taxes are destined to pop – as is the case in Vancouver this week (8% hike). There’s the burgeoning rain tax. Transfer taxes. HST on closing costs and commissions. Crackdowns on speckers, flippers, Airbnbers and suite-renters. And don’t brush off that election-time revelation of Liberal plans for a phase-out of the principal residence capital gains exemption. They’re serious. This is why (as we told you when it started) personal tax returns now collect data on every house purchase and sale.

It’s relentless. And expanding. Canadians over the next few years will be paying for the property lust that propelled valuations higher, created untaxed windfall wealth and birthed an affordability problem that’s splitting generations and widening the divide. As stated, you can hide liquid wealth. You can’t put a bungalow in your pants.

So time for an update.

First to (of course) Vancouver. This was the debut North American city dumb enough to put a tax on houses politicians think should be used more. So second homes not occupied every month, condos used for business purposes, retirees’ winter abodes, occasional-use properties owned by Americans – all are taxed along with units held by evil Chinese satellite families, offshore investors or local speculators. The stated goal is to force under-utilized real estate onto the rental market. But it’s really a tax on wealth. Obviously. The city says it has siphoned off $39 million from sitting duck owners. Meanwhile the vacancy rate has not declined.

The latest? More tax. The empty-house levy will increase by 25% next year and (probably) by half again over the next two years. This is in addition to the provincial ‘speculation tax’ on second properties (another grab at the wealthy, and those damn Albertans who cross the line), plus a new uber property tax on higher-end homes (yeah, the wealthy again).

Toronto is studying the EHT and there’s political pressure to copy. It’s the hot new thing. The kids see it as an ok-Boomer tax. And now the Trudeau feds are about to bring in a national version. Foreign dudes first. Then, without much doubt, the locals.

During that piteous federal election campaign the Libs pledged for the first time to have a national government directly tax  residential real estate. Soon there will be a pan-Canadian vacancy tax – a levy equal to 1% of a property’s value per calendar year on any place owned by a non-resident, even if the property is rented to or occupied by the owner’s family. Expected to suck off $217 million a year, it would apply to all residential properties owned by individuals, corporations or trusts.

It comes atop the massive 15% tax on the acquisition cost of property being bought by any non-resident in the GTA, and the 20% whack charged by BC. Plus foreigners in that province also have to pay 2% annually in spec tax. The message is clear: go home. We don’t want you.

Conclusions: Taxes don’t make houses cheaper. The opposite, actually. The more politicians intervene in the market and the more that’s sucked from the private sector, the more costs increase. If the object here is to chase away non-residents, forcing them to sell to locals, they’ll certainly be looking to recoup their overhead in the process. The only winner is government.

Second, the incursion of the feds into taxing residential real estate usage and ownership – normally the preserve of cities – is a big step. A national vacancy tax on Chinese dudes can easily become one on your ‘luxury’ cottage or cabin. And if politicians have decided nobody can keep a condo void for six months without being taxed more, what about empty nesters and their two vacant bedrooms? Plus, how long do we expect real estate profits to remain completely untaxed? When every other asset producing a capital gain is whacked, why not this one? Hasn’t the exemption for houses been the overarching reason your daughter can’t afford one?

Most Canadian have most of their net worth in one thing. Their homes. Silly geese.

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The big blue bank pays 1% on its high-interest savings account. That’s half the inflation rate. Fail. But RBC will pony up a 2.5% yield for the first 90 days. Meanwhile Laurentian Bank has rattled the market with a HISA delivering 3.3% – bizarre, since that’s almost a third point higher than the rate charged on the bank’s five-year mortgages (which deposits fund). So, this is a gimmick. Won’t last.

Given the wussiness of millions of Canadians, bank deposit rates are important. Despite returns that are negative (after inflation and taxes), lots of people don’t understand or trust other financial assets. So they stick with TNL@TB and GICs or savings accounts destined to deliver pathetic but predictable results.

As you know, about 80% of TFSA money is stuck in these things. Languishing. While stock markets are up 20% this year and balanced, diversified portfolios have delivered an average of 7% over the last eight years, most people plod along giving the banks their savings in return for one per cent or less. So the Laurentian offer rocks. (Meanwhile its stock is paying a dividend of more than 5.6%, with a tax credit to boot. Go figure.)

But wait. How safe is this?

One appeal of chartered bank savings accounts and GICs is that they’re covered by deposit insurance, through the CDIC – a federal agency. It’s massively unlikely any Canadian bank will fail, but this coverage is worth understanding. Just in case. And it’s free.

Most people believe the insurance tops out at $100,000, which is less than half the protection Americans get at their banks. But it’s possible to seriously expand it by spreading money around within an institution. The key thing to remember is that only the boring, low-growth stuff is insured – chequing and savings accounts, term deposits and GICs, mostly. No mutual funds, stocks, preferreds or ETFs.

So the feds will cover a hundred grand in a variety of categories (seven, actually), and extend coverage to you and your spouse/partner/squeeze separately. This mean you and s/he could have separate GICs, a joint GIC as well as ore GICs in your RRSP, RRIF or TFSA, all covered. That could end up being the better part of a million.

But remember only certain assets are protected. So if a TFSA contains a $20,000 GIC and forty grand in ETFs and stocks, only the twenty would be insured. Not the whole TFSA.

You can also magnify coverage within one institution by keeping assets in various parts of it. The bank. The bank’s trust company. The bank’s mortgage corporation, for example. And there’s nothing preventing you from opening multiple accounts at different banks, having four non-registered GICs, or five HISAs or tax-free accounts at a few places containing savings or investment certificates. All is covered.

Of course the cost of insurance is performance. Interest-bearing investments have paid subsistence returns now for almost a decade while investors in other financial assets have seen their portfolios essentially double. Also remember that outside of a TFSA, an RRSP or other registered account earned interest is treated the same as income, with every single dollar subject to tax. That’s punitive when compared with the break on capital gains or dividends.

So what protection do investors have, as opposed to savers?

The depends on what you invest in, and where. In-house proprietary funds, or pooled funds created by some brokerages may not be covered, and not tradable. Ask. Portfolios of ETFs, stocks, bonds, REITs, preferreds and other negotiable assets are liquid and can instantly be turned into cash. If your broker were to go kaput, you still own all that stuff. It’s yours. The value is not protected, but the assets aren’t lost.

As for cash balances in brokerage accounts, there’s CIPF insurance, which is industry-funded and covers up to $1 million per person. That’s a million for all general accounts combined (non-registered plus TFSAs) plus another million for registered retirement accounts (RRSPs and RRIFs) plus another million for an RESP – and more millions for your spouse’s accounts.

Comparing CDIC and CIPF coverage is like choosing between a fish and a socket wrench. You can’t. They do different things. Bank insurance means you don’t lose your principal if the place goes down, but you own no-growth assets. Brokerage insurance means your securities and cash are safe in a failure, but there’s no shield against market losses.

The rule remains: if you already have enough money to finance the rest of your life and need no growth, no tax-efficiency nor cash flow – only capital preservation – stick with GICs and maximize insurance coverage.

If you’re normal, however, that’s a bad idea.

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Bow-wow. Time for a Blog Dog update on some of the sordid, lamentable and usually nauseating topics this site loves to wallow in. Pull on the hip waders. Here we go.

Siphoned seniors, going in reverse:

So the amount of money being sucked out of houses by old people is reaching astonishing levels. Reverse mortgage debt is just a few Cybertrucks short of $4 billion, according to the federal agency that worries about such things. The rate of growth is staggering – 26% in a year, or more than $800 million over that period. Needless to say the wrinklies have never swallowed this much debt before.

And it’s sad. Reverse mortgages are giant money-sucking proboscises thrust into the livers of the financially illiterate, the naïve or the unprepared. By borrowing against their equity with open-ended loans at huge rates of interest (currently well over 6%), these innocents end up owing more money every single month. The only way out is to sell the place and placate the parasite or croak and hope the kids don’t hate you too much.

Thinking of a reverse mortgage? Then stop. Sell the house, invest and rent, or set up a simple-interest HELOC. Get your spawn to make payments as a deposit on their inheritance. Only fair.

We told ya this was coming:

Yesterday the topic was rain tax. The offspring of the carbon tax. And the message is simple – liquid wealth can be shifted around in the name of tax avoidance. Real estate, however, is a sitting duck. Utility costs are mounting. Rental income is being targeted. Transactional costs are ridiculous. Storm runoff, sewers, water consumption, garbage collection – all taxed as user fees abound. There are taxes for leaving a house empty. More taxes if it’s a second property. Extra levies if it’s worth a lot. And the relentless march higher of property tax.

Poor Van owners just got shellacked with a local boost of 8.2% – four times the rate of inflation and double the average increase in family incomes. And there’s more – a 9.4% jump in the cost of service fees for water, sewage and picking up the trash. The dudes running the city have increased their budget more than 7%, to $1.6 billion. “It is about tackling the big problems that everybody wants us to tackle,” says a long-serving councillor, “getting more affordable housing, dealing with the opioid crisis, making sure we are combating climate change.” More to come. Get used to it. Or get out.

What? Realtors lie? Who knew?

In the Kingdom of 416, this kind of statement appears just about every month when the local real estate board releases its questionable stats: “We will likely see stronger price growth moving forward if sales growth continues to outpace listings growth, leading to more competition between home buyers.”

Ah yes, competition. Also known as FOMO – the fear of missing out that whips young buyers into an orgiastic frenzy of desire so they pay whatever’s needed to get a home before all properties have been snapped up, and they find themselves bedded down on pizza boxes under a bridge. Have you seen those ‘Sold Over Asking!’ stickers than realtors love to slap on their signs? Pure Viagra.

Well reality is something else. A study released this week found more than 70% of the sales in a hot area of Toronto went to buyers who paid less than asking. Yes. Less. That included detacheds as well as condos.

What does that tell you about the market? And realtors?

What comes after the Boomer boom. Bust.

A moister lament is that the Boomers stole all the good jobs and houses. True, maybe, but it will come to an inevitable end as the Stones generation fades and eventually pfffts. If Canada is like America (it is) then about 60% of all the houses are currently owned by wrinklies. Real estate outfit Zillow figures Boomer aging will create havoc in the real estate market over the next two decades, potentially whacking buyers now paying peak prices.

The estimate is that almost a third of all the homes in America will come to market – about a million per year by the end of the 2020s. Hardest hit there will be the retirement destinations like Florida and Arizona, as well as the rust belt states where the young left and parents remained. The result will be supply overwhelming demand, and falling values. The good news is houses will get affordable. The bad news is reduced equity for owners.

How about Canada?

Actually our Boomer population is proportionately larger than in the US. We have a higher rate of home ownership. We owe one helluva lot more in mortgage debt. Our savings rate is less. Mortgages reset more often. Our government pensions more meagre. Figure it out, kids. If you’re buying a house today from someone in slippers and a Motley Crue T-shirt, don’t.

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This week the UN said greenhouses gases spew unabated, and we’ll all fry in eighty years. Global temps will spike over three degrees, and millions will become climate refugees. The economic destruction, political disruption and human misery will be legion. So why would you ever birth a child today? Action is desperately required.

The deniers, Trumpers and pro-growth gang say the UN’s a criminal outfit full of globalists who wish to subjugate, tax, control and geld us. The climate change hoax is part of the agenda to create a one-world, borderless, pan-national reality serving the elites. Trudeau is their toady. It’s just weather. Resist.

The debate is not going away. Meanwhile – agree or not – climate change is the dominant political issue in Ottawa and, increasingly, it’s a factor with real estate. As mentioned recently, 30-year mortgages may soon be a thing of the past in the US where they are the backbone of the housing business. Given increased storms, floods and wild fires, some regions will be deemed uninsurable. No insurance, no decades-long mortgage. No mortgage, no market. Prices topple.

In Toronto some agents are now counseling clients away from buying properties in areas when flooding is prevalent. As the climate/weather impacts in new, more intense ways they warn valuations could be zonked. Meanwhile the federal government’s carbon tax – set to ratchet higher as the years pass – is hiking the cost of home ownership, making energy-efficient homes more valuable and eroding the sticker price of those with leaky windows or scant insulation.

Fuel oil, natural gas, propane, electricity – all taxed now for climate change. Plastic bags, straws, burger boxes – banned. This is the age of biodegradable cutlery, anti-fossil fuels and derision if you drive Silverado. Even without truck nutz

And now they want to tax the rain.

Actually they already do in a number of cities, including Ottawa, Kitchener and Mississauga. Hamilton is studying the issue, because of climate change. Toronto councillors will be voting on it in mid-December.

Rain taxes are the levies imposed on property owners according to the amount of runoff their land or roofs generate. In some places they’re called ‘stormwater fees’ but they’re really just penalties for owning real estate and a revenue grab by cities struggling with climate-related infrastructure.

Hardest hit, as you might imagine, will be those who own parking lots, businesses or factories with large paved surfaces. “As Toronto faces more intense rainstorms and floods … stormwater pricing is the type of responsive tool our city needs to adapt to climate change,” says the Toronto Environmental Alliance. “We need to climate proof all of our existing infrastructure from the extreme weather Toronto is facing.” In order to escape or reduce the tax, owners are expected to turn asphalt into green space, re-roof in absorbent materials or create in-ground cisterns to collect and reuse rainwater. Big bucks. Big potential tax.

Residential property owners will probably not escape this, as the rain tax is added to water or sewer bills. The more roof you have, the more you pay. The more water your property sheds into the sewer, the more tax faced.

(One formula to calculate the rain tax uses a measure called ERU – Equivalent Residential Unit.  This equals the amount of impervious square footage in a typical home, factoring in the roof, driveways, walkways etc. One ERU equals 3,000 square feet. Existing taxes range from $3 to $9 per ERU per month.)

Proponents argue it’s simply fair landowners pony up more money to finance the upgraded pipes that’ll be necessary in dealing with the big weather events that climate change is bringing. Opponents argue that real estate’s turning into a sitting duck asset with all levels of government assaulting owners as a cover for their profligate social spending. Taxing real estate based on its market value – which owners can’t influence nor escape – is bad enough. But taxing land more when it rains is, well, something only renters and commies-in-condos would dream up.

The rain tax is maybe not a big deal. But it’s a harbinger.

Climate change levies will be coming hard and fast over the next few years. Some may actually help the environment. Some will be pure revenue grabs. All will be cloaked in moral superiority. And count on overwhelming support from the largest voting demographic, those who believed in a shared economy and jazz hands.

Real estate’s a prime target. You can’t move it. You can’t hide it. Urban properties eat resources and these days they’re symbols of wealth. Whether you believe man-made climate change is real or not, you’re going to pay for it. This may be the end of free parking at the mall.

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Some days ago Dominique Walker, 34, and Sameerah Karim, 41, and their kids broke into a three-bedroom suburban home in Oakland, California. Actually they moved in. Squatters.

The two have founded an ad hoc group called Moms for Housing. The goal is poetic and just, if illegal: “a collective of homeless and marginally housed mothers with the ultimate goal of reclaiming housing for the community from speculators and profiteers.” As Karim told a media conference, “Why should anyone—especially children—sleep on the street while perfectly good homes sit empty?”

The context: the property is owned by a company which buys distressed and foreclosed homes, repairs and flips them, or waits for market conditions to improve before selling. It’s a business. Greg Geiser runs the real estate investment outfit called Wedgewood.

Also for context: the average home in the area sells for about $925,000 (US) and the median income is $65,000. Like Vancouver or the GTA. Local rents are $2,500 for a one-bedder. Similar to Toronto or Van. Oakland real estate has been propelled higher in recent years by the massive proliferation of tech giants in the regions. One of the most expensive markets in America.

Needless to say, the Moms have support. There was a community march for the cause on the weekend. Unknown is if the women will be ejected. But it’s unlikely.

So what does this mean?

As you know, Vancouver now taxes homes the city thinks aren’t utilized enough. They don’t need to be empty or abandoned. Just vacant for a few months at a time. The province also taxes people with second places, even though all property taxes are paid. Toronto is actively considering the same ‘empty homes’ tax.

This month Vancouver expropriated two seedy downtown hotels owned by the Sahota family, occupied by low-income folks. The properties are worth millions. The city gave $1. The justification was the owners’ refusal to conform to municipal standards. The same politicians are changing zoning regs to allow four-storey rental apartment buildings to go up in hoods now devoted to single-family homes. The impact on local valuations could be significant. The justification: the market has not created enough low-cost or rental housing.

Do people have a right to housing, that government must respect? Are these actions therefore justified even when they penalize property owners or arbitrarily change rules? Should we expect more to come?

Here’s what the United Nations says: “The human right to adequate housing is more than just four walls and a roof. It is the right of every woman, man, youth and child to gain and sustain a safe and secure home and community in which to live in peace and dignity.”

That’s sweeping. The UN goes further still. All people have a right to “security of tenure” which means no forced eviction. The cost of housing should “not threaten or compromise” the ability to finance other aspects of life. Plus, housing must be well-located to jobs, healthcare and schools and include access to services and transportation.

Five months ago Canada signed onto this philosophy as the T2 government passed Bill C-97. It reads: “It is declared to be the housing policy of the Government of Canada to recognize that the right to adequate housing is a fundamental human right affirmed in international law; and to recognize that housing is essential to the inherent dignity and well-being of the person and to building sustainable and inclusive communities.”

It’s the first time in history our country has legally recognized an explicit right to housing. Canada is now one of the few places on the planet where politicians have done so. The implications are unknown, since it will be up to the courts to interpret and enforce this newly-minted right. But we know this: there are two new agencies being set up. The National Housing Council will advise on policy and the Federal Housing Advocate will delve into factors impacting housing conditions. The first report comes in four months.

A big deal?

Probably, given the political creep taking place, eroding the historic rights of property owners. From rent controls to empty-house taxes to expropriation and zoning bombs, the actions of governments are growing – a response to the big-city affordability crisis. The wealth gap’s obvious symbol is real estate. Now that every citizen has the right to affordable, convenient housing, expect a lot more activism. Look at the promises made in the last election campaign.

Ironically, politicians have rendered property harder to get and housing less affordable to own or rent. But they’re responding to the demands of a society which has glorified real estate and made its ownership into a cult. It’s a recipe for conflict. More tax. More intrusion.

So, Moms for Homes may be just Mr. Geiser’s problem now. Until it’s yours.

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By Guest Blogger Ryan Lewenza

This week I’m going to pull back the curtain and highlight a few of our key investment themes. Just like a magician, I can’t give away all of our tricks but here’s a few ideas that we believe could do well in the current market environment.

I should start with a quick summary of our market outlook and portfolio positioning. We remain bullish with our constructive view predicated on the following: 1) our generally positive view of the US/global economy heading into 2020 (i.e. no recession); 2) our expectation that earnings growth will pick-up over the next 12 months; 3) central bank easing with the Fed cutting rates this year and the ECB/BOJ keeping rates at rock bottom lows; 4) supportive market cycles like the Presidential Cycle; and 5) the technicals, which remain demonstrably bullish with global equities in a long-term uptrend and above the rising 200-day moving average.

Here comes the but or the however, while we’re constructive on the economy/equity markets, risks remain elevated (e.g. Trump’s trade war, Brexit, Hong Kong), and given these risks we are looking for creative ways to position for more upside, while reducing risk in our holdings and the overall portfolio. Essentially, we’re taking smaller bets with our client’s hard earned savings. We think this is prudent given where we are in the business/market cycle.

Against this backdrop one great way to play for more upside but with lower risk is though low volatility ETFs. These ETFs screen the different equity markets for those stocks with the lowest volatility. The ETFs are also rebalanced, generally quarterly, by kicking out those stocks that experience an increase in volatility. This helps to ensure the ETF is zeroing in on those stocks with the lowest volatility and is adjusting to changing market conditions.

The chart below really hits home the attractiveness of low volatility stocks and why we believe this is the right time to own them. I calculated rolling, long-term volatility (standard deviation) for both the S&P 500 Index and the S&P 500 Low Volatility Index, which holds 100 of the lowest volatile stocks within the S&P 500. Note how the Low Vol Index consistently exhibits lower volatility by roughly 25%.

Now you would assume the returns would be significantly lower, but this has not been the case in recent years. For example, over the last five years the S&P 500 Low Volatility Index has returned 11.75% annually, beating the S&P 500 Index at 10.34%. Now as they say, past performance is no guarantee of future results, but I do believe the Low Vol theme could continue to perform well, at least until the next bear market, where we would then likely exit this theme/position.

Low Vol Reduces Equity Volatility by 25%

Source: Bloomberg, Turner Investments

Next up is our preference for US value stocks over growth stocks. Over the last decade growth stocks have been the clear winner with the S&P 500 Growth Index up 272% versus the S&P 500 Value Index up 193%.

We believe this is going to flip with value stocks set to outperform growth stocks over the next decade. Fortunately, we’re in good company with JP Morgan’s highly regarded quant analyst, Marko Kolanovic, recently stating that “the value rotation should continue into Q4 and Q1”, and more assuredly, that this rotation is “once in a decade”. That’s a bold a statement, and is up there with Trump’s claim that the Ukraine call was “perfect”.

Value stocks, at times, can be more defensive than growth stocks. For example, in last year’s Q4 sell-off value stocks declined 18% versus the S&P 500 at -20% and growth stocks at -21%. One reason for this is their cheaper valuations. Currently the S&P 500 Value Index trades at an attractive 16x earnings versus the Growth Index at 26x. I believe that if the equity markets come under pressure that value stocks could hold up better than growth stocks due in part to their lower valuations.

Value stocks are a good holding for us right now given the mix of decent upside in the coming years and that they tend to fall less than the overall market during downturns.

Value Stocks Are Attractively Valued

Source: Bloomberg, Turner Investments

Finally, readers of this pathetic blog know that we are strong proponents of holding REITs in portfolios given their high dividend yields and solid long-term returns. This year is case in point with REITs up over 23%, beating the TSX. We like REITs as they can provide a hedge to a weaker economy and stock market as they are negatively correlated with interest rates. Below I illustrate this where I chart the Canadian REIT Index with government bond yields (note: the government yield is inverted to better show the relationship).

Historically, REITs have a negative correlation of -0.64 to government bond yields. In simple terms, they often do well when government bond yields decline. So if markets do come under pressure and bond yields decline then REITs could do relatively well.

REITs Provide a Hedge to Lower Interest Rates

Source: Bloomberg, Turner Investments

As I’ve laid out today, we see the potential for further market gains. But this call is no slam dunk given the myriad of risks that exist today. So to hedge our bets we’ve been reducing risk in portfolios by investing in lower risk ETFs like low volatility, value and REIT ETFs, which should hold better in a downturn should we be wrong.

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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– Christian Vieler photo

Twenty-four years ago this week the Dow breached 5,000 for the first time. Now it flirts with 28,000. Let’s have some context.

For example, remember the dot-com bubble and crash? Tech stocks lost 80% of their value, and for good reason. We went through the Y2K scare. Then the mother of declines in 2008-9 as Bay Street shed 55% of its value, Wall Street banks caved and people freaked.  Rates crashed. In short order there was the 2011 debt ceiling crisis with investors worried the US was running out of money. Stocks tanked. Gold spiked. Then came the Bitcoin bubble/bust, followed by Brexit and Trump. That begat volatility, trade wars, populism and protectionism.

And here we are. Over the last eight years a nicely-balanced portfolio has delivered a 7% return. From 1926 until now a 60/40 portfolio has averaged almost 8%. Returns were positive 85% of the time. There was even a depression. People who put their money in and forgot about it doubled their wealth every decade – despite the fact the world ended fairly regularly.

So far this year middle-of-the-road portfolios are ahead about 12%. The US economy is blooping along steadily. Unemployment’s at a 50-year low. Corporate profits have exceeded expectations. Global trade tensions are easing. Interest rates are on hold. Equity markets are at record levels. Markets think Trump will be re-elected. Brexit will probably fail. Populism’s best days are behind us and the alt right is going down. The world is being reshaped by AI, apps and the Internet of Things. Now rockets land on their bums, everybody’s online and cars drive themselves. Why would we possibly start going backwards?

Yes, debt’s a disease. The climate is unhappy. Porous borders have ignited tribal unrest. Social media fuels the anger of the disadvantaged.

But in the sweep of recent history, this is a gilded time. Let’s hope you’re making the most of it.

Now, what’s next?

CBs give a good clue. The job of central bankers is to keep inflation in check, support the currency and help maintain economic stability. When they worry, pay attention. A good example was in 2008 as these guys chopped the cost of money and flooded the system with liquidity. It worked. In fact central banks around the world now routinely coordinate their monetary policy. The result has been a decade-long expansion amid low inflation, rising global wealth and progress, despite the Kardashians, vaping, Fox News, TikToc, the Amazon, Drake, opioids, Rudy Giuliani, K-pop or Don Cherry.

This week the Bank of Canada dialed back the next rate cut. It’s a big deal. This comes after the US Fed’s decision not to trim the cost of money further, the bond market’s big reversal on yields and the fact nobody’s yakking abut recession or a stumbling economy any more except those trying to justify their investment mistakes and bad calls.

Bank boss Steve Poloz said it clearly: “We think monetary conditions are about right,” and “We’re watching and waiting,” and  “The Canadian economy is in a good place overall.”

As a result, expect no rate cut when the next decision day comes in early December. In fact, no reduction until the Spring. Maybe not then, either. Market odds at the moment are 50-50 for a quarter point drop in March, but that could be wiped away by one Trump tweet on trade news with China.

Says Bay Street analyst Ed Pennock, in writing about recession warnings: “Not going to happen. The US consumer engine is engaged. The tsunami of liquidity injected over the last decade is finally working. Starting to work. It’s the 3rd inning not 9th.”

Really? Ten years of economic expansion, and we’re still rocking. It’s a record. So maybe things are different this time?

Nah. The rules still apply. Those who are invested are doing great. And will continue. Those who have borrowed from the future are taking a big risk. Nothing fundamental has changed. The rich hold assets. The rest hold debt.

A balanced diversified approach has paid off. No flipping individual stocks. No stupid mutual fund fees. No brain-dead GICs or high-interest accounts. Portfolios that contain a variety of safe ETF assets as well as growthy ones. Combine that with smart tax planning – using all available shelters, plus income-splitting – and this is a formula for success. But you need this, too: confidence.

Remember my only piece of advice. Invest whenever you have money. Redeem it when needed. Ignore everything in between. It’s all noise.

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