Category: Accounting tips

Are you as sick of reading about the orange guy as we are scrobbling about him?

Well, suck it up. There’s more.

Tomorrow is Trump’s ‘Liberation Day’ when he unveils (at 3 pm) an economic policy that’s failed every other time in history. A full-on trade war and protectionism. Expected is a 20% universal reciprocal tariff on all goods exported to the US from anywhere. Also promised is a 25% levy on autos, while an equal tax is already in place on our steel and aluminum guys.

Canada is not being singled out. Nor are we being spared, yet. But no other country is as massive an exporter to the States as ours – and no wonder. We make good stuff and share a border with the biggest market on earth. Access to it is critical to our standard of living.

That’s why Mulroney made history with the FTA (Free Trade Agreement) four decades ago, why the 1965 Auto Pact was critical in bringing massive investment to places like Oakville, and why we secured a continent-wide deal with NAFTA, which Trump and Trudeau renewed as USMCA six years ago.

But now the American president has abrogated that treaty – not by going to Congress (which ratified it), but with a single executive order. Yeah, like the one he signed directing that Canadians be fingerprinted at the border.

Stock and bond markets are jumpy going into LD. Nobody knows what the exact outcome will be. But for us, probably a bump in unemployment, the worst housing market in a few decades and a recession. The current Leader of the Opposition may even have to go looking for a private sector job. What a shock that’ll be.

As you know, equities have had a cow. The S&P has flirted with correction for a while. Down almost 10% since just the middle of February. Off 5% for the year so far. Wobbly again today. The Mag 7 have been slammed. Tesla crushed. Bay Street has done much better, surprisingly. Ditto for the bond market.

You can’t do anything about Tariff Man. But you can look after your family.

“I have a balanced and diversified 60/40 etf portfolio,” blog dog Andrew says. “However, US has made up about 30% of this portfolio. Do you think it’s wise to decrease my US exposure?”

And he asks this: “A couple years ago you recommended buying bond etfs. They have done very well. Just wondering what your current thoughts are about them. Should I sell and replace? If so, with what?  Or should I hold or buy more?”

Before doing anything in reaction to tumbling events, remember the two golden rules of not being an emotional dork (GRNBED): First, never sell into a storm. Odds are you’ll get it wrong and, besides, the storm will pass. Second, never turn paper losses into real ones. If you don’t need the money immediately, why dump an asset that’s down? It will recover.

Andrew should not exit his American assets. Trump’s evil and crazy, but he’ll probably carry through with US corporate and personal tax cuts, increase public spending, loosen regulations and force greater capital investment through the trade war that America alone can endure. If all that happens without a big hike in inflation (and Fed rates) the S&P may be in record territory again within a year.

As for bonds, hang on. Those fixed-income ETFs have done just peachily of late as stock investors vexed. Bond prices are up because yields have decreased as recession odds mount. The sentiment is that central banks will have to deal with rising unemployment and economic contraction. That means holding the line on interest rates, or lowering them, while pumping liquidity into the system. Yields fall more. Bonds swell in value.

The best advice for A – already with a B&D portfolio – is do nothing. Hands off the portfolio. Stop watching BNN. Walk the dog more. Load up your playlist with soma from Ed Sheeran and Lady Gaga and chill. Check your portfolio next in May. Of 2026.

Other ways for looking after your family during the Reign of 47?

If you need real estate, the moment to buy is not here, but the time to begin looking has arrived. Odds are the Bank of Canada will try to soften the tariff blow with cheaper money, that lenders will fish for borrowers with rate reductions and anxious house sellers will yield on their asks. The Spring market is already dead, and the coming three or five months could bring the most meaningful buyer’s market since the depths of Covid.

One other key point. Stay employed.

The hallmark of recession is the erasure of hundreds of thousands of jobs, all the more likely this time as we see serious sectoral tariff threats. Like the making of cars. This is hardly the time to be a problem employee, to resist a back-to-the-office directive, to threaten a strike or go hardass into a compensation review.

Stability is the goal now, and for at least the next two years. Keep your job. Keep your marriage. Keep your cool. Keep perspective. Stay calm.

He’ll be 79 in June.

About the picture: “Rosie getting her chin scratch and LuLuBelle going for their car ride,” writes Steve. ”  These two have the biggest hearts ever!”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

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Garth Turner's post returns tomorrow, March 31. Woof.

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  By Guest Blogger Sinan Terzioglu

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The journey to homeownership is often challenging, particularly for those with poor credit or insufficient down payments. This has led Canadians to increasingly explore innovative options like rent-to-own agreements, which allow potential buyers to rent a property for a specified term with the option to purchase it later. While rent-to-own might appear to be an ideal solution, these agreements often come with significant risks and challenges that can lead to substantial financial losses, making them advisable to avoid for most people.

Rent-to-own arrangements resemble traditional rental agreements, where tenants pay monthly rent to the landlord. However, the rent is generally 10-20% above the market rate because it includes a portion called rent credit. The rent credit is set aside to contribute towards the future down payment of the agreed-upon purchase price of the property. If the tenant decides not to buy the property at the end of the rental term, usually lasting 1-3 years, they forfeit all the accumulated rent credits.

Additionally, rent-to-own arrangements require applicants to pay an upfront fee called the option deposit. This deposit grants the option, but not the obligation, to purchase the property. It typically ranges from 3% to 5% of the property’s agreed-upon purchase price, which is usually higher than current market values to account for anticipated appreciation. If the tenant decides to buy the property, the option deposit is applied towards the purchase price. However, if the tenant chooses not to purchase the property or cannot secure a mortgage at the end of the rental term, the option deposit, in addition to the rent credits, is forfeited.

In addition to the higher costs, one of the biggest disadvantages of rent-to-own agreements is that tenants do not have the legal rights of homeowners during the rental term, but are often still responsible for all repairs, taxes, and insurance. If, while covering all these recurring costs, the tenant misses or fails to make a single lease payment, the option to purchase the property can become automatically null and void, and the option deposit will be kept by the owner/seller as “liquidated damages.”

Another drawback is that tenants often have no control over the landlord’s actions during the rental period. The landlord could decide to sell the property to someone else, default on the mortgage, or face foreclosure. If the property had issues before entering the agreement or encounters legal problems affecting its value or title, tenants may be at risk of having to cover unexpected costs to preserve their opportunity to purchase the property and avoid losing their option deposit and rent credits.

Example

John, a 35-year-old, has experienced financial setbacks over the years, but he is now earning $75,000 annually, has repaid his debts, and has accumulated $25,000 in his TFSA. Although he currently does not qualify for a mortgage, he is eager to purchase a property within the next few years, fearing that if he doesn’t act soon, he may be priced out of the market permanently.

John finds a property listed for $500,000 and is considering entering a rent-to-own agreement. The monthly rent for a similar property is $2,500, and John has been presented with the following rent-to-own agreement:

Rental Term: 3 years
Agreed upon purchase price in 3 years: $538,445 ($500,000 current price with 2.50% annual price appreciation)
Option deposit: $16,153 (3% of agreed upon purchase price of $538,445)
Monthly rent including rent credits: $2,875 ($375 rent credit per month)

At the end of the 3-year rental term, if John decides to buy the property with a 5% down payment, his option deposit and rent credits will total $29,653 and cover his down payment so he will need to qualify for a mortgage of approximately $509,000, calculated as follows: $538,445 purchase price minus $16,153 option deposit and $13,500 rent credits.

Even before accounting for property taxes, insurance, and maintenance, the monthly mortgage payment for a $509,000 mortgage amortized over 25 years at 4.25% would be approximately $2,750. This exceeds the 39% limit of gross income that lenders generally prefer for total housing costs. Additionally, finding a lender willing to finance a rent-to-own agreement can be challenging, as some lenders may not accept rent credits as part of the down payment or may impose higher interest rates and stricter underwriting standards. Furthermore, with a down payment less than 20%, John would need to obtain mortgage default insurance, which would add upwards of 4% of the mortgage value to his total mortgage outstanding.

To enter the agreement, John would need to commit two-thirds of his savings to an asset without legal ownership. This not only puts his savings at risk but also exposes him to significant additional expenses, further increasing his financial vulnerability.

If John loses his job and is unable to maintain the agreement or secure a mortgage at the end of the rental term, his total loss from the rent-to-own arrangement could far exceed the option deposit, rent credits, and additional property expenses. The lost opportunity cost of $25,000+ invested in a TFSA, combined with all the additional expenses, could exceed $150,000 over 25 years. The risk-to-reward ratio for this rent-to-own agreement is unfavorable for John.

In summary, while rent-to-own arrangements might seem like an ideal route to homeownership, they often prove to be more expensive and problematic than anticipated. These contracts typically require paying above market value, offer no ownership rights or protections, and may leave you unable to qualify for a mortgage at the end of the term, leading to substantial financial losses.

Individuals like John would be better off focusing on building their financial foundations by accumulating and investing savings in tax-advantaged accounts such as FHSAs, TFSAs, and RRSPs. They should only consider purchasing a property through traditional methods when it makes financial sense. This approach is significantly less risky, provides more flexibility, and has a much higher probability of success.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

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About the picture: “Hey Garth!Long time reader of your blog,” writes Alanna. “Thanks for everything you do. I start my mornings by reading, and then take George out for a walk. I started my own financial literacy company focused on empowering Canadian women+ when it comes to their finances. As a financial coach, I get to change the lives of individuals who may not have a high enough portfolio to seek professional advice, and may not have the confidence to do DIY investing. You can find me at www.broadmoney.ca if you want to check it out! Feel free to use the picture of George.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

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The plot thickens.

Canada will be in election mode within (maybe) hours. Tariff Day is exactly two weeks out. Inflation has spiked. Trump just dissed Poilievre. The polls are gyrating. People are freaking out over layoffs and $21-a-bottle olive oil. The Bay is toast. Economists are expecting a drop in retail sales and (they whisper) a recession. The US treasury secretary himself is talking about a period of ‘detox’.

Well, Tariff Man may or may not whack us again. So far it’s been more bluster than bite. But our steel and aluminum exports are now being punished. The Chinese are at it, too. Effective tomorrow our key canola shipments will be taxed at 100% – punishment for keeping cheap EVs from arriving. Trade wars are bad news for everybody. But, sigh, here we are.

One canary in the coalmine is residential real estate.

Yesterday we detailed some reasons things are going south. Sales, listings and prices are fading. New home construction has crashed. An icy fear threatens the traditional Spring market. Good props in demand areas still sell but condos do not. First-time buyers have all but vanished, despite the most generous borrowing and financing regs in decades.

The hairshirts, nihilists, Debbie-downers and moaning doomers oddly attracted by this manly blog think we’re on the verge of an historic collapse. Prices, they say, will plunge. Recession will become stagflation and morph into depression. Recent buyers will be tossed into Elon’s wood chipper. Sellers will drown in their own tears. And the US president will have done what our own government could not – drop real estate values by half. Yeah, he’d also burn down the economy, but what the heck? All girls want is a bungalow.

But wait. Is this also an opportunity?

Of course. Inside every reversal, disappointment, hurt and crisis lurks a chance to do better. It’s something you learn after living through decades of volatility. Things seldom (if ever) turn out the way they seem to be headed. And I’ve yet to mutter, “it’s different this time”, and be right.

At this moment the construction industry is forecasting collapse and mayhem. The Bank of Canada is telling you to duck. Every week a new residential condo development is cancelled. The layoffs have started with metal fabricators, furniture builders, machine shops and manufacturers. Lately we’ve told you about tradespeople forced to use liens against non-paying, stressed customers amid the worst conditions in a quarter century. Housing starts are down 68% in the GTA and 48% in Van. Inflation’s back. So is unemployment.

All true. All depressing.

But that’s only part of the story.

The Trump assault is being demonstrably positive for this country.

It’s taken only a few weeks of tariff insanity and brainless talk of ‘annexation’ and 51st state to bring Canadians together, get people actively buying goods from each other instead of the USA and supporting domestic enterprise. Already Ottawa and the provinces are working on eliminating trade barriers within the country. The new PM decided his first trip would not be on bended knee to Washington or Mar-a-Lago, but instead to Paris and London to cement relationships and talk about diversifying trade. Our pneumatic foreign minister has seduced the American mainstream media in a way hitherto unknown for a Canadian politician. And when was the last time you saw 13 provincial and territorial leaders all chummy, united and moving forward together?

Yeah. Never.

So there’s reason to think we might come out of this mess stronger, more insulated from the dorks in Congress and the Oval Office and finally bury the divisive, corrosive ‘Canada is broken’ meme we’ve had to endure for the last two years. It isn’t. Never was. But we can do better.

Practically, interest rates – and mortgage costs – will come down more because of all this. Real estate values, especially for urban condos, will fall further until the first-timers are able to scramble onto the property ladder. A weakened Canadian dollar will allow us to sell better into the world. And the more America looks like a dumpster fire, rife with political retribution, gutted government services, polarization, zany leadership, oligarch influence, dictator envy and an insane mix of imperialism and isolationism, the brighter shines Canada. Stable. Democratic. Resource rich. Boring and the sexiest half of North America.

Do things look dark today?

You bet.

Will they get darker?

No doubt.

Ready the chequebook.

About the picture: “No more cats on the blog, please,” writes Paul. “Now’s not the time. So, meet Lucky. He turned one on (yup) Feb 1.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

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Changes in the wind. Pay attention.

The Bank of Canada is pulling back on the throttle. Finally. Weekly bond-buying that stood at an incredible $5 billion every seven days last year and dropped to $4 billion in the autumn is heading down to three. This means the ongoing suppression of interest rates in the bond market (where the central bank now owns 40% of all debt) will lessen. It opens the door for the creeping normalization of rates, as the virus recedes.

There’s more. Did you see the latest inflation stat?

Yeah, I know. The government numbers are ridiculous since we all know life has become hideously more expensive. But this is significant – the cost of living officially doubled from February (1.1% annually) to March (2.2%). So what? Well, 2% inflation is the central bank’s big target. Once we get there, it’ll consider raising its benchmark rate.

Economists and Mr. Market saw that happening in a year. The odds of hikes commencing in 2022 were 60% before Wednesday’s announcement. Now they’re 100%, which poured gas on the dollar. All those folks who come here to tell you the cost of money will never increase and ‘the government won’t let housing decline’ need a new hobby.

There’s more. Vaccines. So far 10.5 million doses have been squirted into shoulders, which means 27% of the adult population has been jabbed. We may still be struggling with the Third Wave, but we know where this is headed, and when. Ten million more doses will arrive next month. About 1% of the population gets inoculated each week, and UK experience shows that at a level somewhere around 40% life gets a lot better.

The central bank is turning off the stimulus tap and telling markets to expect higher rates sooner for one reason: economic recovery. The bankers say growth this year will be 6.5%. Just weeks ago the forecast was 4%. In the world of CBs, that’s elephantine. We’re likely just weeks away (maybe a dozen of them) from everything changing. The next few months will be difficult, volatile, and filled with news of virus victims, new restrictions and a struggling health care system. But it’s finite. The light’s there. End-of-tunnel days lie ahead.

By the way, here’s today’s reaction to yesterday’s blog from the realtor who reported the housing market flipping the day before:

I don’t see an actual rate increase yet, but rates will drift north when the bank gets out of the bond market. I do see the prime rising in 1/4% increments after the election regardless of the outcome. The years run up in real estate prices is attributable almost entirely to  lower rates, so some price decline is inevitable as the rates climb. Judging by your blog there wasn’t a lot of agreement with my comments concerning a cooler market. Maybe a blip, or the very early stages of a correction. Some agents are worried, particularly the 20+ year vets who know that prices don’t rise forever.

It’s a lesson lots of newbie agents, house speckers and inexperienced homeowners have yet to learn. Yesterday we yakked about a potential market flip in real estate. The reasons – prices most people can’t afford and (mostly) a surge in listings. As Covid recedes, expect a dearth in inventory to become a flood. And why not? Astute owners will want to cash in on the highest valuations in history, and the vaccine will make selling a property much less scary. Once prices start to soften, FOMO recedes. Gone is the fear sellers have that they’ll never be able to buy again.

By the way, check out the latest StatsCan borrowing numbers. Maybe things aren’t exactly as they seem. Maybe the ‘bubble market’ is already leaking gas, and the breathless media missed it.

Mortgage borrowing in the latest monthly report fell 12% from January, and has toppled since last autumn – down over 60%. Yes, house sales have been booming (up 40%), but this is evidence a big whack of those resulted from move-up buyers with equity. No surprise there. The kids are being priced out. First-time buyers are the most important fuel of the housing market. When the fuel disappears, the fire fades.

Now, do the Bank of Canada’s moves – cutting back on stimulus and changing its rate-increase timetable – mean the end of the real estate insanity?

Nah, of course not. There’s an ample supply of greater fools left to keep realtors busy. March home prices shot ahead a big 1.5% month/month says Teranet, plumping the most in Halifax, Hamilton and Toronto. Meanwhile CREA reports the average price of a house nationally jumped 31% year/year. It ain’t over yet.

But as supply increases, vaccines flow, the GDP reflates and the end of emergency interest rates grows nearer we’re closer to the end of this bizarre episode than the beginning. Nothing has been normal since February of 2020. Those who think what Covid brought was permanent societal change will learn otherwise. It’s not different this time. It never is.

About the picture: “This is Juno, a 5yo border collie waiting for her next command in sunny East Van,” writes Dave. “Perfect obedience came as a standard feature with this one, unlike the unruly pack found sniffing around your blog. She would be thrilled to be your daily pin up girl/boy.”

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So Chrystia the Impaler turned out to be more of a Milquetoast Mama. The budget will be quickly forgotten, especially when it comes to pricing a house. Sorry, newbie would-be buyers, but the feds want real estate to run hot. That’s now clear. They did absolutely nothing to cool this sucker off, not even lip service to their Millennial and Gen Z voter base who will shoulder real estate debt for most of their adult lives.

But stop. Hey, what’s that sound?

Silence.

Apparently realtor phones (at least in the nation’s biggest market) have ceased ringing. Look at this report from one of GreaterFool’s clandestine double agents, posing by day as a prominent GTA broker:

“Live from my office meeting,” he says. “The market has flipped. Don’t know why but it has. Tons of new listings. Showings down big time.”

“Early days, and I haven’t checked the stats, (they tend to be a bit of a lagging indicator anyhow), but I have noticed that signs have been popping up like tulips for a week now. Today, at our virtual listing tour I had the first opportunity in a week to check in with the men and women who are active agents.  Two things stood out. First, everyone reported a new listing, some more than one. This follows a period of many months in which everyone had buyers but no listings.

“Secondly, showings, which are tracked in real time on every listing agent’s phone, were down significantly. Others reported expecting multiple offers, but finding themselves with none. Staff reported that the phones were quieter than they had been. It is anecdotal at this point, and perhaps some of your blog dog realtors may or may not corroborate my experience.”

He’s not alone. Similar reports have come in from the burbs of Vancouver and some of the larger regional markets, like London and Barrie. What was a conflagration two weeks ago is now barely smouldering. Deal numbers are off, yes, but it’s the level of buyer activity – inquiries, calls and showings – that tell the real story.

What’s happening?

Lots. First, we have the damn Third Wave. This one is scary in a whole new way as the health care system starts to buckle. Now you don’t need to worry only about getting Covid, but anything that could send you to the hospital. The world is suddenly too volatile and unpredictable to merrily mortgage your soul.

Second, it’s spring. The time when people traditionally list houses. If demand drops a little while supply swells the market will respond. And it is. Bigly. Have you done a realtor.ca search for new listings in the past 14 days?

Third, travel restrictions. In BC Comrade Premier Horgan has told people not to venture out of their own health authority regions. In Ontario Doug Ford has erected barriers at the borders with Quebec and Manitoba (to keep Ontarians from fleeing). Today Nova Scotia virtually sealed its borders, including to residents who are now told not to travel unless essential. Nobody gets in, either. Even for funerals.

Fourth, there’s no value left in residential real estate. Everybody looking to buy knows they’ll be hosed, fleeced, Hovered and ripped off by greedy vendors and rapacious realtors. All purchasers – except those still riddled with FOMO – must understand they’re buying into a bubble, at the top, paying a huge premium in precarious times for dubious reasons. In short, we may have hit that wall. And no wonder. A 30% year/year price increase is absurd, irrational and historic.

We used to have a five-month supply of houses on the market, which recently slid below two before starting to edge higher again. If demand slows, things could change quickly. ‘Offer nights’ will end up being lonely affairs as agents and sellers who craved a vicious blind auction are left staring at an empty kitchen table. As new listings crop up beside places that have yet to sell, competitive pressure will build for prices to drop.

And, inevitably, as the herd gets dosed (we’re at 27% of adult Canadians) you can count on more workplaces opening, the WFH craze phasing out, and the shine coming off markets that looked like rural utopias six months ago. How did people moving to Woodstock, Hope, Marmora or St. John ever think they were going to pull this off? Pandemics suck. But they’re temporary. And, no, this one is not going to change the world.

Let’s see what happens. But for every action there’s a reaction. This one could be epic.

About the picture: “Baylie is a 2 year old Schnoodle, who loves to jump up on my chair,” says blog dog Peter in Kitchener, “as I’m reading the daily Greater Fool blog … she needs portfolio advice to protect her kibble account from the ravage of inflation, and from incompetent government policy. Lol.”

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Budget Day. An historic one. Our current prime minister will officially have accumulated more debt for the nation in one administration than all of the 22 prime ministers who went before. That takes some effort.

But was it worth it, to fight a one-in-a-century pandemic?

We’ll have a few comments to add later in the day, once Chrystia drops her document in Parliament. In the meantime, let me tell you about Saturday…

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“So,” I said, baring a toned, athletic and muscular upper shoulder, “how many have you jabbed today?

“Six hundred and forty-one,” she said. And in went number 642. I asked her if she was a volunteer or a health care professional. A family doctor, she replied. Then we talked about what life must be like for her colleagues in distant, diseased Ontario. Turns out her best bud is a gynecologist who has been pressed into emergency service in the ICU of a major Toronto hospital. “Whatever it takes,” she said. “So glad we are here.”

The squeeze and I got the Pfizer stuff on the weekend. Dorothy had spent the previous few days watching TV images of pop-up clinics in TO hoods where hundreds of people waited four or five hours for their chance to be vaxxed. It looked chaotic, disrespectful, disorganized and worrisome. Things weren’t helped much when some friends came by the house and relayed the experience of their high rise-living daughter in one of the “hot” Toronto postal codes.

A vax van arrived one day last week and announced over loudspeaker that 400 doses were on board, first come-first served. It was, she said, a desperate stampede.

Well, the inoculation centre in Halifax was in a hockey arena with a big sign outside telling people not to arrive until five minutes before their appointment. There was no line. But there was a greeter who thanked us for coming, then an iPad checkin, then the jabs, then 15 minutes in a recovery area patrolled by a nurse. Then out – twenty minutes in total.

Five minutes later the vax receipt arrived by email, along with confirmation of the hard appointment for the second dose, 105 days hence.

Side effects? A sore arm for a day, then nothing. “That means the antibodies are being created as your defence against Covid-19,” said the literature we left with. So now I’m full of these little suckers.

It’s been four months since I flew out of Toronto just as that city was shutting down for four weeks. It hasn’t opened since. Now things have devolved amid chaotic and conflicting policies and government announcements. Infections are at a pandemic high, the hospitals are seriously stressed and a five-year backlog for elective surgeries has evolved. Don’t get breast cancer or be in a car crash, in other words. There are over 50,000 active Covid cases in Ontario with 2,000 people in the hospital and over 700 in ICUs, the majority on vents.

NS is far smaller (one million compared to 14.5), but the numbers are tiny: 49 cases in total, two people in hospital, none in intensive care. There were 7 new cases on the weekend, which was kind of high. While my fancy corporate offices on the 53rd floor of a bank tower at King & Bay have been silent for more than a year with colleagues stuck at home, my wee bank by the sea has been full of employees and community groups. We shuttered for three weeks last April, but soon realized that was extreme.

So why has Covid – now decimating the Main Street economy of our biggest province – been a non-event in the East? How can people in NS be casual and decent about the vaxxing process when folks are treated like cattle in the Big Smoke?

Simple. Quarantines. For more than a year now (with the exception of a few months the Atlantic Bubble was in place) nobody can enter Nova Scotia without spending 14 days eating storm chips and watching Oprah in isolation. No shopping. No visitors. No walking around the block. It’s a total pain in the butt. And it’s been a defensive measure which kept the slimy little pathogen at bay. Now people are proud of it.

So far this year, as a result, one elderly woman died of the virus. In Ontario, sadly, two dozen perish each day. Premier Ford blames the feds for a vaccine drought. The prime minister argues back that doses have run 50% ahead of schedule. It’s political. Sad. Businesses across the province are on life support. It will be a miracle if any hair salons or restaurants are left standing by the time they’re allowed to reopen – maybe in May. Perhaps longer. The events of last weekend when the premier had to walk back provisions on Saturday that were announced on Friday only added to the confusion.

Well, as far as your money, investments, portfolio go, Ontario, BC, Saskatchewan and other places still crippled by Covid don’t much matter. The reopening of the American economy and the inevitable spread of vaccines across the world have pushed financial assets to record highs, amid massive government stimulus and central bank coddling. That will continue. Stay invested.

Meanwhile let’s come out of this long shadow understanding what we did right, and wrong.

About the picture: “This is our puppy Maggie – she will be 10 years old this summer!,” says blog dog Andrea, in Waterloo. “Maggie enjoys long walks around our neighbourhood and watching the bunnies hop through our backyard as our neighbour sold her house for $151K over asking. She wonders how much her dog house is worth these days?”

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When people have babies they’re swimming in expectations, obligations and hormones. Those are the prime days of vulnerability. The insurance guys descend, prey on emotion and walk off with nice commissions on needless policies. Realtors have a field day selling people debt and deeds even though the kid would be a happy renter. But perhaps most heinous are the baby vultures, shamelessly peddling college funds to parents of newborns.

Now, don’t mistake. Money for uni is hugely important. School costs a ton, especially if your spawn ends up being a dentist or, like David, a PhD earner. And the thing called an RESP is a valuable tool for getting there. But, but, but. Beware. A good idea twist into a costly trap.

“When my daughter was born, my father started an RESP with Canadian Scholarship Trust (CST), which is one of those mutual fund outfits you rightly decry,” says David, a 40-ish academic in BC. “He made the initial contribution and then I made regular contributions for several years until July 2019.”

It was that year that I wanted a closer look at the return on my investment. It was going “up” so it looked fine (of course it would! I was contributing monthly!). But when I calculated it, it seemed to be an annual rate of return of 2%. Remember, this is for the 10 years that started from the bottom of the GFC to the heady days of the Trump years. I asked them to show me their calculations but they never replied. That’s when I decided I needed to transfer my contributions to my self-directed account. I would have done it earlier but I did not realize I could also open an RESP in a self-directed account. I suppose the banks don’t advertise it a lot so you’ll buy their mutual funds instead.

Well, what a nightmare it has been to transfer those funds because CST doesn’t want to make it easy to lose their money. The charges are outrageous. So with a $4613.69 penalty on an approximately $26K balance, is it worth it? I’m pissed at the low returns, the high MERs, and my bank’s incompetence in handling the transfer, which has cost me at least a year of good returns. Thanks for you all you do. Feel free to share my story to your readers. Certainly a cautionary tale with real figures for those who invest in mutual funds.

When David asked for the transfer, the company initially rejected it, writing: “We want to make sure you understand the impact this will have on your child’s post-secondary education savings. Transferring your child’s RESP to another institution may have a significant effect upon your current savings and the amount of money you will have to help finance their post-secondary dreams.”

You bet. The hit for David was almost 18% – and that came after a decade of returns below the prevailing inflation rate and during a bull equity market. This is what happens when you’re talked into an RESP with an outfit that charges high fees, misinvests and erects a costly barrier to exit – just like those DSC (deferred service charges), which create a mutual fund prison for unwary investors.

Are we pregnant? Then this is what you need to know about Junior’s college fund….

The Registered Education Savings Plan is a tax-sheltered way to grow money and the government pays you to have one. Woo-hoo. Once a kid has a SIN you can start. Contribute $2,500 a year and the feds will give you a $500 grant – which is the easiest 20% you’ll ever earn. The lifetime contribution limit is $50,000 and you have over 30 years to put the funds in. The most the government will chip in is $7,200 by the time the child hits 18.

The contributions and grants swell within the RESP tax-free, which means they should be in growth-oriented assets like equity ETFs. (Way too many helo parents choose brain-dead GICs and do their kids a huge disservice – or sign up with the wrong provider.)

When university starts money can be taken out and given to the child. Contributions are tax-free, while the grants and growth are taxable in the student’s hands. But since most college kids have no taxable income, there’s nothing to pay. If the kid becomes a TikTok star and eschews school, contributions to the RESP can be taken back, the grants have to be repaid, and the growth can go into an RRSP, if you have the room and the plan’s been in place for a decade or more.

Remember that anyone (called a subscriber) can open an RESP for a child (called the beneficiary) – not just parents. Missed grants can be carried forward one year at a time. There’s no limit to the size of annual contributions – but the max is fifty grand in total (and only $2,500 a year qualifies for the grant). Beneficiaries can be changed if your kid turns out to be a stinker. Family plans give more flexibility, since funds can be shifted between offspring. All plans have to be wound up after 35 years.

In short, if you procreate, do this. Tax-free growth. Forced savings. Free grant money. What’s not to like? Just ensure the self-directed RESP is hosted somewhere that offers the ability to hold low-cost, growthy ETFs. That could be an online brokerage, robo outfit, or your family advisor. No vultures.

About the picture: “I’m one of your younger millennial blog dogs and have been reading your blog everyday for almost 2 years now,” writes Kayla. “Thank you for the great advice! Attached is a picture of my two-year old golden retriever, Marley looking oh so proud of herself after finding a mud puddle. She’s been loving that I WFH and will let out a loud sigh every couple hours while I work to let me know we aren’t doing anything fun like finding mud puddles to play in. Feel free to use it on your blog!”

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  By Guest Blogger Doug Rowat

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There are investment lessons to be found in the most unlikely of places.

Take, for instance, the first 20 seconds of this rather intense scene from Oliver Stone’s Platoon.

As Sgt. Barnes helpfully pointed out to that young soldier, it’s often in one’s best interests to “take the pain” even when—and sometimes especially when—the world around is out of control.

And so it is with investing. Quietly absorbing discomfort, particularly major discomfort, is often the best thing for your portfolio results. And what’s the most frequent source of discomfort for investors? Volatility.

There are two main types of volatility. The first is the face-melting kind, which occurs infrequently, say, once every three to five years. Recent examples of this kind of volatility occurred during the European sovereign debt crisis, the surprise Brexit vote and, of course, the Covid-19 crisis. In fact, during the Covid crisis the CBOE Volatility Index (VIX), which measures the magnitude of price change (volatility) on the S&P 500, reached an all-time high of 82.7 in February 2020, eclipsing the previous 80.7 record set during the financial crisis. For some perspective, the VIX, as of this writing, is at about 17. Investors are most likely to make emotional, fear-fueled investment decisions during such periods. This kind of volatility basically amounts to a bullet wound to the chest.

The second kind of volatility is less intense, but occurs with more regularity. Every single year, for example, the S&P 500 experiences intra-year drops. The average intra-year decline over the past 40 years has been about 14%, but it’s sometimes as mild as only 3%. Investors are less prone to make emotional investment decisions during any one of these less-intense volatility periods, but the sheer frequency of them still makes poor investment decisions a constant risk. This kind of volatility amounts to a bee sting, but if you get enough bee stings…

Both types of volatility result in an onslaught of behavioural biases: loss aversion, recency bias, herd behaviour, overconfidence and so on. All of these biases can be combated through balance and diversification, infrequent trading, rebalancing, avoiding incessant media newsflow and seeking professional investment advice.

However, it’s impossible to avoid all the hardship that capital-market investing brings. Sometimes you just have to suffer. And this is difficult, especially when you don’t have assurances that all the suffering will be worth it in the end.

While I can’t guarantee the outcome after the next round of face-melting volatility, I can show you how the S&P 500 has soared past mountains of historical volatility over the last 10 years. It’s also useful to highlight that the S&P 500 continues to advance strongly throughout the current recession (a common occurrence for equity markets):

S&P 500 (blue line, LHS) vs CBOE Volatility Index (red line, RHS) – 10 years

Source: Federal Reserve Economic Data; shaded are – recession

And while I can’t guarantee the outcome after the next, and inevitable, intra-year market decline, I can show you that the vast majority of the time, despite these declines, the S&P 500 ultimately finishes the year in the black:

S&P 500 intra-year declines vs calendar year returns.

Source: JP Morgan Asset Management ; Intra-year drop refers to the largest market drops from a peak to a trough during the year; Returns don’t include dividends

Volatility is unavoidable, but if you give in to it (sell assets) every time it occurs, it will kill your performance. If you can endure the suffering that it inflicts, your portfolio will almost certainly come out the other side of it in a better place.

So, the next time the VIX spikes (and it will), think of Sgt. Barnes leaning over you and take the pain. He’s a horrible SOB, but he’s actually doing what’s in your best interests.

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

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Just three more sleeps before B-Day.

Will Chrystia and Justin drop the hammer on housing? Nibble around the edges? Throw gas on the flames? The debate has been raging. Some bankers (RBC, BMO) are literally begging for a govy intervention to save people from themselves. Other financial heavyweights (TD, Scotia) argue things will self-correct, especially as Covid fades and a ton of new listings hit the market.

Realtors are lovin’ it. Buyers are disgusted. Prices have spiked wildly amid cheap money, WFH, aggressive nesting and now dollops of FOMO. What a wicked combination this has been. It’s historic. I thought I’d lived through the worst housing escalation ever in the late 1980s. Nope. This is far more intense and, maybe, destructive.

The facts are arresting. Shocking, even.

• More properties changed hands last month than… ever. Over seventy-six thousand sales.
• The average national house price is up 31.6% in one year. Nothing in history has come close. It sits at $713,700, so the average household cannot afford the average place.
• The insanity is everywhere. For the first time, a real estate bubble is more suburban, rural, small-town than urban. This is completely new and socially disruptive. In Bancroft, Sooke, Owen Sound and Nanoose, Wolfville or Peachland they wonder what the hell hit them.
• Levels of inventory have collapsed. The long-term average was five months. Now it’s less than two. Another record.
• Leverage is off the charts. Cheap money and the delusional belief rates will never increase have seduced buyers into new territory. Almost a fifth of borrowers now have debts equal to 450% or more of their incomes.

So sales are up 76% over last year and houses cost a third more. Nobody saw this coming in March of 2020 when something called Covid-19 caused society to go into lockdowns, quarantines and restrictions unknown in modern history. A year later over a million of us got the virus, 23,500 Canadians have died and our biggest provinces are going dark as the third wave hits. Five million people are still working from home and public finances are shot. These are uncharted times.

Should government act? Or let the market run hot and possibly implode? Will the greater fool be the fool who follows, or the one who bailed?

It was interesting to read the latest missive from mortgage broker/blogger Rob McLister. “The fear is that the market is like a nuclear reactor running too hot, i.e. prone to an accident,” he says. “It’s not Chernobyl by any means, but a Chalk River-style partial meltdown could be in the cards if market imbalances take values much higher.” And he echoes what a certain pathetic blog has been yammering about for months now…

This is truly a once-in-a-generation nationwide aberration that’s leaving young buyers with fewer and fewer homeownership options. Buyer desperation has been growing by the week and it’s leading a record number of people to pay as much as lenders will approve them for.”

Meanwhile mortgage rates are plumping a little, which has spurred buyers into action. The stress test will get more onerous starting June 1st, which has accelerated buying intentions. Federal immigration quotas are about to expand, adding buyers. Building material supplies have crashed and prices bloated, spiking construction costs. And FOMO – fear of missing out – is at screaming pitch as news of the March housing stats spreads. In short, the melt-up that could lead to a melt-down continues.

Oh, and did we mention benchmark housing prices nationally rose by an annualized 37.2% last month? In Woodstock (birthplace of legendary bloggers) the price jump was 8% in March. Yup, that’s 96% per year. And it’s rutting season. What will April and May bring?

Outta control, of course. “The pace of Canadian home sales and prices is simply in uncharted territory,” says BeeMo’s Doug Porter. “Given the extreme market imbalance currently at play, almost entirely due to fiery demand, look for the record pace of price gains to spread far and wide beyond Ontario.” The old record for price hysteria – set in the late 1980s, “has been shattered.”

As mentioned, TD economists are cautioning against government diddling in the market (which rarely works), and instead saying it’s time for the Bank of Canada to throttle back on stimulus and start raising rates. “The quickest route to cooling this market and squeezing out speculation comes down to the interest rate channel, and therein lies the solution. Canada had one of the larger downward movements in mortgage rates relative to other countries, and the current monetary stance may no longer be appropriate for this segment of the market.”

Well, Monday could bring one of three outcomes. The feds do nothing of substance. The market roars. They can try to help newbie buyers with more incentives. The market roars. Or they can bring in a national spec tax, start taxing windfall equity profits on a graduated basis, increase minimum down payments, tighten debt ratios, encourage provinces to reform rules around blind auctions and end the tax-free raiding of RRSPs for real estate. But that’s not happening.

So, let it nuke.

About the picture: “I read your dog blog nearly every day,” writes Jane, “so I thought I’d toss you this photo of our 5-year old cockapoo, Charlie (or Chuckles as he is affectionately called). We weren’t looking for this designer faux-breed of a dog but a friend of ours knew of a young millennial couple who bought a cute little puppy before realizing just how much work puppies are. When they were expecting their first baby, the dog had to go. Chuckles settled right in with our family. People just need to have realistic expectations and not jump the gun. We like to call this photo “Covid hair, don’t care”.

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When not doing my day job, I moderate comments on this blog and try not to throw up. It’s a challenge. Here’s a recent example.

April 14, 2021.
The beginning of the end. When two of the largest banks, JP Morgan Chase, and Wells Fargo, report earnings on the same day. Between these two banks, there is $5.1 TRILLION in assets, which is an astounding 23% of US GDP.
The world will be holding its breath to see those numbers because it will be a signal of what’s to come. And when the news of the ugly chain of corporate/personal defaults and the resulting massive holes in the big banks’ balance sheet hits…
Panic will set in… And global liquidity is going to start drying up… just like it did in 2008 when Bear Stearns and Lehman Brothers troubles became public. And stock markets will crash in a spectacular fashion… Hope everyone is liquid as of tonight. 14 hours from now may be too late.
PREPARE

Well, it’s April 15th now. Let’s review and see what happened. Bank of America hit a four-bagger. Revenue up 17%, underwriting fees tripled. Earnings were $5.1 billion, beating Street estimates of $4.3 billion.  More big gains at JPMorgan, Goldman and Wells. In total revenues were 50% above estimates and the beat on earnings was 82%. Equity trade is up. Bank deposits up. Loan loss provisions way down. “These are blowout numbers,” says my wizened buddy Ed Pennock.

Oh, and did you catch the latest US jobless claims? The lowest since the pandemic began. So the reopening trade continues, based not just on expectations and hopium, but on stats. Earnings season will be awesome. Up to four million Americans are being vaccinated daily. The unemployment rate has crashed. Biden is spending up a storm. Bond yields have tapered off again. Inflation is moderate. Consumers are juiced. Personal savings are at the highest point in decades.

So did you watch Jay Powell on Sixty Minutes a few days ago? The Fed boss was clear – the economy is fine; Covid will fade; the recovery is still in its baby stages; inflation’s no biggie; the central bank is not going to withdraw support any time soon.

Meanwhile, in case you missed it, here are some recent equity market scores. The S&P 500 has advanced 49% in a year. The Dow is ahead 44%. Bay Street has added 37%. The tech-heavy Nasdaq has returned 67%. People quivering in cash on the sidelines have actually lost money to inflation, if not also to tax.

Some folks worry P/E ratios are too high by historic standards (that is the relationship of a company’s stock price to its profits). They have a point. The numbers are elevated – but hardly a surprise. We’re at the tail-end of a global pandemic which triggered a deep recession, rapid loss of jobs, a crashing GDP and an earnings plunge. Now as the Q1 numbers stream in, mostly beating estimates, the ratios decline and stocks which seemed overvalued weeks ago now look fairly priced.

So, balanced and diversified portfolios returned more than 15% in 2019. They added just over 7% in 2020, the Year from Virus Hell. So far this year things are rocking and rolling quite nicely. Anything can happen, but most analysts look at the second half of 2021 and are forced to put on their shades. So bright.

In the entirely of my financial career, which now spans 35 years (yikes), I’ve seen the same movie repeatedly. Market advances are the norm. Market corrections are the exception. The economy expands far more often and substantially than it ever contracts. Crises are sharp and short. Recessions are rare and always brief. And now we know that pandemics always end.

But I’ve also learned fear is a far greater emotion than greed. Confidence is elusive and fleeting. Humans are more worried about losing what they have than eager to gain what they want. It’s why, eternally, grifters, spammers, charlatans and weasels use panic and scare tactics to flog their stuff – from doomer websites making money through clicks, to precious metals, cryptos, newsletters, proprietary research or ‘alternative’ investments.

Should you have fear now?

Sure, be afraid of the idiots around us who won’t get vaccinated. People who don’t understand what a stay-at-home order means. Be concerned about politicians making stuff up as they go along, or governments squandering a balanced future. Fret about polarization and detachment in society. The loss of responsibility. House lust, cats and Reddit.

But don’t worry about your wealth. Not if it’s in the right place. You know where that is.

Now, the daily cookie toss. Wish me luck.

About the picture: “My husband and I are big fans of your blog,” says Zandra. “I love all the great financial advice but I also love all the dog photos. Here is a great picture of our dog really showing off his crazy tongue! I would love to see my husband open his computer to read your blog and see our dog Kooper looking at him. Thank you for all you do!”

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