Second thoughts

Can’t let inauguration day pass without a few words, now can we? While I’m personally excited to see the Bikers for Trump arrive and form their ceremonial Wall of Meat, financial markets have been less enthralled with things.

Trump starts his presidency with an approval rating of just 44% (Obama was almost double that), which reminds us that he lost the popular vote to a woman most Americans would like to back over. His cabinet nominees have flubbed some key lines during their confirmation hearings, a few recent POTUS Tweets have been rash and shallow and Republicans have already started to dismantle Obamacare, with no replacement plan. In short, lots of investors having sober second thoughts.

Need proof? Look at this:

Click chart to enlarge

After the giant rally following election night, the Dow has not only stalled within sight of the 20,000 mark but lost ground in each of the five sessions before the big event  Friday, trading in a narrow 1% range – the tightest in history. Lots of people, clearly, have lost some confidence in what happens next. Gazillionaire George Soros said as much on Thursday, warning of an end to investor euphoria and presaging lots of volatility to come.

What were investors expecting after the shocking Trump win? A blast of government stimulus spending, quick corporate tax cuts, slashed business regulations, tough trade talk and an agenda leading to more growth, higher inflation and protectionism. They may still get some of it, but clearly not all of it. And probably not fast. Plus, it will come peppered with late-night Tweets that can, in mere minutes, destroy the shares of pharma companies, upset the forex market or crash GM stock.

So the same rebellious little puddle of testosterone that inspires five thousand Harley-hog owners to thunder into Washington also now powers the commander-in-chief. Craving attention has always been a Trump characteristic. But if that’s all we get, then – as Kevin O’Leary has proven – watch your wallet.

$     $     $

Home prices in Toronto (our last remaining bubble market) are rising wildly at the moment due to a lack of inventory. It’s leading to enhanced house lust, media hyperventilating and increasingly worried realtors. With each day of idiocy, the end draws closer. Just look at this headline from Thursday’s Toronto Star. Classic porn.

The ugly half-house in question jumped from $850,000 when it last sold 25 months ago to $1.375 million. To his credit, veteran realtor John Pasalis had this comment while everyone else was clucking and drooling: “When you see appreciations of 30 per cent a year it generally doesn’t end well. That’s a concerning thing.”

As this pathetic blog has mentioned enough times to kill roaches, prices don’t always go up. Toronto (like all cities) has suffered some momentous house price declines, the last corker being the crumble of the earlier 90s which took a decade to shake. As prices hit historic highs each month – yet the economy staggers, wages fall below the rate of inflation, debt soars and lending regs tighten dramatically – it becomes clear the status quo won’t hold. Either listings surge (which won’t happen because few can now afford to move), or buyers run out of gas trying to purchase at these insane levels.

As mentioned, there are more worried voices being heard within the real estate establishment. One belongs to agent Marisha Robinsky whose insightful charting hit the media this week. Her conclusion is that Toronto’s in the midst of a repetitious house price pattern that will shock and surprise many people. History shows  valuations routinely soar above the mean, then always sink back in years of funk. Check this out:

Remember what I’ve telling you about not expecting a US-style crash, but rather a correction followed by a long melt? Well, Marisha’s work shows that, adjusted for inflation, prices have declined a third of the time – 23 of the last 63 years.

So what’s it like to be a buyer right now? “Horrible,” she says.

When realtors talk like that, take cover.

Canada goose

There’s one good reason 20% of your portfolio should be in USD. His name is Steve, and he works for the government. Blame him.

On Wednesday Steve said in a world where interest rates have started going up, ours may yet go down. And because the guy controls Canadian monetary policy (he prints all the cash and sets the price of it), the value of the dollar flattened. Roadkill on the highway to Making America Great Again.

This came a day or two after some giants of the financial world, including Vanguard, Moody’s and Deutsche Bank issued reports saying the Bank of Canada (Steve runs it) would be raising its rate later in 2017, lest our currency be skewered, and because the economy’s not half bad. But in a few words – “a cut remains on the table” – Stevo squished that thought. Within a short time the loonie has plunged more than a full cent, suddenly increasing the price of essentials like cauliflower and Harleys.

Besides murdering the currency, Steve signalled the Canadian economy is vulnerable and the T2 gang is quivering at the prospect of what a Trump White House might bring. Nothing good, apparently. Yeah, the US economy will likely swell which is normally a plus for us. But for the first time in decades, the border will harden to trade.

Ouch. One-third of our entire economy is made up of exports, and 75% of those go to one place. So if Trump lives up to his bombastic anti-free-trade rhetoric, we’re screwed. In the past few months he called NAFTA a “disaster” and his new commerce secretary says rewriting the trade deal, to be more pro-America, will be “an early, early priority.”

And don’t forget the BAT. The Border Adjustment Tax – being promoted by Republicans in Congress (especially Speaker Paul Ryan) – could be a game changer. It would disallow US businesses from deducting the cost of Canadian inputs from their revenues when calculating taxable profits. But if they get it from the States, bingo, it’s a valid input cost. The net effect is a 25% tax on stuff coming from the north.

Well, we don’t know what Trump will do, of course. We only know what he says. And for a guy who brags he can grab women by the genitals (because he’s famous), then says he didn’t really mean it, that may not count for much. But Steve’s obviously rattled. So I guess he’s buying into the devil-Trump meme racing across Parliament Hill these days. Either that, or he’s trying to talk the dollar down. And he’s very good at it.

So here’s the deal. If our central bank does freak out and cut its rate by a quarter point, it will drop to just 0.25%. That means one more hike or two by the Fed (perhaps in March, then June) will put the US bank rate a dramatic four times higher than ours – ensuring our dollar plops further as money flows to where it earns a better return. If the Bank of Canada hangs tough, and doesn’t respond to the BAT, a gutted NAFTA, a big American business tax cut or Trump’s 35% border tax on cars, then the dollar’s whacked anyway.

Hard to see an upside here for the money that your entire life is valued in. And that’s exactly why a balanced, globally-diversified portfolio should also be one that constantly hedges against the dollar. As this blog has suggested for years, best to maintain about a fifth in US-denominated securities. That would include, for example, about a 7% portfolio weighting in an ETF holding the S&P 500, plus another 8% in exchange-traded funds which own US mid-cap and small-cap companies, then a few points in US-valued funds giving exposure to emerging market companies, large and small.

A word of caution: don’t ever, ever try to make money trading forex. Stevie’s loose talk on Wednesday should prove that to you – it’s impossible to know when markets will move, on what information, or how sharply. Forex trading is gambling, not investing. Most people who try it end up as somebody else’s lunch. Also, converting CAD to USD or vice versa because you’re a genius is another bad move. The only people guaranteed to profit from that trade are the converters in the middle. And you know what Jesus said about those dudes.

So build this portfolio with a permanent US-dollar component. The stupidity has just begun.