Let’s go

For the past nine years this blog has been rolling history. Every day it sticks its pink little proboscis into the breeze and sniffs for change. So far there has been 2,695 posts containing more than two million words. That’s 33 books.

In response, the people who come here have posted 490,000 comments. That works out to less than 1% of each day’s visitors. The other 99.2% know better. The average time people spend reading this is three minutes and forty seconds which, as pointed out in the past, is exactly 120 seconds less than the average love-making session. But the latter doesn’t require having an Internet provider, or hand-held device. I hope.

Google Analytics, if it can be believed, shows 7.4 million sessions occur here per year. And, I’m happy to say, my file of DELETED comments has shrunk drastically in the last 18 months, since a bunch of dipsticks and ne’er-do-wells were punted from this site.

Anyway, this context is just to remind you we’re all on a voyage together into the unknown, and those two thousand-plus posts amount to an attempt to look a little further down the road, in real time. So don’t bother coming here a year (or five) later to say the observations were wrong. If you don’t like what this pathetic blog has to say, leave. Anybody can look backwards and be a genius. I think they’re called Conservatives.

Well, what’s next?

Pretty much what we’ve been expecting. Record debt and historic house prices have trapped the middle class in a snare of their own making. Income disparity is epic, as wealthy people with more liquidity and diversification make out as never before. Despite universal access to wisdom, financial illiteracy is rampant. A regrettable experiment with populist politics is starting to go badly all over. And, like Sears retirees, many people will suffer in the clash between a globalist, tech-driven, free-trade online world and their own bad assumptions.

So this blog, highly imperfect as it is (but with glistening abs and a six-pack torso) adds a little each day to that map. Maybe people are starting to get it. I see in Toronto, for example, a third of all homeowners now say they’re considering selling. Given that there are two million households, 821,000 detached houses and about 400,000 condos, with the market poised to decline and rates set to rise, this’ll be interesting. Much may be about to change as supply overwhelms demand after years of exactly the opposite.

Anyway, personal real estate is just a symbol of the past – an expensive, inefficient, antique way to live, and an emotional, unpredictable, costly way to invest. It’s amazing how many of us think the goal of life is a house. It isn’t.

The purpose is to enjoy the single asset you cannot earn, borrow or steal. Thus time is the measure. Money can make it pass with more pleasure, but not more meaning. For that you likely need family, success or love. And a dog.

The landing

Update time:

First, Sears surrenders. As prefaced here yesterday, the company which was once our largest retailer is going down for the count. Sears Canada is bankrupt, announcing on Thursday the first 55 locations that will be shuttered, erasing the jobs of about three thousand people (without severance pay).

Sears has been a disaster for shareholders, with the stock collapsing in value over the course of a year and, it seems, about to go to zero. Retailing’s in the same soup as print and electronic media – where the industry is now begging Ottawa to pony up money to pay 35% of reporters’ salaries, so they can rewrite press releases from the local real estate board.

But newspapers are as terminal as regional shopping malls, travel agents, cashiers and (yes) realtors.

Second, the Buffett factor. Shares of Home Capital, Genworth and almost all other outfits involved in mortgages shot higher Thursday after legendary rich guy Warren Buffet became the largest shareholder in troubled Home Capital. Soon he will own almost 40% and has provided a backstopping LOC – effectively taking Home Cap off the critical list.

Does this mean everything is suddenly okay with the real estate market?

Nope. No change there. It’s negative sentiment  – not struggling subprime lenders or retreating Chinese dudes – that’s responsible for a 50% sales drop and a 12% price plop in the Big Smoke. What Buffett did (again) is recognize an opportunity to mine profits out of a distressed company. He’s already made $260 million in a capital gain, and he’s actually not loaning Home Cap anything – just providing an emergency pot of money which is already invested and on which the company must pay standby interest.

Third, up she goes. Expectations of a Bank of Canada rate hike are undiminished by oil’s recent slide or the growing anxiety of GTA homeowners. An increase next month is 50-50, but one by the end of the year is now 80-20.

Benefiting from that already are rate-reset preferred shares, which this pathetic blog has consistently recommended you own. Not only do prefs churn out a nice steady dividend, currently in the 4%-4.5% range, but they do it in a tax-efficient way, since you get to claim the dividend tax credit on cash that flows in every 90 days. Better yet, they go up in price along with rates – which helps explain the 25% hike in the capital value of preferreds since early 2016, and the 8% total return investors have enjoyed so far this year. When the BoC pulls the trigger, there’ll be more.

Prefs should make up about 20% of your overall portfolio, and half of the fixed-income allocation – along with corporate, provincial and high yield bonds, and a smidgeon of government debt. Remember – this part of your accounts is there to reduce volatility, provide consistent income and be a counterweight when you do something stupid, like short Home Capital (or anything else).

Lastly, Joe has a question.

Love your blogs! In Sept 2015 I decided to go with a 5 year variable for my mortgage, currently at 1.90%. Should I try to switch to a fixed with a possible anticipation of rates going up soon or hold on with the variable until renewal?

That’s easy. Hang on. Your mortgage rate is so obscenely, ridiculously, freakishly low it will take several rounds of tightening by the central bank to make it worth your while locking in. If feeling frisky, Poloz may up the cost of money four times between now and the beginning of 2019, which would add a full point to your home loan. But it’ll still be a lowly 2.9% at that point, barely more than the cost of a fixed-fiver if you locked in now.

So relax. Divert your extra cash into an ETF-based investment portfolio for the next three years. Then dump the growth against the mortgage principal upon renewal. That should help take some sting out of what comes next.