He may be a physicist, and a PhD, but he needs a whack on the head.
Sergey emailed me two days ago looking for financial advice. “What do I do with my TFSA?” he asked. Depends, I said. What’s your gig?
Turns out he makes a bundle, has an $800,000 house with $115,000 left on the mortgage, and this year alone paid the home loan down by $70,000. Other than that, he has $28,000 in an RRSP and ten grand in his tax-free savings account languishing in cash in the DGS.
That’s it, I asked? Yeah. Pension? No. Income? Two hundred. Mortgage rate? Prime minus three-quarters. RRSP? Three stocks. Age? 56.
Of course I told Sergey he was a financial wreck, when he thought he was doing great. Paying off a 2% mortgage when his cash could be earning him three times as much was an idiot move. Putting three stocks in his retirement plan amplified market risk. Sticking high-octane TFSA money in the orange shorts was nuts. And having more than 90% of his net worth in a single asset, now facing steady depreciation, was a massive threat. I mean, how could a guy with 32 years of higher education making two hundred large walk into such a trap?
So he took the honourable way out. Blamed it on his European mom.
“She said real estate was safe.” Yeah, but mothers can be dangerous.
Deflation stalks the land, as anyone selling a house in Edmonton has discovered. Or people who panic bought gold at $1,250 an ounce. Or the last GM workers to file out of their shuttered Windsor plan last night.
Of course, the epicentre lies to the south of us, where the moment of capitulation seems imminent (the best time to invest). This week the US Census said the number of vacant properties (foreclosures, residences for sale, and vacation homes) rose to 18.6 million. House ownership has fallen 66.9%, the lowest since 1999. And new foreclosures will top 1 million this year.
But this deflation is different, since it’s taking place while other prices are rising. In Canada, for example, 16 million people now pay more for virtually everything, thanks to the HST – a tax sure to raise the inflation rate since virtually no businesses are passing on savings from their own reduced tax overhead (duh). In Ontario, the price of electricity is set to rise 16% next week, the first of two jolts raising the cost of power by about a third. Gas is well entrenched at over a dollars a litre, even though the price of crude is half what it was when fuel was $1.50. And governments at all levels are contemplating user fees, while grocery bills and interest rates escalate.
Asset deflation, price inflation. This means what?
Stuff (cars, iPhones, blow-up realtor dolls) will become cheaper. That puts downward pressure on business income and ultimately on wages. It makes people delay buying decisions since what you want will probably cost less in October. To entice you into buying, prices fall more.
Incomes get more stressed. Already coping with record levels of debt, most households now must pay the idiot harmonized sales tax. Property taxes are set to rise, along with energy costs and mortgage rates. All this quells house lust.
Money needs to work harder. Most Canadians have the bulk of their net worth in a home and their savings in a bank vault. Bad combo. Defend yourself by investing, not saving, by growing money in a balanced portfolio instead of hiding it in a penurious GIC. Earn 7% or so. Take a whizz on the economy.
Housing’s done. At least for a few seasons, perhaps a few years. Take a look at the chart below and note the four-year lag between the US and Canadian markets. If you think the little red line is gone to continue going higher, I have some lovely shoreline in Louisiana for you to invest in. The shrimp boat’s free.
As you might imagine, Sergey now plans to suck off a big whack of his wavering home equity with a HELOC and invest it in a sweet selection of marketable bonds, preferreds and sector ETFs. He’ll earn interest, dividends and capital gains while writing off the interest from his throbbing income. He gets diversified, spreads risk, creates his own pension, fights deflation and defies his mom.
Like every Boomer knows. Never trust anyone over 65.
