Entries from April 2011 ↓

The new world

She runs a thriving BC-based export business. Her message to me yesterday: “The Canadian dollar can’t keep rising can it? My biz is 95% to US customers; I’m dying! Thinking of voting for Jack on Monday….”

Yeah, that might do it. In fact, it won’t take PM Layton to bomb the currency trading desks on Bay Street Tuesday morning. Just Jack the king-maker. Which, right now, is absolutely the expected outcome. So the latest from RBC Dominion Securities escalates the anxiety over the Dippers and the Libs getting a bigger seat count than the Cons. “This would create the greatest degree of political uncertainty,” the company says, “and boost volatility.”

You bet. If Jacko becomes the leader of the Official Opposition on Monday, it’s a new world. As I speculated some days ago when this first became a possibility, it means Stephen Harper’s minority government could be toppled in a heartbeat and the G-G would be duty bound to ask the other guys if they could take over. Would Iggy acquiesce in an Orange Revolution and join the moustache? Is Kate Middleton hot?

It all depends how many separatists Quebeckers send to the Hill. Harper has happily counted on their support in the past to avoid defeat (one reason he pushed through Parliament recognition of Quebec as “a nation”). But if Duceppe is humiliated with less than 20 MPs, this might not be an option. In which case, we’d likely have a change of government in a few months – sans the democratic fuss and expense of another election.

Next move: new leaders for the Cons, the Libs and the Blockheads. Ironically, the guy with the bionic hip and the prostate cancer would be the one left standing – in serious danger of becoming a symbol of what optimism in the face of tedious pomposity can do.

Last time, we mused on what the election might do to politics. Let’s focus more on what’ll do to your financial health.

Assume a reduced Harper majority, Jack ascendant, Iggy squished (now the best case scenario for the Conservatives). It’s reasonable to muse there won’t be another budget passed without Layton’s approval. After all, the opposition parties will have the votes to humble F at any time, which means the only hope the Cons have of remaining in power will be to give the barbarians enough red meat. Or in this case, probiotics yoghurt.

Some implications: No jets. More critically, no corporate tax cuts. In fact, taxes on big businesses might actually be squeezed higher (the NDP platform calls for an 18% increase). This will probably scare off some new investment and put Canada out of step with competing jurisdictions.

And down goes the dollar.

It’s also a safe bet that Harper’s plans – announced during the campaign – to slash $11 billion in government spending and garrote the economic stimulus program will be kaput. The Dippers have run, after all, on more spending to be paid for with more taxes. More social programs. More for old folks, education, the disadvantaged and the environment. And while they pledge to balance the budget, it will come as government dramatically extends its size and reach.

Also pivotal to NDP beliefs is an end to subsidies paid to the country’s major oil producers, and a cap-and-trade system which will have profound effects on our greatest emitter of greenhouses gases, the oil sands. As you may have figured out, it’s been romping commodity prices that have actually kept Canada’s economy above water for the past two years, so this might not be the move the energy barons were anticipating. Jack’s also hinted at federal curbs on gas prices at the pump, and promised to clip bank profits with a cap on credit card interest.

Now, he’s unlikely to be prime minister Monday night but, as I said, he may end up with more influence than the guy who gets the limo.

And this is what the currency cowboys will be hopped up for.

So what if the dollar falls a few cents? Well, it sure removes the one big reason interest rates didn’t pop a few months ago. The Bank of Canada’s boss, Mark Carney, has made it clear he wants to “normalize” rates because we have borrowed our flipping brains out, created a real estate bubble and threatened future economic growth. But the soaring loonie was an impediment, since higher rates would goose it further, killing off more exports and jobs.

That could change in a few hours. And what if the Layton agenda of big government, big spending and big taxes comes to pass? Big inflation, probably. More impetus for higher rates.

As for real estate, well, I think this may be the end of McMansion-friendly, big-hat-no-cattle, leverage-lovin’, energy-sucking, pave-it-all era of government. Mr Layton and his MP wife, Olivia Chow (she’s also hot) live on a dodgy street in deep urbanity in a frame structure that would make a piss poor garage in Calgary.

This is going to be so interesting.

Scary

When you’re as irresistible as I, you get used to attention. Even when it comes from girly-men. In fact, those who hate risk (and they’re legion) like to hate me. I’m scary.

First, some context.  Most Canadians are living in a dream world where houses are a right, everyone gets a pony and there are no consequences to how you vote. They’re convinced what exists today (cheap mortgages, rising real estate, government largess) will last forever. They’ve shrugged off lessons from 2008 (debt kills, jobs vanish, houses plunge) and redefined risk. Now it means not buying stuff, especially a home. Ironically, this puts most people at greatest risk – of running out of money.

Oops. Sorry for that scary thought. Let’s get back to the sunshine.

This week a quarterly survey done by a Toronto ad agency confirms our collective delirium. Six in 10 say their personal finances have improved over a year ago, while eight in ten say they expect to do even better in the year to come. But at the same time, half of them admit their expenses have increased without any rise in income, or growth in their investment portfolios.

Huh? Most people have less cash flow and no more saved. Many make less money than before the recession, have zippo job security and have seen their investments wane. Why are they so damn happy?

Says researcher David Herle: “It appears that the boost in real estate values is the only thing that is making them feel positive.” A majority believe their homes have soared in value, and that makes them feel rich. It’s called the wealth effect, and was endemic in the US, circa 2005. It fueled a surge in consumer spending that ended in hurt.

And it’s dangerous as hell. It means most everyone you know, work with or sadly have as family members have staked their security on one thing. So a real estate correction is unthinkable. If  house values do drop, says Herle, or interest rates pop, “then you’d have a lot of people who really have no idea how they are going to retire.”

Of course not. Most people are wicked dumb when it comes to their finances. Let me remind you of last week’s big news: 30% of Canadians can’t pay their monthly bills. Forty per cent have zero savings. But 70% own houses.

All of this means the vast number of folks around you have reached the same conclusion. House = safe. It constitutes their single financial strategy. They’re screwed, of course, but there’s always hope. Which brings us back to this oft-assaulted blog.

What we do here is push back the curtains. Real estate is vulnerable, and values will fall. I’ve told you why. People without liquidity are gamblers. That makes houses full of risk. Savers, like those too afraid to invest, are but a few years from regret. Long-term debt will sink you. DIY investing’s usually fatal. And putting most of your net worth in one place is the dodgiest strategy of all.

Which brings me to this. It’s a column trashing me on the wimpy MoneySense site, written by a young father of three  brave enough to be anonymous. I read it, and know why. I’d ignore this, as I do most of the invective hurled my way, but this is instructive. It goes to the heart of the sentiment described above. House = safe. Sad to see that in a magazine which says it gives “the latest investment news, tips, and guide, money making ideas and money management articles.”

The ballsy author takes a recent post here wildly out of context, then rakes me for suggesting that borrowing against one’s home to invest in a diversified portfolio, giving an 8% return and tax-deductible interest, is a strategy worth considering.

I said: “This is called diversification. It mitigates against having the bulk of your net worth in one asset alone. It lets the government pay for a big chunk of your borrowing. It takes non-performing real estate equity and turns it into income-producing capital. It takes advantage of generationally-low interest rates to create your own carry trade. It builds up the critically-important non-registered side of your investment portfolio, since RRSPs are destined to become tax bombs.”

He says: “This advice is so bad that I don’t even know where to begin. First, an 8% expected return from a balanced portfolio is not very likely at a time bonds are yielding 3%. Second, it doesn’t make much sense for anyone to borrow short at 3% and lend long at 3%. Third, holding bonds in taxable accounts is terrible when Al also has $200,000 is his RRSP account. Fourth, home equity is not “non-performing” when the owner is living in it (and not paying for the privilege). Fifth, borrowing against a free-and-clear property is not “diversification”; it is leverage.”

And I say: An 8% return is no stretch, when this portfolio gave 15% last year. Low-yield bonds form just 10% of this portfolio but add needed stability and, of course, would be swapped into an RRSP to avoid tax (duh). Preferreds are held outside, to suck up their delicious tax credit. And real estate equity which is not growing is certainly non-performing, a lesson too many people will soon learn. This blog has shown repeatedly that occupancy costs are about double those incurred by renters. As for borrowing against that equity, it could be the one genius move that saves the ass of those smart enough not to read MoneySense.

There will not be an Armageddon which blows financial markets apart. That’s doomer fiction. There won’t be a crash putting a quarter of all Canadian homeowners under water or dropping  houses in some cities by 56% – as in the US. That’s extremist.

However there will be millions of people, if they stay on this path, just getting poorer. Too late they’ll learn houses peaked shortly after the financial crisis and Canada was no different. What we all need – more than stuff – is money.

Sure, it’s scary. Investing takes confidence. People will call you names. It works for me.