So my theme this week has been sunshine and puppies, hugs and canoodling. Clearly this enraged half my readers, which makes it all the more fun. An astonishing number of people simply don’t want to hear about record bank profits, US rebounds or the sensual joys of a balanced and liquid portfolio.
But let’s be clear. Simply because investors can do very well today not owning real estate or hiding in a buried school bus with four virgins (trust me, it’s stressful), does not mean the world is over its funk. It ain’t. There’s more volatility ahead. Years of it.
Ben Bernanke made that clear when he gave a keynote this week. Unemployment is grave, he said. The economy is tepid. Without a foot on the gas pedal, this condition could last a long, long time. And so the US Fed will bring in yet another stimulus program in mid-September – opening itself to charges of political interference, coming just six weeks before the presidential election.
This means stock markets will roil, shooting up, then toppling back. Meanwhile the elfin deity known as F told reporters on Friday things are still screwed up. “There are risks in that big world out there and we’re part of the world,” the finance minister said. And he had this message for real estate addicts: “At some point, interest rates are likely to rise and that means residential mortgage rates will be going up over time. I think Canadians are increasingly getting that message.”
In fact, risks abound. Europe’s recession could deepen. Chinese growth could falter. Commodity prices could swoon. Unemployment could spike. Romney might win. After all, you wouldn’t have government officials like Bernanke and F saying this stuff on the same day if things were going according to plan. So while banks make bloated profits, the indebted masses struggle – which brings me back to yesterday’s basic point: own the banks, don’t owe them.
Real estate’s at the epicentre of this mess. House horniness in the US precipitated the GFC, and the same fetish will end up goring the Canadian middle class. The staggering pile of mortgage indebtedness means a continuous flow of wealth from families to lenders and, as F alluded, this will only pick up steam as interest rates inevitably recover to normal levels.
It’s all changing fast. Eight months ago, for example, the BC real estate association forecast a 2% price decline in 2012. This week it upped that to almost negative 8% – a four-fold increase. Of course, even that’s suspect, with Vancouver sales tanking and prices eroding 1% every two weeks. As I’ve said a few times, BC’s housing meltdown (Van, Victoria, OK) will sooner or later be replicated across the country. And if Quebec goes PQ on Tuesday, Montreal will be headed there by Wednesday at noon.
By the way, BC’s realtors have also given their prediction for 2013, which is flatline. Now imagine you bought a $500,000 starter, baby condo in Burnaby with 5% down. How would you feel after two years of an 8% slump, then a real estate recession, living in an illiquid investment?
The real risk we face is not the stuff doomers worry about. There will always be gas in the pumps, food in the stores and money in the ATMs. Nobody will be buying Jeeps with doubloons and no bank will fail. You don’t need $100,000 CDIC insurance, nor is there any reason to have a GIC. The risks are not systemic, global or exterior. They are what you bring upon yourself.
Real estate is a highly dangerous asset class at this time and into the future. Its typically bought with extreme leverage, increases living costs dramatically, and has the potential for large capital losses. In days of slow growth, quasi-deflation and debt there is no argument for capital appreciation. This is a lesson seven-tenths of the population, with varying degrees of heartache, will learn.
The next greatest risk comes with the flight from it. As people scramble to avoid risk they lock up money in dead-end investments paying less than even meagre inflation, like GICs, HISAs and savings bonds. They fork over usurious management fees for segregated funds which guarantee no loss of capital. They give money to financial packagers who promise to give it back with ‘guaranteed’ payments in retirement. And most folks (especially women, sadly) forget the greatest risk of all. Running out of money.
My posts of the last few days were intended to show how you can tap into the cash being spun off by banks or real estate trusts. How to be a real estate contrarian. How financial assets like preferreds can give stability, yield and low taxes at the same time. And how rolling the dice on Canadian real estate or trying to short systemic collapse with PMs is a high-stakes play.
Risk is the consequence of your own actions. Confront it.