Entries from July 2015 ↓

If he asked me

HONK

It’s a day etched in my memory. The prime minister called me into his office on the third floor of Centre Block, with the big wooden door guarded by two beefy guys with wires in their ears.

He said a few things that pissed me off, so I got up to leave. He ordered me to sit. Like a poodle. Then this: You were a journalist, he continued. Journalists make lousy politicians. They think they always have to tell the truth.

And that was the moment I knew this was going nowhere. So I left. A few weeks later my derriere was punted from the Conservative party, even thought I’d been elected a Con MP. The PM sent his caucus chairman out to tell the media it was because I had blogged about matters the public had no right to know. (By the way, that guy was later arrested by the OPP with drugs in his vehicle.)

See how much fun politics is? Mr. Harper knew that by running me out of the party I’d be finished. I knew it, too. And that’s exactly what happened. I became a pathetic blogger, sleeping in ditches and underpasses, stealing food scraps from feral dogs, selling financial advice in bath houses and brothels, until rescued by a kindly nun who turned out to be an Amazon. But that’s another story.

I mention this because we’re at a new intersection of economics and politics. Sometime this weekend, it seems, the Big Guy will drop the writ for the autumn election. The supposed date is October 19th, but if he asked me (lol) I’d suggest Monday the 14th of September. There are a few reasons for this.

First, the Bank of Canada is set to make its next interest rate announcement at 10 am on Wednesday, September 9th. This is a tricky situation for the governing Conservatives. With the economy now in negative growth every single month so far in 2015, the price of oil mired in the mid-$40 range, our trade numbers in serious deficit and job losses looming, there’s a growing chance the BoC could cut again. On one hand, voters love cheap money and free mortgages, believing it will keep their houses going up forever. On the other hand, this will hurt the dollar and underscore our economic woes, creating a sense of crisis.

That is eerily similar to the vote of October 14, 2008. The stock market was crashing, the credit crisis was expanding, companies were slashing payrolls and fear gripped the land. Is this, Stephen Harper asked, the time to let some tree-hugging, tax-increasing untested leftie take the reins of power? And he won, defeating Jack Layton and Stefan Dion.

Of course, if the central bank does not drop its rate in early September, then the government will point to it as evidence the economy is recovering and we should all get over ourselves.

Second reason for an early election: the Fed. If you believe Janet Yellen, the US central bank boss, instead of all the Nobel-winning macroeconomists who read this blog, the first rate increase in ten years will take place on September 17th. That will dramatically highlight the disparities between the two economies – theirs which is healthy enough to end excessive monetary stimulus and stand on its own and ours, which sucks bad. Besides, if the BoC cuts one week and the Fed raises the next, you can kiss the dollar (now at 76 cents) goodbye.

Third, we’re in the ninth inning for housing – a fact which will be a lot more evident to people once they stop drinking Red Bull and return to autumnal sobriety. With the Canadian economy entering a technical recession, amid lousy commodity prices, rising unemployment and off-the-chart household debt it’s only a matter of time before most people sweat. Greed can turn to fear in a few days. When it happens, folks need somebody to blame, since they themselves are utterly blameless. Remember that Canadians do not vote for a new politician. They just punish the old one.

As we head into this election-call weekend, a new report from TD is warning of “cautionary yellow” flashing over the housing markets in YVR and 416. “When we put it all together, key housing indicators on balance continue to highlight the vulnerability of the Toronto and Vancouver housing markets to a significant correction in activity and prices,” says the bank. In a departure from the past, we now have a major Bay Street outfit using words like “a steep and painful price adjustment,” which the economists are giving a “moderate” chance of happening.

So there it is. That’s why I’d call this election early, and not risk waiting until October – also traditionally the most volatile month for financial markets and the value of your TFSA. But if I were Stephen Harper, I’d have retired long ago, paving the way for a charismatic new star to grab the party horns with a fresh alternative to the leftist hordes.

Isn’t ego interesting?

Lessons

DOG SHOT modified

Some things worth knowing as we head into a weekend federal election call, a slagging Canadian economy and the biggest vacation period of the entire year. So slide on those flip-flops, grease up with SPF 30 and throw a tofu burger on the barbie. Here we go:

THURSDAY SEPTEMBER 17th: That’s the day US interest rates will rise for the first time in a decade. This is a big deal, with global implications – not to mention for your mortgage and our dollar. There’s now little doubt the Fed will pull the trigger that day, after this week’s economic report.

The American economy grew at 2.6% in the second quarter – more than forecast – and growth in the first three months of the year (plagued by snow and strikes) was revised higher. Job creation has stayed impressive while corporate profits are running higher than anticipated and we’re heading into a Presidential election year. Even legendary bond guru Bill Gross has thrown his cards on the table, saying cheap rates are bad for the world – creating asset bubbles, distorting capital flows and turning people into porcine debt-snorflers.

So, up she goes. And down goes the loonie. Then, in 2016, the Bank of Canada eats a giant crow and follows suit. Unless, of course, we’re in the throes of a scary recession. In which case we are will have a helluva lot of real estate news to share.

DINKY DIVIDENDS: Here are three headlines which splashed across the MSM this week as we settle into what’s looking like a long and serious commodities rout…

Cenovus looking to cut jobs, slashing dividend by 40 per cent
Goldcorp slashes dividend 60 per cent as price of gold tumbles
Shell to axe 6,500 jobs, cut spending to cope with lower oil prices

It’s been ages – almost seven years, in fact – since we’ve seen news like that. Trust me, the last thing CEOs want to do is cut dividend payments to stockholders. This makes the shares inherently less attractive, drops the capitalization of the entire company, torpedoes the market price and signals that the company’s entering survival mode and needs cash that normally would be distributed.

This also throws more cold water on the belief many amateur investors have that they should load up on dividend-paying stocks and eschew diversification. Bad idea. See why?

COWTOWN CARNAGE: Well, not exactly, but it may be coming. What does it tell you when a local real estate board tries to get out in front of public opinion, and issues a warning? Yup, crapstorm coming.

That just happened in poor Calgary. The realtors, who seven months ago predicted prices would rise 1.58% this year are now forecasting a slight decline in values and a big drop in sales – 22%. The effects of cheap oil are just starting to be felt, they say, and the city’s economy “continues to be plagued with a level of uncertainty.” You think? Just take a look at the headlines above – the big job cuts may only be starting. About 12,000 positions have been cut – a whack of them highly-paid engineers or execs – and the Conference Board is predicting twice as many will get the axe in the next five months.

“Employment conditions are expected to worsen and put increased downward pressure on wages. When combined with lower levels of migration, it’s expected that these conditions will cause further impacts on the housing sector.” So far this year detached homes sales have dropped by a quarter, luxury-home sales are a disaster and the rental vacancy rate has doubled. Commercial space for lease? Don’t even ask.

Only a year ago Cowtown was a swaggering mass of bidding wars, cowboy testo and realtors leasing Audis. If you can’t see a lesson in here, I give up.

CANADIAN SUBPRIME: Remember how we loved to make fun of Americans with their insane borrowing, their zero down payments, adjustable mortgages with teaser rates, subprime lending market and liar loans? Well, those days are gone.

Now we borrow far more than they, with banks giving 100% financing. There are 1.99% home loans, while subprime lending is the fastest-growing segment of the mortgage market as people finance down payments for million-dollar homes. And, yes, lender fraud. Apparently almost a billion in diddled loans from one company alone, Home Capital.

The largest ‘alternative mortgage lender’ in the land, as the result of an OSC investigation, was forced this week to reveal that 45 brokers were punted from its network for falsifying the incomes of borrowers. Yup, liar loans. In order to secure larger loans, brokers purposefully inflated the earnings of clients. Collectively, these bad seed brokers wrote about 12% of Home Capital’s 2014 loans, representing 5.3% of its outstanding assets.

This raises serious questions about how often this practice goes on among the nation’s tens of thousands of mortgage brokers. Besides, all of these falsely-obtained mortgages were insured by CMHC, and apparently still are. Worse, Home Capital (in its defence) said it did not verify the incomes of applicants, because it doesn’t have to. Apparently CMHC guidelines don’t require such a bothersome detail. “The practice met the standards of mortgage insurance companies, including the federal government’s Canada Mortgage and Housing Corporation,” it explained.

Still feel smug?

This doesn’t end well.