Entries from August 2016 ↓

Sunny ways


So far this year Bay Street has handed investors a 12% gift. That return on the TSX has been double the amount recorded by Wall Street, where the Dow and the S&P are both ahead about 6%. So far in 2016, after eight months, a balanced and diversified portfolio – despite Brexit, Trump & ISIS – has given investors a return of 5%, and it looks like there are sunny ways ahead (as some tattooed dude once said).

So why are investors in financial assets doing okay while the Canadian economy diddles? After all, the latest GDP numbers suck – a big 1.6% (annualized) contraction in the last quarter, thanks to the incineration of Fort Mac, slumping exports and a slowing fading manufacturing sector?

Oil and commodity values sure helped. Crude has gained more than 65% since the winter, for example. The financials are doing okay, as the latest round of bank earnings showed. Preferred shares continue to pump out a 5%-plus return, while REIT distributions have been manly and bond prices have strengthened. So while Main Street’s been pouring cash (most of it borrowed) into real estate, 1%ers have riding the other bull.

But what about risk?

Hard to imagine there’s more in any asset class than residential real estate. Look at the latest RBC anti-affordability survey – the biggest plop in more than a quarter century just too place. It now requires 126.8% of pre-tax income to carry a detached Van house. That’s pre-tax – not the actual money a family receives from working. And the whole thing is premised on having a whopping 25% down payment. In other words, this is a market where housing fundamentals have detached from the economy. It will not last – the basic definition of risk.

In Toronto, it takes 72.2% of median pre-tax income to carry a detached house, which is pretty close to 100% of take-home cash flow. This is the worst that things have been in 16 years, a fact made all the more poignant when you consider a five-year mortgage is now 2.2% and in 1990 it was 12.1%. As pointed out here often, there’s a perfect correlation between rates and house prices. The rate bottom brings peak house. If that’s not now, it’s close enough to smell.

In 1990 a monthly payment of $3,100 carried a mortgage of $300,000. Today for the same bucks you can carry $750,000. See why houses have more than doubled in value? And why they can decrease in exactly the same fashion?

This is risk. Because rates will rise over time, just as they have declined in the same fashion. Home loans of 12% are unthinkable at the moment, but a doubling of current five-year rates are pretty much a certainty. The US Fed will increase at least once this year, and likely twice (or more) in 2017. And Canada will follow.

In fact the next few years should be great for financial markets and misery for real estate. There are a few compelling reasons for this.

Trump is toast. Clinton, massively imperfect as she may be, will win the US election in November, ushering in a significant equity rally and eight years of left-leaning government with increased budgets and deficits. Markets like Dems. They like spending. And lots of government fiscal stimulus will let the central bank tighten up on monetary stimulus. That’s another way of saying ‘higher rates.’ The Bank of Canada, ultimately, will not resist this trend, and the bond market will quickly roll over.

Speaking of Canada, continued US recovery (it’s real, if tepid, and sustainable) will help edge commodity values higher with increased demand. Oil in the mid-forties should be twenty bucks more expensive in a year or so – enough to help rebound our limpy economy. The Bank of Canada knows this, which is why it will not be cutting its key rate even given the bad numbers out on Wednesday.

Meanwhile global growth, believe it or not, is plodding along at about 2%. Not bad, actually. And around the world, central bankers have been coordinating monetary policy in a way that makes those warning of another 2008 look like the Chicken Littles of our age.

Now, having said all of that, you should know this: there’s only one month of the year since 1928 when stock markets have given a median negative return. And that month starts on Thursday. But now you know what to do.


The landing

LANDING modified

So what’s your fav topic? You, of course. And if you ever doubt it, look at yesterday’s torrent of information spilled all over this pathetic blog by the better part of a thousand readers. Because the Amazons were so busy scanning comments for buried links to white power, porno or (the worst) cat sites, no exhaustive analysis has been done of the data dump.

Actually, none will be done, either. At least not by me. The point of asking about you was not to sell the list to Porsche dealers or Investors’ Group carnivores, but rather so we could share some insight into each other. A random scan tells me a majority of people own, rather than rent. The average family income level is at least three times the norm. There are a truly scary number of millionaires reading this, so watch your language. The range of occupations is vast. Some people, shockingly, do not own dogs. Plus, you’re generally young and horny.

“I grabbed some age data from the “Who Are You” post just for fun,” blog dog Dan wrote me.  “I took this from posts 1 thought 709.  It was fairly easy to parse out age data using automatic tools but ‘net worth’ and other info was too much work to extract in the time I was willing to spend.  I used 400 data points. They are a combination of the ages of respondents and their spouses. Most of them are between 25 & 50 with a peak in the mid 30’s.”

The minimum reported age was 25 while the max was 74, which yields an average of just under 42 and a median of 39 (almost exactly the national number). Here’s Dan’s chart:


If anyone with a particularly empty, vacuous life cares to comb through this heaping pile of info, organize it, parse it and chart it for us, then proceed. The results will be joyfully published here because, as you know, your fav topic is you.

$ $ $

Time for a quick update on the rolling-over real estate market, which is germane to the bloated net worth of puffed-up readers who list property in YVR and vicinity as a big hunk of their net worth. You might want to rethink that in the coming months. Or, better, bail.

Among the latest developments:

  • Former Lehman Brothers exec Jared Dillian is urging investors to short the Canadian dolarette since we have a massive housing bubble that (he believes) will blow up and take the country with it. “Debt to disposable income for consumers is 165 per cent which is much higher than it was in the U.S. at the top of our housing bubble,” he says. Dillian also debunks the myth that rich Chinese dudes have been responsible for the housing gasbag, saying instead it’s obvious from debt levels that Canadians themselves have been “stretching” to buy houses they actually can’t afford.
  • The sales number out of Vancouver continue to suck. They were down 51% in the first two weeks of August. Tomorrow we should know more. Will be ugly.
  • Canadians, slowly, are starting to realize this real estate romp may be coming to an end, suggests the latest survey from pollster Nik Nanos. The number of people in his Bloomberg-sponsored sweep who expect prices to decline has spiked by 8.5%, the most since this polling began three years ago. So 20.5% of people now think housing is pooched while 41% expect gains and 36 believe there will be no material change.
  • Alberta continues to suffer. CMHC is reporting a 52% increase in mortgage arrears compared to a year ago – loans on which no payments have been made for at least three months. The absolute numbers are still small, but the trend isn’t.
  • And housing analyst Ross Kay continues to beat the Drum of Doom. “There are transformative months in all housing markets and August will probably go down (unless interest rates are dropped) as the most transformative in Canadian history,” he said on Tuesday “Already $1.3 Billion is now pending removal from Vancouver’s market on transactions recorded the last 60 days. Mortgage debt has now reached our May forecast levels for July 30th closings, at a record 1.4 Trillion.” If realtors did not continuously mislead us with their stats, Kay argues, people would be seeing a 20% price decline.

Yup – balanced, diversified and liquid. The father, the son, the Holy Ghost. Soon everyone will know why.