Entries from October 2017 ↓

I, Advisor

DOUG By Guest Blogger Doug Rowat

I’ve always been fascinated by chess. I’m a terrible player myself, but I understand the game enough to at least appreciate the brilliance of truly great players. I’ve also followed the career of grandmaster Garry Kasparov my entire life.

As a result, I remember how shocked I was when he lost his epic battle to the IBM chess supercomputer, Deep Blue, in 1997 as well as him famously walking away from the table exasperated, arms in the air, after losing the deciding game. Kasparov fought hard, but IBM had finally created a computer that was able to accurately foresee future possibilities as skillfully as the human brain and successfully anticipate Kasparov’s moves. In other words, it had created a learning machine so advanced that it was able to defeat, for the first time, a reigning world chess champion.

Kasparov (eventually) was able to have a sense of humour about the loss (https://www.youtube.com/watch?v=cUqXr9Jlhwc), but the event undeniably marked a stunning ‘rise of the machines’ inflection point and was a huge advancement for artificial intelligence (AI).

Today, AI surrounds us constantly (talked to Siri lately or had Netflix suggest a movie for you?). UK researchers have even created a computer that can independently compose catchy folk songs and Bob Dylan himself half-jokingly suggested a musical collaboration with IBM’s Watson supercomputer.

It’s fascinating also that even though US automotive stocks have done incredibly well this year, Tesla has more than doubled the return of GM (65% versus 30%, respectively). The reason, of course, is that Tesla is also viewed as a technology company with perceived early-mover advantage in AI-fueled, self-driving cars. Tesla’s self-driving promises even recently drew the ire of a GM executive who called Tesla CEO Elon Musk “full of crap”. I don’t know if this is true or not, but it’s rarely a good idea to tell a visionary entrepreneur that they can’t do something. Steve Jobs, I’m sure, was told a few times that he would never be able to combine a camera, music and video player with a phone.

Research firm Gartner predicts that by 2020 the average person will have more conversations with a virtual assistant than with his or her immediate family. Gartner also predicts that by the end of the decade, AI will be a top-five investment priority for more than 30% of CIOs. And another research firm, International Development Corporation, estimates that worldwide investment in AI will rise from US$8 billion in 2016 to more than US$47 billion by 2020. Basically, computers are no longer going to be built simply to gather and process data more quickly—they’re going to be built to evaluate the data more effectively and actually make the decisions for us. In other words, eventually, you’re going to simply have to trust your AI-powered car to stop at a red light on the way to the grocery store.

Naturally, of course, there are investment opportunities. Global X, for example, has a Robotics and Artificial Intelligence ETF (BOTZ) and the chart below indicates its impressive performance thus far. We don’t currently own this ETF in our client portfolios, but we have plenty of other exposure to the technology sector. AI also, of course, is not without risk. Government regulation is lacking and, if not introduced thoughtfully, could cripple the sector. AI pure-plays are also difficult to find as AI is usually only a part of a large technology firm’s myriad other projects. Ethical concerns also abound. For instance, what effect would AI have on the labour market if self-driving vehicles actually became practical? Or, on a more immediate level, what would happen if a self-driving car struck a pedestrian and just kept on driving?

The World Economic Forum also speculated on the following doomsday, Terminator 2–type scenario:

Imagine an AI system that is asked to eradicate cancer in the world. After a lot of computing, it spits out a formula that does, in fact, bring about the end of cancer—by killing everyone on the planet. The computer would have achieved its goal of “no more cancer” very efficiently, but not in the way humans intended it.

There’s also the eerie possibility of recreating a loved one based on their historical cyberspace presence as one Russian woman, who worked at an AI startup, did in 2015 after her close friend was killed in an accident. ‘He’ continued to send her texts long after his death. How’s that for spooky as we head towards Halloween?

Global X Robotics & AI ETF (BOTZ-US, White Line) vs S&P500 (Orange)

Source: Bloomberg; Returns since the Sept.13, 2016 inception of BOTZ

However, AI, even with all these creepy potential consequences, is the future. And I suspect that very shortly we’ll be unable to distinguish whether a customer service representative we’re talking to regarding, say, our water or hydro bill is, in fact, a human or a computer.

Trust me on this prediction. Assuming, of course, that me is even me?

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.

No escape

No Bank of Canada rate increase next week. Phew. Talk about hammers and flies. With B20 taking flight, effectively adding a full 2% to mortgage rates, the housing market is already in for serious diddling. Plus, events of the next 10 weeks might make everything worse

Why is the central bank suddenly putting on the brakes after being all macho in the summer?

Oil is mired at fifty bucks. GDP growth is waning. Sears is firing. Trade numbers are weaker. So are retail sales. Real estate is wobbling. But mostly the worry is about NAFTA. That trade deal with the US directly impacts a quarter of the entire economy and millions of jobs. By all accounts, the talks suck. Ottawa is fighting for gender parity. Trump is fighting for jobs. We’re pooched.

Would Trump dump the deal? Well he walked the US away from the Trans-Pacific Partnership (TPP) and shocked the world by exiting the Paris Accord on climate change. Giving notice that NAFTA is dead would be no stretch since the guy doesn’t actually care what anybody (who didn’t vote for him) thinks.

So, no hike Wednesday morning. None until early 2018, despite the Fed pulling its trigger in December. Expect the dollar to lose ground for a while, especially if there’s a cabinet shuffle and Bill Morneau goes back to being simply a rich business dude brought down by arrogance and bad staff.

Let’s get back to B20 for a few minutes. The mother of all mortgage drones is loaded with nukes and groaning down the runway. What, exactly, happens next?

First, don’t listen to any industry chatter about mortgage lenders finding loopholes to circumvent the stress test, or to mitigate its affects by putting people into long (35-year) amortizations. While it’s true the bank cop (OSFI) did not spell out this aspect of the regs, rest assured any major moves to circumvent them will be squished.

Does that include borrowing from credit unions, which are not subject to OSFI rules?

“My wife emailed FICOM and the response she got from them made it sound like credit unions have no plans to follow these guidelines,” says Evan, “so I’m left wondering… is B20 really going to impact the market that much?”

Good question. For a while I’m sure the CU guys will benefit from a flood of new apps, since one in five borrowers today would fail the stress test and qualify for smaller loans. So the credit unions will happily take on more risk and become even more insanely exposed to a housing market which has a long road down. But they’re not banks and don’t have unlimited wells of money. Moreover, politicians in BC and Ontario are likely insist that B20 rules eventually be replicated by everyone. Finally, if the stress test is designed to protect people from being total hosers when it comes to taking a loan, why shouldn’t it apply to all?

Other questions include: when does the stress test take effect? When a house is bought? When it closes? When you get the mortgage funds? What about renewing an existing mortgage? Does it matter if I drive a Kia?

While January 1 is the date everyone’s throwing around, expect all the banks to have the test in place soon. Within a couple of weeks. OSFI instructed as much when it told them last week: “Where possible, federally regulated financial institutions are expected to comply with the principles and expectations set out in this guideline as of the date of this letter.” Remember – the banks wanted this rule change. It reduces their risk. They’ll get the paper cups ready just as quick as they can.

The test will take place when you apply and since almost everybody gets pre-approved these days, that’s when the moment of truth will arrive. Do you have enough verifiable income to pass the debt service ratio test at the offered mortgage rate + 2%? If not, the loan amount will be reduced until you do. As mentioned days ago, a family with 20% down who qualified to buy a $725,000 house before the test would be shopping for a $570,000 property after it.

So it doesn’t matter if you have an accepted offer, or if the deal closes in November or February. As soon as your lender has the test in place, it rules. Does that mean it makes sense to get pre-approved now while you still qualify to buy more? RateSpy had this advice on its site Friday: “If you need a mortgage or HELOC in the next 120 days and you expect your debt ratios to be high, apply ASAP. You don’t want to lose lender options as banks start announcing they’re implementing the stress test ahead of time.”

Sure, get pre-approved. But it’s useless. The approval will last, at most, until the middle of January and anyone buying in the 90-day period is likely to regret it. If overall credit shrinks as a result of the stress test with buyers qualified for lower mortgages, prices will naturally follow. That’s the object of this exercise – to dial back on inflated real estate equity while improving the quality of home loans. B20 adds 2% to mortgage costs – the equivalent of a huge spike in interest rates. Of course valuations will fade.

However, thousands will rush in, borrow and buy. Especially the moisters. May God have mercy. But she won’t.