Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Thu, 03 Sep 2015 02:25:03 +0000 en-US hourly 1 Failure to launch Wed, 02 Sep 2015 21:53:56 +0000 SWIMMER modified

When I married Dorothy, shortly after electricity was invented, eight of ten twentysomethings were like me. They went to university and left home. Forever. By 1981 almost a third of people that age were still living with their parents. A decade later it was 32%. These days the number is almost half – over 45% of adult children are in the basement with Mom washing their skivvies. It’s a social phenom.

Why? Beats me, actually. Couldn’t wait to get out and bite the world.

But I’m told there are two main reasons. Economically, fewer kidults are capable of being self-sustaining as they spend longer at school, chalk up fat educational debts, then graduate with high expectations into an environment of crappy entry-level jobs and insane living expenses. Second, they have copter parents who’d rather cling than launch. Protective and cloistering, they think junior can’t possibly leave until he has a condo and enough resources to protect him from all the potential hurt out there.

But there are costs. For the Millennials, this breeds dependence while shielding them for all the valuable things you learn from suffering, penury, loss and failure. For the parents, it’s a true economic cost – up to a decade more of picking up the overhead for an adult child. CIBC just did a survey on this, announcing the results Wednesday. The kids ain’t cheap, it seems.

So, 66% of parents say they’re feeling the financial impact of supporting their adult children. Of those shouldering the burden, 47% report this is hampering their ability to save money for themselves while a fifth say it’s delaying their retirement. About a quarter state they spend at least $500 a month supporting their spawn by paying for rent, groceries or cell bills.

Meanwhile, if this blog’s any indication, a mess of these Millennials have morphed into left-leaning, bitter, Boomer-hating, entitled baby socialists who come here to praise Mulcair, Norway and higher taxes. So, perchance their parents erred by not booting them out on their pliant, soft derrieres?

Or is such a generalization beneath me?

Jennifer believes so. In fact she probably thinks I suck. She emailed me two days ago. I responded, and have agreed to publish the following letter. If I do not, she threatens to drag me behind a speeding Vespa through a Pride parade wearing a Metallica shirt. So here it is:

“Hey Garth: I think it’s about time you got an actual Millennial perspective.  It’s very fun and trendy to bash us, our spending habits, our work ethic, how weirdly intense we are about our dogs, but I don’t think the generation wars are getting us anywhere.

“Literally just days ago, you advised an Vancouver Millennial about whether she should buy or rent.  She cited that she would have to spend $2.5k a month just to get a decent place close to work.  I guess I don’t really know how you can look at that figure, compounded with falling wages and higher debt and believe it’s the renter’s fault that prices are so out of whack.

“I own my own consulting business now, but before that I worked in corporate learning and development for 8 years.  All but one of my jobs (which was later outsourced) was a permanent job.  I have been on contract, no benefits, no job security for almost all of that time.  My husband has degrees in mechanical engineering and neuroscience.  He started his first professional job on Friday after a year of part-time employment as a waiter.  He sent out around 10-20 resumes ever day during that time for professional jobs. This new contracting job will pay around $30k a year.  My father, by contrast, a Boomer poster child, worked for the same crown corp for 27 years, collected a $1M+ public sector pension, has a basement full of toys and 3 SUVs in the suburban driveway, and has the nerve to say “Every time I hear a Liberal talk I hear a hand going in my pocket.”  Yeah, Dad, you do, TO PAY YOU AND YOUR PENSION.

“Every generation has challenges, I acknowledge that. But you can’t say that Millennials have a chance to make the investment guidelines you recommend for FI when more than half of our paycheque has to go just to keep a roof over our heads.  And you must know that rent is not the only cost that has increased exponentially. It’s increasingly difficult to find permanent work that is worth doing.  Not sure when your last foray into the private sector was at the peon level, but it’s just a fact that not all jobs are worthwhile, even to the company that hires for them. Companies have gutted their development and mentorship programs and management has been left wanting for many decades.  This leads to inefficiency and layoffs.  This doesn’t even include older working generations who cannot keep up with essential technological advances in the workplace.  Again, training programs have been gutted and outsourced. Maybe they are interpreting our “frustration that our managers fundamentally don’t understand the systems our business runs on” for “entitlement and laziness”? Just a thought.

“So I would ask, please, for a little consideration with regards to how “selfish and entitled” Millennials are.  Keep in mind you literally outline financial independence guidelines which, if trends continue in the direction outlined above, will always be out of our reach.  Are we wrong for just wanting enough to meet those guidelines?  If so, why recommend them?   Are we wrong for wanting use the technology that has been promised to improve our lives?  If so, why was it developed? Are we wrong for wanting to work towards a better future? If so, why did older generations want the same thing for us?

“Pensions, employee development, even permanent and paying (remember the rise of the unpaid internship in my lifetime) jobs are vanishing and not coming back.  I’m not going to say absolutely everyone my age is a winner, but that’s also true of any generation isn’t it?  I would ask to keep things in perspective. And as for the reason why we don’t vote, consider this: there is no major political party on the landscape now that will take on climate change in a meaningful way, take necessary steps to address income and wealth inequality in this country, ensure transparency in the media and bust the corporate monopolies which pervade most of the Canadian market.  Who speaks for us?  Not really anyone, so it’s difficult to see participation in elected democracy for anything other than what it is: gently nudging someone you don’t want out of office, rather than getting behind someone who really speaks for you.

“We have our problems, but it’s disingenuous to say that we’ve created all of them. It’s disingenuous to say we’re selfish for just wanting to do what you yourself recommend.  Many problems were inherited, but are now ours nonetheless.

“All the best, Jen.”

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It’s here Tue, 01 Sep 2015 19:37:51 +0000 HUGS1

A recession, eh? What does that mean? Does it matter?

In case you missed it, StatsCan revealed Tuesday the Canadian economy has, unlike Mike Duffy, contracted monthly. It’s called ‘negative growth,’ and if you’re the sitting prime minister, it’s the worst news. When an economy shrinks for two consecutive quarters, it becomes recessionary. Thanks largely to oil, that’s us.

And while the price of crude took a giant leap up (27%) in the last week or so, it’s volatile, unstable and unpredictable (look at Tuesday’s drop). More worrisome has been a relentless plop in business investment in Canada – down 11% during the winter and 8% over the last few months (witness today’s 1,000-job oil patch slaughter).

As you might expect, things are getting worse in the People’s Republik of Alberta where the Dipper government has announced not only a recession but a provincial deficit of almost $6 billion. Oil, drought, blazes and ideology are whipping the former cash cow province into submission. Oil rig activity has fallen by 50%, big money has gone into fighting wild fires and the government is goosing social spending, bloating the budget to over $50 billion for the first time. Concurrently an extra $500 million is being removed from often-struggling corporations in the form of higher taxes. Go figure.

Of course, news we’re into the R-thing is manna for the Muclairs and Trudeaus among us. After nine years of Conservative rule, they’ll point out, we have almost $200 billion more in federal debt, epic personal indebtedness, structural unemployment, eight years of deficits and now a recession. It’s hard to know if this will affect the outcome on October 19th, but hard to see how it won’t.

Anyway, what does a recession mean to us wage slaves and house-snorflers?

The last one of consequence hit at the end of the Eighties and extended through to the mid-Nineties. It was caused by high inflation and climbing rates, which makes our low-inflation, cheap-money recession all the more remarkable. But it’s interesting to note that residential real estate, which spent most of the 1980s in bubble territory (as now) suffered a US-style crash once recession gripped us.

The peak-to-trough decline in the average price of a Toronto house, for example, was 24.5%. Ouch. And during that entire period, mortgage rates got more affordable – with no measureable result. As I mentioned here yesterday, houses were cheaper in 2000 than they were in 1990. It took 14 years for the price of a house bought in 1989 to recover – not even factoring in inflation and buying/selling fees. Double ouch.

However, being a sunshine-and-ponies kinda guy, I have to point out that this recession is likely to be shorter and shallower than the one that hit the last time. The decline in business activity in the second quarter was less than in the first. That’s good. While business investment was way down, household spending was up – a lot. So you can thank all the idiots running up the LOCs and taking mountainous mortgages for mitigating the commodity price collapse. The US is motoring ahead (as the labour stats Friday morning will show), and that’s always good for Canada. Finally, the $3 billion largesse the desperate Conservative government bestowed on parents in July is also a factor, seeing it all got spent on Huggies and Heineken.

Now, despite recession being official, don’t look for cheaper interest rates. Ain’t gonna happen. Even economist David Madani, beating the drum for a third rate cut ever since the second one took place, has thrown in the towel. “Overall, this latest economic data is broadly consistent with the Bank of Canada’s economic projections presented at the time of the July policy meeting. Accordingly, we now expect the Bank to hold off lowering rates any further for the time being.”

In fact, given that the Fed will raise its key rate in September (odds are 44%) or October (odds overwhelming), fixed-rate, five-year mortgages in Canada will cost more by Thanksgiving – regardless of what happens with our central bank. That means 2015 likely marked the bottom of the interest rate cycle. This might even have been the cheapest money you’ll see in your lifetime.

So the real consequence of this could be political, not economic. Canada will get back on its feet when global growth moves higher and commodities respond. But in the process it might take a dramatic swerve left. As Alberta has started to prove even in the nascent days of NDP control, spending and deficits go up, and taxes follow. Is the answer embracing bigger, more costly government and less disposable income? I guess we’ll find out next month.

You might wish to prepare.

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Kids Mon, 31 Aug 2015 22:27:40 +0000 KIDS 1

On this day 25 years ago a five-year mortgage cost 13.75%. Seriously. And that was an improvement from where it had been a few months earlier. Discuss that with your basement-dwelling, condo-lusting Millennial spawn over dinner tonight. They’ll think you’re a scaremongering old fossil.

I mention this because RBC did, sort of. The bank’s latest non-affordability report says Vancouver’s insane (we knew that) while buyers in Toronto are “approaching 1990” conditions. That means it’s almost as hard for folks to buy digs in 416 today as it was back when Linda Ronstadt could still wear Levis.

Of course high rates aren’t the problem now. Five-year, fixed-rate mortgages are available everywhere in the 2.5% range. The problem is price. In 1990 the average Toronto house traded for $255,020. Ten years later the same house was worth less – $243,255 – because rates stayed high. By 2010 it had mushroomed, to $431,276, as our current era of cheap money began. Today the GTA average is $609,236, and rates have bottomed.

Logic then dictates the negative correlation between house prices and the cost of money is bad news for the next decade, as we head towards rate normalization. (The US Fed kicks this off in the next few weeks.) It also means when RBC uses a word like “risky” regarding home ownership, this is probably the time to be doing anything with your money except buying a house – at least in the bubble markets.

Well, here’s Ed. I include his note to prove that even the 1%ers among us can sometimes lose their way. Fortunately, they all read this pathetic, free blog. It’s a cult thing.

“You don’t seem to have a shortage of these emails,” he says, “but thought I would throw my hat into the ring. Here’s my story…”

So Ed took my advice and sold his McMansion plus six rental properties in BC, and now has $3.5 million, “in a fully diversified GT-style portfolio” managed by two smart guys he pays 1% to. In his late fifties, he earns $200,000, rents for $2,300 a month and is starting to mull retirement. “We might buy in a couple of years when the current lease runs out, maybe a 20-year house, leaving feet first.”

So why is Ed writing, other than to piss off all the little socialist, Norway-loving, Millennial underachievers who stumble in here by mistake just because Stephen Harper hates me? Family, of course.

“Our son earns $100,000 a year and our daughter-in-law has a classic case of house horniness, which is somewhat reined in by her husband, by watching their investment portfolio of $250,000 grow, and by reading GreaterFool.

“So here’s the question.  Part of the reason for the current situation is that my wife and I have been (I think) diligent about not cultivating a sense of entitlement – either in our own or our kids’ lives.  Of course we can afford to lend/give significant $ to our kids to give them a leg up in the housing market (and want to) but feel that in order to be productive and useful to society we (all) need to be a bit “hungry” as well. Where’s the balance? Any ideas as to how much, when, etc.?”

First the legal stuff: there are no restrictions in Canada on gifting money or property to your adult children. We have no gift tax (unlike in the US) so none of this money will be hung on them as income nor any investment proceeds considered capital gains. You’re free to slide your adult kids all the cash they need to max out their TFSAs, for example, with all the tax-free gains going to them. Or you can hand over your real estate without attribution or consequence, for that matter.

But should you?

First, there’s the incentive argument. Gifting a million bucks (or half that) to your kid so he can move his family into a luxe house is not exactly an exercise in building character. This is not akin to handing over equity in the family business, of course, or even cutting your adult son into half-ownership of your scallop boat. It’s simple, unadorned largesse delinked from financial merit.

Second, Ed, why would you finance a real estate purchase for your horny DIL when you yourself have decided this is an abysmal time to be invested in property and a great time to be on the sidelines? How’s it doing them any favours to grab an asset with a precarious future?

Third, does the kid really need it? Just because he’s your seed? After all, the couple seem to be doing fine in terms of income and savings. Perhaps the best path is to leave them with their own accomplishments and rhythm, instead of blowing it up with parental moolah.

Finally, is there nothing better to do with money you don’t need than give it to someone who doesn’t deserve? How about saving homeless donkeys? Or those poor Syrian refugees throwing babies over barbed wire fences? The mutts in the local shelter? The humanity on the Lower East Side? Terry Fox?

Dammit, Ed. Now I’m all misty and altruistic. Kills me.

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The conundrum Sun, 30 Aug 2015 19:46:51 +0000 SHORT modified

Karly’s shopping for a better rental in Vancouver and she’s not a happy babe. “While I agree with you renting is the best financial decision can we also agree it really sucks sometimes? Our apartment building had a fire a couple of months ago and we were forced to leave our essentially rent controlled apartment. When we started looking at other places I was flabbergasted at how much rents had increased, I mean I knew they were on the rise but this is crazy.”

To get a decent two-bedroom unit in YVR these days, Karly says, will cost her $2,500 a month (apparently she hasn’t heard of Kijiji).

“One of my theories is that the rents have increased because the people renting them need to cover their bloated mortgages. Some friends of ours just bought a two bed in our neighbourhood for $480k, now I’ve been reading this blog long enough to know that this isn’t a great financial decision but could you help me crunch the math? How high can we go in rent before buying isn’t such a bad idea? We make about 120k/yr combined and have 130k invested with a financial planner (not TNL@TB) <—see I follow your advice.”

Good question. Vancouver’s one of the best condo markets in the country at the moment, with year/year sales ahead 42% in July. Easy to see why, when detached houses have gone into ludicrous mode, requiring buckets of money, a love letter to the owner and at least one kidney to purchase. The average beater SFH commands seven figures, while condos have a median price of $400,000. Even so, while detached prices rose 16% in a year, condo values climbed by only a third of that.

By the way, what happens to condos when a market runs out of hormones?

Let’s look at Calgary, where the pain has only started. In August apartment sales have crashed almost 40% from last summer, and the average sale price has taken an 11% dive, down to $296,300. Compare that to a more modest 20% rout for detached sales, and a mere year/year 1% drop in values, to $541,000. (In surrounding areas, it’s a far worse story, however, with prices off more than 9%.)

The lesson? If you’re going to buy real estate, make sure it includes some dirt.

Anyway, back to Karly. Does it make sense to buy a $480,000 apartment instead of handing over $2,500 a month to lease it?

Well, with closing costs that condo chimes in at about $500,000 and to avoid CMHC insurance you need a hundred grand down. The mortgage costs $1,900 a month (5-year, closed), with strata fees and insurance adding $500 and property tax at least another hundred. The $100,000 downpayment is not without cost, either, since if invested at 7% over five years it would grow by $580 a month. Total nut for owning is $3,080 a month.

Over five years, then, ownership costs are $184,800 as opposed to rental costs of $150,000, for a $34,800 premium. Now let’s say the condo retained its full value and was sold in five years for $500,000. After commission, HST and mortgage repayment ($343,000 remaining on the loan), plus getting the deposit back, the owner would walk away with $28,450.

So, Karly, it almost makes sense to buy since you’d lose only $6,350. That’s the cost of a used Kia and two mani/pedis at the Absolute Spa in the Hotel Vancouver (don’t ask). But it doesn’t end there.

Let’s talk about risk. Owners might make money if the condo they buy appreciates in value, but they face an equal risk of losing. Given the country’s swampy economy, the spreading impact of the oil collapse, crappy job creation, higher mortgage rates over the years to come and the fact young people are being priced out of YVR (not to mention the advancing hordes of socialists), residential real estate faces heavy headwinds. As Calgary proves these days, it’s condos – not detached houses – that are the first casualties.

There are other factors to consider, Karly. If the fire that forced you out of your rental unit had toasted a condo you owned, it’d be the worst news possible. Sure, insurance might have covered living costs and repairs, but you can be sure the resale value of your unit would be forever impacted, along with the monthly fees. With a condo, in fact, you have no control over the regular levy imposed by the condo corporation. You can’t control property taxes. You can’t have a mortgage without insurance, the premiums for which increase annually. If the building is not brand new, there could be a special assessment levied for new elevators, repairs to the parking garage or (shudder) leaks.

Of course, if the guy who buys above you is a flamenco dancer who practices all night, you’re screwed. The only way out is to sell. And what if the market is bad? What if you land a great job in Lillooet herding alpine goats and have to move fast? You already know you can’t rent out the condo for enough to cover your monthly costs.

In short, it’s no slam-dunk. People who rent expose themselves to potential inconvenience. People who own embrace risk – with the potential of return. So there’s your answer, Karly. And you expected clarity from a free blog?

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Lessons Fri, 28 Aug 2015 22:17:38 +0000 PUPPY modified

This week Wall Street lost a thousand points in mere minutes on Monday and by Friday hosted the biggest two-day rally in six years. Oil crashed by 10% in a single day, then finished the week gaining 16% in two sessions. On Tuesday the mainstream media was wall-to-wall doomerism, screaming “Stocks CRASH.” On Friday they still couldn’t get enough of the whacko who lit up two reporters. The stunning financial recovery was boring.

This is a world in which Ashley Madison and Donald Trump matter. The economy and bond yields don’t stand a chance. It’s no wonder most people are financial illiterates who end up with maybe a house and a mortgage, while expecting the government to send them cheques.

Remember the four things this pathetic blog told you when the markets took a dump?

  • Corrections are normal. Corrections are good. They blow off steam, prevent bubbles and reset markets at more realistic levels. Despite that, people always react the same way, because fear is greater than greed.
  • Nothing about the US changed. America’s job-spewing recovery continues, corporate profits are good and growth is robust. In fact we now know that economic expansion has exceeded all expectations.
  • China will fix itself, but it’s the US that really matters.
  • Commodities are oversold. Prices are below levels experienced during the GFC when the world was contracting, and yet today the world is growing. “It’s hard to see how this will not snap back.” I said. And it did.
  • Create a balanced, diversified portfolio and ignore any storm that comes along. Having both fixed income and growth assets, plus the right geographic mix (little maple, even less China) will mitigate losses. So when the TSX was down 11%, this portfolio was off a faction of that.

Most people will never have this kind of portfolio, never max their TFSA, never find the discipline to invest, never get investment help, never understand markets or financial events, and never try. When reversals come and the media shouts at them, they’ll bail, take a loss and blame others. Most people have a one-asset strategy, embrace debt and ape their parents. In fairness, the biggest goals for the majority are to have a family and a nice house.

So, is it any wonder society’s self-dividing into the 1%, and the rest? If this week taught us anything, well exemplified by the comments on this blog, it’s how incredibly naïve and myopic many can be, even in an age when a few clicks will teach you anything.

Well, there’s more on the way.

The volatility is not over, and the coming weeks will bring more big swings on equity markets and in emotions. China has stemmed the wave of selling, but remains a manipulated market (what else would you expect in a socialist paradise?). The US central bank will raise rates in either September or October, depending on the next round of data. As the first hike in almost 10 years, and marking the start of a cycle of tightening, it will be consequential.

And poor Canada has its own swamp to crawl out of. On Tuesday we’ll get the latest economic data, and it won’t be pretty. The betting is the country contracted in the second quarter of the year by about 1%, on top of the 0.6% negative growth in the first three months. The loonie has fallen against the US dollar by 12% since the beginning of the year – a far worse record than the Chinese yuan. And while the snap-back in oil prices by Friday was welcome, the serious damage has already been done.

Calgary house sales are still running 26% behind last year. Retail sales at the West Edmonton Mall have tanked, and car sales in the West are sagging. The dollar volume of commercial real estate transactions in Cowtown has fallen 57% from last year. And the next round of labour stats for Canada is expected to be grim.

Says Capital Economics: “Further declines in commodity prices, droughts and weaker business confidence indicate that the economy is struggling to escape the mild recession that began in the first half of the year. We still expect the economy to return to positive growth in the second half of the year, but the recovery is going to be even more modest than we feared a couple of months ago.”

Many economists still expect the Bank of Canada to cut its key interest a third time next month, even as the Fed is clearly heading in the opposite direction. That would throw more misery on the loonie, as well as the trading on Bay Street. Thus the yawning gap between the US and us grows right along with the divide between the wealthy and the wannabes. If folks think real estate will save their butts as the economy contracts and rates inevitably rise, may Allah be with them.

By the way, a lead story generated by Bloomberg at the end of the week was about Canada being a bigger threat to the US than China. Maybe Stephen Colbert was right all along?

There is a way out, of course. And it’s not just voting NDP. Do what your neighbours are not – become liquid, balanced and diversified. Between now and Christmas you’ll see why.

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Not yet Thu, 27 Aug 2015 22:27:59 +0000 SONS1 modified

HA HA Garth- You and all the peon’s that listen to your financial ‘advise’ are losing it all! Get physical gold and silver you stupid bitch.

Normally I delete one post in a few hundred. Normally I tell you why.

But over the past few days I gave up and just hit the KILL button, and obliterated a mess of comments like the one above. They came from the usual rabble – people who hate America and want it crushed. GIC-lovers and fear-biters who crave a market crash to justify their own wussiness. Anti-1%ers and proud members of the socialist horde who love it when the investment portfolios of others are smouldering. And, of course, the under-employed, basement-dwelling Millennial masses who would like Boomers to retire in the penury they richly deserve for stealing all the houses and hoarding all the jobs.

Well, tough.

In case you didn’t hear the news, equity markets in Toronto and New York soared again Thursday. We’ve just had the best two-day rally since way back in 2009. You can tell how powerful this is by the fact the stock market no longer leads the 6 pm TV news or is plastered across every newspaper’s web site. When things go well, you don’t hear about it. When they suck, it’s a prelude to oblivion.

Not only did stocks recover in a dramatic fashion (adding about a thousand points in two sessions), but there was an unprecedented rise in the value of oil – ahead 10% in a single day. Crude’s now heading back towards the $45 level, just days after it looked destined for thirty bucks. In concert, commodity prices in general romped to better levels, and Canada’s prospects perked a little.

At the heart of all this?

No surprise. It’s the steadily recovering US economy. So I hope this week was a reminder to everyone of this blog’s premier advice (after the relationship counseling, of course): never bet against America. Those who did, shorting US equity markets, were creamed. People who gave up their nerve and sold into the storm on Monday lost a whack of money. There was never any doubt, as this pathetic blog told you, that the positive fundamentals remained in place.

So now we know the American economy shot the lights out in Q2. Annualized economic growth was a ribald 3.7%, blowing past all of the expert estimates. This comes atop growth of 2.3% in the first quarter. That was enough to ignite stocks and restore confidence around the world, since the American economy is the undisputed engine of the global economy.

There was more, too.

Consumer confidence is heading higher. This is no surprise with an average of 211,000 new jobs appearing in the US every month. As I told you, 13 million of them have been created in the last 65 months, the most impressive record in a generation. At the same time cheaper energy has reduced household costs, and American families – unlike ones here – have steadily reduced their debt levels, so the costs of servicing that debt drop. Now consumer and business spending is on the increase.

Corporate profits have been consistently robust. Jobless benefit claims are declining. Sales of resale homes in the US climbed in July for the sixth time in seven months. New home sales are at the highest level in eight years. And now the stock market has enjoyed the strongest back-to-back advance since the current bull market was born six years ago.

Stocks have recovered in Europe and in China, where the index soared 5.3% amid more moves by the interventionist government to stabilize markets and restore investor confidence. And now the next question is when the Fed will begin its program of raising interest rates. Whether it will occur is not even a debate. Only when.

The betting had been for September 17th, prior to the wild swings on equity markets. Now traders figure there’s a 30% of that happening, but about 100% odds of the pop taking place by the end of the year. Maybe October, or an outside chance of December. The exact timing is less important than the event itself – an historic one, after 10 long years of cheap money policy.

So, not much has changed.

America motors ahead. The recovery is intact, and strengthening. The bull market for equities continues after steam was blown off and values corrected. The days of cheap money are still numbered. Expect higher bond yields and more costly mortgages here by Thanksgiving. This is likely the low water mark for interest rates and the high water mark for house prices.

It also reminds us of how many souls there are capable of being led around by the nose, quick to panic, devoid of confidence and willing – if not wanting – to believe the worst.

There’s a reason wealthy people stay that way. And why others get DELETED.

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Be a man Wed, 26 Aug 2015 21:17:13 +0000 POLICE modified

From time to time this blog strives to be a Public Service, and make you feel better about your spouse. Seriously. It could be worse. You could be Raymond the Henpecked Accountant:

“I have been a long time reader of your blog but today I am writing to you in desperation,” he says. Here’s the background: RHA is 40. She’s 37. Two kids destined for uni in a decade, and twenty years until retirement. He makes $110,000 and she pulls in $54,000, both with DB pensions, about $150,000 in liquid assets and a 905 house worth six large.

In short, they’re doing okay. Better than you, probably. Only $67,000 left on the mortgage, financial plan in place, budgets intact, flow chart taped to the fridge – the usual stuff that arouses accountants. But all is not happy.

“Now here is my biggest challenge – I am surrounded by friends and relatives who have all bought and upgraded their houses to more expensive ones. I am just very glad to have no debt, no mortgage starting next year. I have no desire whatsoever to upgrade and acquire a new mortgage. My wife is not too happy that every other house on the street seems to be more expensive than ours and that our house hasn’t appreciated much in value (paid $354K in 2005). My wife believes that house is the best investment and will always go up in value.

“We argue a lot about our house these days. She wants to sell and upgrade and I don’t. She thinks I am not very smart (financially) and loathes that every tom, dick and harry has a bigger and better house. They must all be very rich and we are so poor.

“I have budgeted that we can save at least $40K annually (and possibly more) and invest in a balanced diversified portfolio (TFSA, RESP, and non-Registered) without compromising our current life style once we are done with mortgage.  How can I talk some sense into my wife and talk her out of buying a more expensive house? How can I convince her now that we are doing so well financially, we shouldn’t make stupid mistakes?

“We have worked very hard to pay down our mortgage and I don’t want a stupid financial decision to ruin our future plans and savings. Please help!!!!!!”

Well, weeks like this probably don’t do much to help poor Ray make the case for a balanced, diversified portfolio versus the unmatched glam and sex appeal of suburban real estate, but this is really a battle of assets vs. debt. Already this couple have too much of their net worth invested in a single asset – about 80%. Ideally (according to my Rule of 90), that should be more like 50%, and then diminish steadily over the years until it hits 25% by retirement age.

Saving forty grand a year, as he plans, would get them there. But upgrading to something costing a million bucks would add at least four hundred thousand to the wrong side of the balance sheet, increase monthly costs and set them up for a kick in the groin going forward when 905 real estate meets its maker. And it will.

Given the sustained and accelerating weakness in the Canadian economy, how can anyone feel horny about upgrading from a fully paid-for house (on which a nice tax-free capital gain has been earned)? Oil is sub-40 and likely to stay that way for a while. We’ve had negative growth every month so far this year. Things are so flaccid the Bank of Canada had to cut interest rates twice this year – and it’s only August. Weakness and poor judgement in China have dropped commodity prices back to 1999 levels, creaming a country like ours which is so dependent on raw exports. And the contrast with the US is growing extreme, as their economy continues to motor ahead. The Fed, in fact, will be raising rates by the end of the year, while we ponder yet another hack. And did I mention there are socialists at the gate?

Ray’s house-lusty wife should ask herself how great real estate ownership is when in our most active market – Vancouver – over four in ten homeowners now have to rent out their basements, garages and spare bedrooms in order to make the mortgage. This week an insurance company survey revealed an astonishing 43% of houses have rented ‘suites’ – triple the national average, and twice that of Toronto.

So, if constantly upgrading your house, taking on more debt to climb the property ladder and reaping fat gains really works, why has it failed in YVR? Why would anyone spend so much money on a nice house, and then have to share it with grotty strangers? What’s the point? Why not just be a tenant yourself and enjoy the same great digs for a fraction of the cost?

Oh, right. Because your friends and relatives judge you by your address. Because all the other indebted people on the street look richer. This is the definition of fatuous, Ray. You poor, wretched sod.

When the reset comes, and it will, pity the folks with seven-figure homes in the burbs. Kinda like where Calgary’s going these days. While average prices have only started to decline, the top end of the market’s been hit much harder. Houses over a million have been unloved, discounted and often become structures of remorse for their owners. If anyone believes 905 or the outliers of 604 or 613 are any different, they’re dreaming.

So, RHA, print out all the hot MLS listings for your area, then slip a copy of this blog post into the pile. No matter how much she screams, make her read it. Then find new friends and tell your families to get lost. Put blockers on Cruise around at night and quietly torch all the For Sale signs. Get a cable package which doesn’t carry HGTV or the dreaded ‘W’ network. Buy a giant dog to destroy your home and make it unsalable.

Or, you could say no. That should be fun.

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Sleepless Tue, 25 Aug 2015 21:45:55 +0000 DOG COFFEE modified

Enjoying the latest flash crash? Read the comments in the steerage section yesterday? So much wasted moaning. So many needless quick heartbeats. Such misplaced fear. And while volatility will continue, there’s no collapse. There never was. Nothing has changed, except lots of cool stuff costs less. Doomers, 0. Blog, 1.

Okay, let’s climb down from the esoteric into the world of traps, compromise and seriously confused relatives.

“My name is Maria,” she says. “I and my husband following your blog for last three years. I understand you are receiving tons of e-mail during the day. I would love to be one of those who never need an advise, but apparently we are. Unfortunately my parents situation effects ours and gives me sleepless nights.

“Our family is first generation immigrants, living mostly beautiful 20 years in Canada. Now my parents are turning 65 and here comes not so easy financial decision we have to make.”

Here’s the deal with Maria and her folks: The own a Mississauga townhouse worth $450,000 with a grand total of $50,000 in liquid (pension) assets, living off CPP and OAS. Not good.

“At least we managed to convince my parents to sell townhouse, but they are horrified of renting idea,” Maria adds. “We came to compromise and my parents agreed to rent condo for 1 year and then I promised they either love the idea of renting, or we are going to look for other living arrangements. I totally understand that my parent cannot afford to buy even small condo, it will eat 50% of all money they have.”

This is the cry for advice: M and her hubs have a kid, a dog, a half-million-dollar mortgageless house, $150K income and about two hundred grand in investments. (And so many people here dis immigrants…).

“Should we buy condo, and let our parents live in it paying us only property tax and condo fee  (if they will be able to afford even that) and we will pay mortgage?, or should we sell our house and buy bigger one with additional live in unit, so my parents will become dwellers? Obviously it will require big mortgage for us. Or should I hope my parents will live independently in rented condo unit owned by some “investor”.  And will they have enough income if I convince them (again not so easy task) to invest money from selling their home in very conservative monthly income generating portfolio?”

“I hope my family situation will be case study on your blog, this way I can have an advise from you and the blog dogs can ridicule for their pleasure.”

Well, this is simple. Let’s assume the geezers are collecting $560 each in OAS and $1,000 between them in CPP. That’s about $25,000 a year. Not enough to pay $15,000 in annual condo rent and still eat. But if they invested the $450,000 in a 40-60 portfolio (that’s sixty per cent fixed income, the rest growth assets) and collected about 6% a year, that would double their income – with the principal remaining for future needs.

No parentals in the basement. No seeing them buy a little skybox, and eating Alpo. A sense of independence and achievement on their part. No property tax, condo fees, maintenance, snow shoveling or financial stress. Just a monthly ‘paycheque’ from their investment account, most of it being in the form of return of capital. That way they don’t even report the additional income and it doesn’t chew into their OAS money. And, natch, a big chunk of their capital should be TFSA’d.

Now why would they refuse this?

Because, Maria, they’re chicken. They confuse the risk of losing money in investments they don’t understand with the bigger risk of running out of capital. After all, they’ve two decades left to finance. Besides, why should your family shoulder a bigger mortgage burden so the old folks can stay mired in their ignorance and live beside the laundry room?

Go find a nice fee-based advisor and drag them over there. Let him/her explain how great assets like preferred shares are on sale and yet will pay then 5%; how having some investment exposure to the economy is their best bet as long-term (twenty year) investors; how earning money tax-efficiently through dividends or capital gains, or unreported as ROC is way better than interest; how events like those of this week should be utterly ignored; how buying a condo in Mississauga is a disaster waiting to happen thanks to over-building and slap-dab construction; and how they can live with dignity, not forcing their daughter into the questionable arms of a pathetic, vaguely horny, blog.

Tough love, Maria. Like Donald Trump says. Be a man.

Tonight's conference call: the correction

Where are markets going and why did all this stuff happen? You might be interested in hearing what Portfolio Manager Doug Rowat and I think about things. We host a weekly conference call, and here is a link to tonight’s (August 25) . Parental discretion is advised.

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No kidding Mon, 24 Aug 2015 21:16:19 +0000 GOAT modified

Fear is greater than greed.

That pretty much describes things on Monday when stock markets plunged, recovered, wobbled and weaved. The doomers saw it as the beginning of the end. Bottom-feeders feasted on Apple stock. Day traders knew it was better than sex. Sage investors ignored it.

After all, a correction of 10% or more for the Dow or the S&P doesn’t mean the US economy is sick. It’s not. Instead, after hovering around record highs for the longest period of time in 90 years, markets blew off some gas. That’s how dangerous bubbles – which pop with far worse, longer-lasting consequences – are avoided. Like the one brewing with Canadian real estate.

But market declines spook people. We think the worst. The media and the bullion-hocking newsletter guys know that. Human nature clicks in – the same hormones which makes people want things that keep getting more expensive. Once again the emotional are led to slaughter – those who bought high end up selling low. A few days, weeks or months later it all passes. Only the realized losses remain. Poor little sods.

So, stocks are fun to watch, but oil matters more. Watch that this week. It means jobs.

Crude oil (WTI), last 12 months
CRUDE-1 modified

The price of crude is close to $38 US. It was ninety-four bucks a year ago and sixty dollars in June. Oil lost 5% of its value again Monday and probably has more to go. At these levels there will be a lot more people out of work in our pivotal energy sector, even more empty office space in Calgary’s towers and more projects cancelled. Revenues from the country’s major export commodity have plunged, and big producers are pumping at a loss.

These are the two real consequences of the current mess: Job stress putting downward pressure on housing markets, and a move to the political left. The Bank of Canada can slash interest rates to zero, but it’ll be a loss of employment confidence and higher personal taxes that most impact people’s lives. Looks like both are coming.

Now, here’s my take on investments and equity markets.

First, Corrections are normal. We’ve had seven of them (5% or more) in the past four years. The last whopper was in 2011 (20%) during the US debt ceiling crisis. At that time this blog was a virtual swamp of primordial juices, rendering it damn hard to type above all the wailing. Of course, it passed. The stock market then advanced by 70%, making geniuses of people who stayed invested or got that way.

Second, nothing about the US recovery has changed over the last few weeks. The economy there grew at a strong rate of 2.3% in the second quarter. Over 13 million jobs have been created in 65 months with an average monthly addition of more than 200,000. Corporate profits are robust, and forecast to rise above 10% in each of the next two years. The budget deficit has plunged and Donald Trump will surely fix everything else.

Third, yeah, China matters. It consumes more commodities than any other nation. Weakness there means troubles in Fort Mac. But the world’s engine is still America, and that will not change for a long, long time. This is why US equity markets have advanced relentlessly since the 2008-9 blowoff, but even so, valuations are not inflated by historic norms.

Besides, China was an accident waiting to happen (which is why investors should have only about 1% exposure to it). The geniuses in Beijing allowed massive speculation on the part of unsophisticated, leveraged investors, which sent the stock market to insane and unsustainable levels, creating excessive volatility. Despite the trip back down, the market’s still up by 40% over the past year.

Fourth, the commodity collapse is already overdone. Prices for copper, oil, grain, nickel and much else are way below levels experienced during the GFC when the world economy was contracting fast. Yet these days the world’s expanding, albeit slowly. If anything, cheap energy and other commodities support more global growth. So it’s hard to see how this will not snap back.

Finally, the kind of portfolio I’ve encouraged – balanced (with safe stuff and growth assets) and diversified (among assets and regions) – is designed to mitigate against days like these. And it’s working. Nobody whose investments are structured this way has seen a 10% drop.

But, as I said, fear is greater than greed. So I’ll probably be writing this same blog again in four years. At least you’re getting your money’s worth here.

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Chill Sun, 23 Aug 2015 18:23:54 +0000 DOG1 modified

Time to review some of the basic investment tenets this pathetic blog has repeated with mind-numbing regularity. Here are 20 things to remember this week, no matter what markets do:

  • Your portfolio should be balanced, with about four-tenths in safe stuff (fixed income) and the rest in growth assets.
  • Lighten up on Canada. Hope you did that two years ago when suggested. Things are going nowhere for a while, and Oct. 19 is a danger point.
  • The growth portion of your portfolio should be diversified, with two-thirds in US and international. The rest maple.
  • Don’t buy stocks. No individual equities unless you have enough dough to diversify, which means seven figures.
  • If you’re silly enough to own stocks, sell the losers instead of hanging on to preserve dignity. Losses are deductible against future gains and remain in force indefinitely. Unlike your sex drive.
  • No mutual funds. You’ll never meet the guy managing the fund, he doesn’t care about you, and you’re paying him too much to do so.
  • Focus on exchange-traded funds (ETFs) which are cheap to own and nicely diversified. But shun inverse or leveraged funds which magnify gains and losses. Pick mainstream offerings with lots of liquidity.
  • Max your tax-free savings account. As of January a couple can have a hundred grand there – plenty of room to have a balanced portfolio, with taxless profits.
  • Don’t panic or worry about timing the market. You’ll end up selling into a storm and buying into a boom.
  • The best time to invest? When you have the money. If you’re investing for long-term financial security, there’s zero advantage to waiting.
  • Own bonds. Sure, the returns suck but they zig when stocks zag. That keeps you safe and mitigates losses.
  • Have a joint non-reg account with your spouse. You can income-split, and if anything happens to one of you, the other gets it all with no legals.
  • Take your CPP at 60. No exceptions.
  • Never believe it’s different this time. It isn’t. It’s boring. You’re not special and these are not defining years.
  • Be tax-efficient. Earn money in the form of capital gains and dividends, not interest, rent or salary, and you will pay as little as half the tax. Wealthy people don’t get that way by working for a living.
  • Expect volatility, then forget about it because you have a balanced and diversified portfolio.
  • Shun GICs. Hold some cash in a HISA if it makes you feel fuzzy, but there’s no justification for locking up funds with the bank, paying taxable interest on money you haven’t received and losing ground to inflation.
  • Never bet against America. It may be fashionable, but it hasn’t worked yet. US corporate profits are forecast to rise 10% in 2016 and 12% the year after. Canada? Nope.
  • If you don’t have the time or stomach for this, hire someone. A fee-based advisor should charge no more than 1% all-in, and it could be deductible.
  • Strive for balance in your entire life. Not too much real estate. Sustainable debt. Love somebody. Get a dog. Know nothing’s more precious than time, including piles of money.
  • Bonus tip: stop reading the comments section.
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