Apocalypse later

PIANO modified

 

The four horsemen are riding our way.
DOUG By Guest Blogger Doug Rowat

Don’t take my word for it. None other than Warren Buffett said the same thing in his most recent Berkshire Hathaway (Buffett’s company) shareholder letter:

“There is…one clear, present and enduring danger to Berkshire against which [we are] powerless. That threat to Berkshire is also the major threat our citizenry faces: a “successful” (as defined by the aggressor) cyber, biological, nuclear or chemical attack on the United States. …what’s a small probability in a short period approaches certainty in the longer run. (If there is only one chance in thirty of an event occurring in a given year, the likelihood of it occurring at least once in a century is 96.6%).There is no way for American corporations or their investors to shed this risk.”

But why would you plan your life around this inevitable but unpredictable outcome? When the apocalypse comes, I’m simply going to take my best bottle of Macallan single malt, sit on the curb and watch the fireworks. Until then, you gotta live! And invest.

Certainly Warren Buffett has been unafraid to do this. He didn’t accumulate a net worth of US$66 billion because he sat around fearing the end of the world. In fact, the remainder of his newsletter is actually incredibly optimistic. Becoming consumed with fear is the biggest hindrance to wealth creation. It’s not a bear market, recession, speculative bubble, or even Donald Trump who will make you poor. It’s fear.

Lacking the courage to get invested and stay invested is what costs investors the most. We occasionally have clients wanting to “go 100% cash” after every bump in the road with 2015 being the most recent example. These are such poorly considered and extreme reactions. Ryan (the other guy you’ve been fileting here on Saturdays) and I have been studying markets for a long time, but, to be blunt, we have no hope whatsoever of timing them on a week-to-week or even month-to-month basis. Therefore we would never make such a drastic wager with our clients’ asset allocation. But you say you personally know a guy who went to 100% cash right before the credit crisis? Good for him. Did he get back in again at the bottom? And can he consistently repeat this successful timing over and over? He cannot.

If you want to prosper, you have to participate in markets—even bad ones. Your advisor can help you adjust your asset allocation based on prevailing market conditions, but this is a process of careful hedging not of making large and absolute bets. If risks are building, perhaps you increase your cash weighting from 5% to 15%. But you should never take your portfolio to 100% cash or even 50% cash. Why? Because extreme positions are dumb and markets, the vast majority of the time, move higher.

Yet despite the overwhelming evidence that this is the case, there will always be fear mongers trying to convince you that the end of the world is coming. Ignore them. I’ll quote myself (I’m pretentious that way) from a newsletter I wrote a while back:

“Focus on the basic probabilities. The S&P 500 has data going back decades over countless economic cycles. Without over-complicating the matter, look simply at full, calendar-year returns. How often does the market trade higher? Over the past 75 years, more than 73% of the time. In other words, the odds are clearly in your favour that during any given year, you’re likely to make money.

“If your holding period is longer—10 years for example—the odds of a positive return are even more stacked in your favour. The S&P 500 virtually never records an annualized loss over a rolling 10-year holding period. Historically, the odds of the S&P 500 recording an annualized positive gain over 10 years are 90%. (Create a balanced portfolio with some bonds and fixed income exposure to offset the negative equity periods and your odds of recording a positive annual gain increase even more.)”

I also found this recent chart interesting. It juxtaposes the quotes of some fear-peddling ‘experts’ versus what the market itself actually did. The lesson? Fear might sell, but its accuracy sucks.

Still, the world will end. Someday. But when the nukes sail past, it’s over anyways. There ain’t anything that’s going to save your investments. Not government bonds (what government? have we learned nothing from “The Walking Dead”?) and certainly not real estate (have you seen the buildings after Hiroshima?). But until The Big Day arrives, you have to make the best of it and invest your money. And keep it invested.

Prefer to go to cash and wait it out on the sidelines? Nice view from there. You can watch braver, more disciplined investors get richer.

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

Vicious

BEWARE OF DOG

It’s now a month since I issued the latest (and last) ‘get out’ warning for homeowners in Delusia, aka YVR. Let’s review what’s happened since then.

But first, why (in early July) did I tell you the Van market was about to roll over?

Here was the warning on July 11th:

My advice on real estate in Vancouver bears repeating. Get out.

If you’ve made a windfall profit, take it and run. If you’re leveraged up to the pits and speculating on big gains, bail. If you’re within a few years of retirement with most of your net worth in four walls, suck it out. If you cannot afford to see your equity peeled back by a third or more, and stay that way for years, then retreat. If you listened to Mom and bought a condo with diddly down, get out. If you’re a Westside gazillionaire, and want to stay that way, sell. If you just bought a shack for $2.8 million, well, too late.

The evidence of a substantial decline in the months ahead seems overwhelming.

That evidence, presented at the time, was bountiful. Detached home sales were plummeting – even before the Chinese Dudes Crash Tax was applied by an accident-prone provincial government. The number of deals tanked by 8% from May to June. The decline was 30% in Burnaby, 28% in Richmond, 26% in East Van and 35% in the west. I asked: Does this look healthy to you?

Meanwhile the sales-to-list ratio was plunging, a barometer of supply-and-demand which was flashing yellow. In early July it was at the lowest level in three years, toppling from a peak of 83% in March to 59% during the summer. In the east end of town, it plopped from 86% to 49% and in the west from 82% to 46%. Ill winds were blowing.

And more: RBC’s affordability survey showed families being crushed, with over 100% of net income required to afford the average home even with a 25% deposit. Your city is an accident waiting to happen, this pathetic blog said. Get out.

And more: fewer jobs, as 40,000 full-time positions were being lost, replaced with thirty thousand part-timers. The national labour stats were turning in April and May as the economy stuttered in the wake of the Fort Mac fires, trailing trade numbers, weakening dollar and volatile oil. In July, they hit fail.

How could it not have been obvious a month ago, and earlier, that this gasbag was ready to blow? Prices wobbled higher on thinning trade, with fewer market participants, an abrupt end to multiple offers and a withering of interest at the top end of the market. Of course, all of this was being cleverly masked by the Greater Vancouver Real Estate Board which publishes headline-grabbing year/year price stats and attempts to fool the mainstream media. It works. Month after month. That’s what an engineered Frankenumber is supposed to do – keep consumers blind to key trends.

Well, since then things have (predictably) fallen off a cliff. The BC 15% levy on Chinese buyers (the new head tax) was the final straw. The market is now in serious trouble. It’s not so much that foreigners have dissipated, but that FOMO has. Remember that over 90% of all transactions in Vancouver are local-to-local, but that the irrational fear of missing out had driven these folks into a debt-snorfling, buy-now-or-buy-never frenzy. So when people think the Chinese dudes have departed (thanks to the tax), they back off, join the sidelines and wait for the market to fall. So it does. Even more than it already was.

Real estate is the most volatile and emotional of assets. This should give you all the proof you need that people create bubbles. Economies never do. And everyone will pay a price for this gaseous Godzilla.

Days ago I gave you Zolo’s report on the market, which the MSM has since picked up and spread widely. Here’s the latest summary of Vancouver detached houses. Ouch. Down 21% in a month, and now down 9% over the year – just weeks after the realtors told us it was up 32%.

SUMMARY

And here is a chart showing average sold prices in Vancouver. This is exactly why it made utter sense for anyone with a windfall gain in YVR to be cashing out of that market over the past year. Nobody ever gets creamed by selling too soon.

SOLD CHART

Prices are down 18% in Richmond in a month. They are negative 22% in Burnaby over the past 90 days, while North Van houses have given up 10% so far. Over the whole region, there was a drop of 19% in sales last month, even before the tax took place. Richmond sales are down 96% and in Burbaby it’s a 95% collapse. As this blog also told you, the sales/list ratio went from over 100% before July 25th to just over 50% two weeks later. In the first two weeks of August, total sales in the west end fell by 94%, to just three.

In a word, it’s freefall. The average detached house is $300,000 cheaper than it was at the peak, with more to come. How much more is an open guess. Count on lots.

TOTAL SALES

Finally, this is not just a Vancouver story. With real estate-related activity now adding up to 20% of the national economy – more than energy and all manufacturing combined – a collapse in YVR will have national implications. “Over-reliance on the real estate market is hardly the sign of a healthy economy,” TD economists said this week.

Of course, nobody in Toronto believes it. But it’s time to get out there, too.