The odds

Well, this is interesting. Six more sleeps until our central bank shoves interest rates considerably higher. News comes this week that the average suburban GTA property sale price has dropped from $1.7 million to $1.4 million. The deceleration appears to be running at $100,000 per week in many hoods. Mr. Market giveth. He also sucketh away.

This has led to a wave of terminations of existing listings as sellers recoil from what they perceive as a “financial loss.” It’s human nature being weird again. Any owner accepting an offer for under the peak price paid by some GreaterFool goof two months ago is seen as a loss. So they retreat and hold out for better days. It could be a very long wait.

The mood on Main Street darkens. Thus price declines become a self-fulfilling prophecy.

Two major surveys came out this week that you should note. Pollster Angus Reid found the greatest number of Canadians in 13 years expect to be worse off financially in the months ahead. Almost four in ten say their situation has deteriorated in the past year. No wonder roughly the same number plead with the Bank of Canada to stop its rate-hike cycle, even though that’s the best medicine for decades-high inflation. (And the US Fed just confirmed it’s on the same path.)

Incredibly, 50% of Canadians say it’s now hard to feed their families. One in five are “extremely worried” about their debt. The housing market is becoming terrifying. Says the pollster: “If you’re in a home, if you’re carrying a mortgage, you’re worried abut the resale cost of the overall value of that home over the short and long term. All of that (is) leading to a place where we are seeing 45 per cent of Canadians saying, ‘Look, let’s have the Bank of Canada wait and see a bit (and) not be too exuberant about another interest rate hike.’”

And here’s my pal Nik Nanos with his latest Bloomberg sentiment sampling. He finds 41% think their finances have deteriorated in a year – retreating to 2008-level anxiety. Overall confidence is back to the depths of 2020 – when Covid was going to kill us all. Central to this is the housing market plop. A year ago everyone said they wanted cheaper real estate. But they lied.

Why are these results so peculiar?

Source: Bloomberg; Nik Nanos

First, houses. Prices may be decelerating, but they’re still 15%-25% (depending on the area) ahead of year-ago levels. This is found wealth. Windfall gains. Tax-free. Historic. What’s not to be happy about if you bought when the pandemic hit? Even in Bunnypatch?

Second, financial assets – despite the plop since mid-February and Putin – have done extraordinarily well of late. The three-year advance for a B&D portfolio to this past winter was at least 36%. Now it’s temporarily given back about 7% of that. How is this a crisis?

So the polls and the social media howling and moaning tell us a few things: folks borrowed way too much money, especially to buy real estate, and never budgeted for higher debt-servicing costs. Second, too much net worth was placed in one asset, now the most visible source of perceived losses. A one-horse strategy is never a good idea.

Most fundamentally, we do not have balanced lives. Too little saved. Too much being spent. No reserves. A lack of discipline and planning. Too many folks borrowed against the future, acquiring today what they needed to borrow heavily to get. That makes them seriously sensitive to economic and financial shocks – which we’re experiencing in spades.

The war. Swelling inflation. Interest rates that have doubled and will triple. A possible recession. Gas at two bucks. Shortages and supply chain issues. The demise of WFH and renewed employment costs. Add in a decline in real estate values, and this combination triggers alarm and dismay. Everybody moaned about their kids not being able to afford their first home. But nobody really meant it. In fact with ubiquitous Bank of Mom deposit loans and mortgage co-signings, millions of families increased their real estate exposure. So this is scary.

What could change sentiment, and the path ahead?

Putin gives in, Ukraine wins and the war ends. Odds of that: zero.

Central bankers raise interest rates two or maybe three more times, real estate takes a dump, stocks swing wildly, inflation data moderates and they announce a pause in August. Odds of this: three in ten.

Monetary policy stays aggressive, the benchmark rises, markets wobble and late in 2022 cost-of-living numbers improve. Further rate hikes are put on hold. Stock markets roar higher. Housing values continue to drop with mortgages above 5%. Odds of this: eight in ten.

Now you know.

About the picture: “Meet Rusty, Mabel and Rocky.,” writes Dan. “We adopted Rusty (3 year old Beagle), bought Mabel as a pup (now 1 year old Beagle), and bought Rocky as a pup (12 year old Yorkie/Shih tzu mix).  They have become irreplaceable family members!  And here they are looking at me at the bottom of the stairs (unharmed), after slipping on a toy, wondering, ‘hey, can we have that back?’. “


Humans are weird. As this pathetic blog has documented, we crave things other people want and buy them at ascending prices. We run and hide when the same stuff is retreating. It’s as if individual reason is routinely surrendered to herd mentality. And that’s crazy.

We’ve documented this mightily with houses. It’s the same with financial assets. Look at the Reddit-Robinhood crowd, for example, piling into bloated junk like GameStop or vacuous crypto, just because everyone else was. And now the pendulum’s swung to the other side, timorous folk think a 20% correction from all-time record highs for the S&P 500 means the market is going to zero. They recoil.

We all understand the situation. Post-pandemic full-employment, with the airports jammed, food inflation, gas at two bucks, war, China zero-Covid and rising interest rates have changed the narrative. Maybe there’ll be a recession. Maybe just a spanking. CBs are aggressive now but may dove out. We just dunno.

What we do get is that things which cost a lot more in February are cheaper now. That includes real estate – but given the fact it takes up to six months for mortgage changes to really have an impact – we’re likely nowhere near the bottom. If you buy with cash and plan to live there for years, no matter. But with 20x leverage, it could be a wild and painful ride.

Financial assets are different beasts. The volatility of the last few days gives us a good clue, as markets vacillate between huge gains and withering losses. Says my trader buddy Ed Pennock: “It’s way too early to announce that we saw the bottom. But, a lot of people are doing just that. The 10Y yield broke support at 2.81%. It got down to a 2.7% handle. The yield has blown out by 40 bps in a matter of weeks. The Analyst from Pimco who said she was buying treasuries at 3.2% is a genius.”

So if bond yields are retreating noticeably (they are) and investors are lined up to buy stuff at 20% less than it cost ten weeks ago, what’s the message? Don’t we still have inflation-Putin-CBs-Xi-Mr-Supply-Chain to fret over?

Yes. But assets like ETFs are not the same as bungalows. You can always find a buyer. You can sell with the click of a mouse. There’s always liquidity. And so long as the economy is growing, people are employed and companies are making money, the direction will be up. Recall that 85% of the time since WW2 markets have gained ground. They have retreated only 15% during that period.

Here’s what that looks like, nicely charted by the econs at Scotiabank:

Looking at that chart, do you seriously believe an economy coming out of two years of pandemic with pent-up consumer demand and a record heap of household savings is in peril? That two or four or six or eight interest rate increases will be any more consequential than tightening cycles in the past? Or that after recovering from sell-offs and draw-downs 100% of the time historically, it will be different now?

If so, stop reading. Because we’re about to meet Melissa.

“Long-time reader, adore the blog,” she says, just to ensure that I like her. “Eternally grateful for the advice. I have a quick question. I remember you mentioned it once before in a post a while back but what are your thoughts on dollar cost averaging? Is it a stupid way to invest?

This is how I’ve been investing, every month when I get paid I put away a certain chunk of money into my TFSA to buy my ETF’s. But I have a 10k line of credit with Tangerine bank at I think 2.45% interest. Do you think it would be a wiser idea to borrow from this to invest right now? I’m thinking its a great time to buy some ETF’s on sale but I don’t have a chunk of my own cash to put in right now. And I’ve never done this before, until I saw you mention something about this in one of your posts. Is it generally a better idea?

Dollar-cost averaging is fine. Your set contributions buy more when prices decline and less when they swell. Over time you pretty much pace the market. But you also miss opportunities. And this may be one of them – if you have a long-term investing horizon.

If M uses the ten grand the orange guys are offering in the form of a LOC, she need pay only interest – twenty bucks a month. Then she can deduct 100% of these payments from her taxable income, dropping the effective cost to (probably – depending on her income) less than 2%. At a time when official inflation is close to 7%, this is free money.

More importantly, she will buy assets that may be 20% cheaper than weeks ago, with overwhelming statistical odds they will recover recent highs over the coming weeks/months. That would yield a capital gain which, if realized, is 50% tax-free.

But both tax-deductibility and the cap gains gift depend on her investing in a non-registered account, not a TFSA. Worth considering. In fact, most people would benefit in retirement from a non-reg account (and all married couples should maintain a joint version, for tax reduction and estate planning).

So you can moan and fold like the wusses below decks, or you can be a man like Melissa. (Did I just get into trouble?)

Career Opportunity

Over the past few years several blog dogs have ended up as colleagues at Turner Investments. Their contribution has helped this become one of the larger financial practices in the country, serving clients across the nation. So I am grateful. And here we are – hiring again. Wisely, I am coming here first in the search for another Administrative Assistant. It’s a permanent job with decent benefits like the privilege of working with a crusty blogger-advisor. Location is Toronto. Bay Street. You need to come to the office daily and wear pants. Start date is immediate. Having financial education is great (CSC, for example), but we train. If interested, send a note and your CV. Email me at [email protected]


About the picture: “Hi Garth, meet Dixie,” writes Lori. “Your newest blog dog, ten week old bichon/poodle mix.  Fresh from her bath, should have called her dynamo!  Have loved reading the blog since forever, thanks!”