Haters

As difficult as it may be to grasp, not everyone loves me. That’s understandable. Luckily, I don’t actually care (despite the words that follow). But what’s harder to understand is why many of those who regret my existence still come here every day. Are they hoping to see a train wreck? Do they have emotional ambivalence and actually worship me (since I’m almost always correct)? Is it the dog pix? The poignant relationship and marital tips?

Dunno. But there are a few points recently raised by the detractors which should be clarified.

For example, a few days ago my colleague Sinan visited a topic that’s been thrashed a few times here: when to take CPP. At sixty, when first offered? Or later when payments are higher but you’re closer to The End?

The advice has been consistent: when the government gives you money, take it. Invest it. Tax-shelter it. Or spend it enriching your daily life. After paying in for 30 or 40 years, why would you wait?

Well, that prompted several variations of this: “Financial advisors like Garth tell you to take CPP early so they can make fees managing the investment assets you don’t draw down as a result.”

Seriously. Some people believe that.

First, if this blog was only about snaring clients and goosing advisor fees, it wouldn’t offer free investing, tax-saving and financial planning advice 365 days a year. You wouldn’t be reading original content from myself and four professional portfolio managers with serious letters after their names and decades of experience. And did I mention it’s free? And daily? Including holidays?

Second, the average CPP payment is south of $750 a month. That’s nine grand a year. Not even gas or grocery money. That’s the amount one should expect as income on a retirement portfolio of less than $150,000, which is insufficient to engage most fee-based advisors. In reality we ensure all the families we care for have the correct CPP and OAS strategy worked into their long-term plans. The basic premise holds for everyone: take money when offered, even if you don’t need it for income. It’s yours. They took it from you over the course of a working life. Sweetening payouts by delaying them five or ten years is a ruse designed to make you wait and ultimately collect less. Don’t fall for it.

When it comes to renting-vs-owning, the knives always come out. Days ago I lit into the dweebs at Zoocasa who tried to flog a media release saying it was more beneficial to buy a starter condo in Mississauga than rent the same unit.

“Garth picked a one-bedroom condo just to prove a point. If you buy a house the odds are way better that owning beats renting,” the haters said.

The post, as stated, was in response to the math Zoocasa used to ‘prove’ its point. Comparing just a mortgage monthly to a rental payment ignores all the other costs of ownership, from closing fees to property taxes, condo levies, insurance premiums and sales commission. In no instance in any major city in Canada is owning cheaper than renting, especially so when the opportunity cost of a major (20%) down payment is factored in, as it should be.

Today it’s worse. Rents may be up, but so are mortgage rates. That means increased interest paid each month and a far larger amount left owning upon renewal. Even worse is the 30-year mortgage Zoocasa ignorantly suggested, since that exacerbates the interest cost.

As for the example of a 700-foot condo vs a house, we can do the math on that at any time – but the fact is prices are still too high to make this even a remote possibility for most newbie buyers. The real estate correction is in full flower and has a long, long runway yet to go. And that brings us to this comment from the anti-GreaterFool squad…

“Yeah, we know what this site is all about. Houses bad, stocks good. Garth you are a slimy, self-serving hypocrite.”

Facts are facts. Real estate is in the midst of a multi-year contraction which will not end until affordability improves. That will come through a drastic drop in interest rates (not happening) or a meaningful decline in prices (happening). If history is a guide, it could be a decade before conditions return to those of 2021.

This was inevitable. It was forecast. We told you the cost of money would rise. We detailed the inverse relationship between mortgage rates and home prices. And we showed, with nauseating repetition, why a one-asset investment strategy is fraught with risk.

This site’s always been about balance. That’s the philosophy behind a 60/40 liquid portfolio, and the Rule of 90 when it comes to real estate. We told you the biggest risk in life is running out of money, not losing it in an investment that declines. We’ve reminded you it’s possible to rent a roof when you’re old, but you can’t rent an income. Only buy a house if you can afford one and doing so doesn’t gut your finances or bury you in debt. Never act through FOMO, peer pressure or the foibles of a distorted society.

There, well. I feel better. Now please try to behave.

About the picture: “Rufus is a soulful 14-year-old cairn terrier,” writes Jay, “who keeps me grounded.  As a landscape contractor he is the perfect companion, as we both enjoy digging in the dirt.”

What’s the Fed to do?

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RYAN   By Guest Blogger Ryan Lewenza
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Over the last week we’ve received two key economic reports that provide a direct line to future Fed rate decisions. And those interest rate decisions could largely dictate where the stock market heads over the next 12 months.

Today I’m going to review the July US Consumer Price Index (CPI) and the nonfarm payrolls reports to see what insights we can glean with respect to the future direction of interest rates.

First up is the US CPI report, which came in better-than-expected and could signal that peak of inflation that we’ve been calling for. US CPI was flat in July on a month-over-month (m/m) basis, following the 1.3% monthly increase in the prior month. As we expected, falling energy prices helped to moderate inflation last month.

More importantly, inflation on a year-over-year (y/y) basis declined to 8.5% in July, down from the 40-year high of 9.1% last month. While core inflation, which excludes volatile food and energy prices, held firm at 5.9% y/y, this drop in headline inflation is huge and signals a potential peak in inflation.

The importance of this development is evident with the North American equity markets rallying strongly on the day of the release. If this trend continues then we might be through the worst of this inflation scare and closer to the end of the aggressive Fed (and BoC) rate hikes.

But let’s not get too ahead of ourselves just yet.

US CPI Declined to 8.5% Y/Y in July

Source: Bloomberg, Turner Investments

Moving on to the latest US jobs report, we saw another great jobs print with the US economy adding 528,000 jobs, crushing estimates of 257,000. With the July job gains the US has now recovered all of the Covid-19 job losses.

Wages also rose and now stand at 5.2% y/y and the unemployment rate stands at 3.6%, which is tied for the lowest level since 1969.

So basically full employment, the lowest unemployment rate in 50 years, and wages are up. That’s a pretty bullish sign for the US economy.

This strong jobs report all but ensures a big Fed rate hike at their next meeting in September. We’re likely to see the Fed hike by 75 bps at that meeting then the Fed taking its foot off the pedal with a few smaller 25 bps hikes. Using a baseball analogy, I probably put as at the seventh inning stretch of rate hikes for this cycle.

North American Unemployment At Record Lows

Source: Bloomberg, Turner Investments

You would think with a 50-year low in the US unemployment rate that Americans would be singing from the rooftops but this is far from the case. One possible explanation for this is the steep decline seen in the US Labour Force Participation Rate.

The US Bureau of Labour Statistics (BLS) is responsible for US employment data. They classify all persons over the age of 16 as “unemployed if they do not have a job, have actively looked for work in the prior four weeks, and are currently available for work”. The labour force is then defined “all persons classified as employed or unemployed”.

As seen in the chart below, the US Labour Force Participation Rate has been steadily declining since 2000 and dropped like a stone following the pandemic. What this captures is that many Americans have stopped actively looking for work and have exited the labour market. Also known as the ‘Great Resignation’, many Americans have simply thrown in the towel and have given up looking for work. As a result this has impacted the US unemployment rate, by pushing it lower than it otherwise would be.

So while we should all be rejoicing the historically low unemployment rates in the US and Canada, it needs to be noted that some of the decline in the unemployment rate is due to a drop in the participation rate rather strictly due to an increase in employment.

US Labour Force Participation Rate

Source: Bloomberg, Turner Investments

Putting it all together, the very strong US employment data and high inflation levels will keep the Fed hawkish with more rate hikes to come. While the Fed is monitoring the declining Labour Force Participation Rate (a negative trend that suggests fewer rate hikes), they remain laser focused on the still high inflation levels and core inflation being well about their 2% target range.

Below are the current implied market expectations for the Fed Funds Rate with the markets pricing in another 125 bps of hikes before the Fed is done. The market then sees rate cuts later in 2023. This is consistent with my expectations and one big reason I see the stock market rallying in 2023.

Current Market Expectations for Fed Rate Hikes

Source: Bloomberg, Turner Investments
Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.