Entries from August 2012 ↓

High risk

So my theme this week has been sunshine and puppies, hugs and canoodling. Clearly this  enraged half my readers, which makes it all the more fun. An astonishing number of people simply don’t want to hear about record bank profits, US rebounds or the sensual joys of a balanced and liquid portfolio.

But let’s be clear. Simply because investors can do very well today not owning real estate or hiding in a buried school bus with four virgins (trust me, it’s stressful), does not mean the world is over its funk. It ain’t. There’s more volatility ahead. Years of it.

Ben Bernanke made that clear when he gave a keynote this week. Unemployment is grave, he said. The economy is tepid. Without a foot on the gas pedal, this condition could last a long, long time. And so the US Fed will bring in yet another stimulus program in mid-September – opening itself to charges of political interference, coming just six weeks before the presidential election.

This means stock markets will roil, shooting up, then toppling back. Meanwhile the elfin deity known as F told reporters on Friday things are still screwed up. “There are risks in that big world out there and we’re part of the world,” the finance minister said. And he had this message for real estate addicts: “At some point, interest rates are likely to rise and that means residential mortgage rates will be going up over time. I think Canadians are increasingly getting that message.”

In fact, risks abound. Europe’s recession could deepen. Chinese growth could falter. Commodity prices could swoon. Unemployment could spike. Romney might win. After all, you wouldn’t have government officials like Bernanke and F saying this stuff on the same day if things were going according to plan. So while banks make bloated profits, the indebted masses struggle – which brings me back to yesterday’s basic point: own the banks, don’t owe them.

Real estate’s at the epicentre of this mess. House horniness in the US precipitated the GFC, and the same fetish will end up goring the Canadian middle class. The staggering pile of mortgage indebtedness means a continuous flow of wealth from families to lenders and, as F alluded, this will only pick up steam as interest rates inevitably recover to normal levels.

It’s all changing fast. Eight months ago, for example, the BC real estate association forecast a 2% price decline in 2012. This week it upped that to almost negative 8% – a four-fold increase. Of course, even that’s suspect, with Vancouver sales tanking and prices eroding 1% every two weeks. As I’ve said a few times, BC’s housing meltdown (Van, Victoria, OK) will sooner or later be replicated across the country. And if Quebec goes PQ on Tuesday, Montreal will be headed there by Wednesday at noon.

By the way, BC’s realtors have also given their prediction for 2013, which is flatline. Now imagine you bought a $500,000 starter, baby condo in Burnaby with 5% down. How would you feel after two years of an 8% slump, then a real estate recession, living in an illiquid investment?

The real risk we face is not the stuff doomers worry about. There will always be gas in the pumps, food in the stores and money in the ATMs. Nobody will be buying Jeeps with doubloons and no bank will fail. You don’t need $100,000 CDIC insurance, nor is there any reason to have a GIC. The risks are not systemic, global or exterior. They are what you bring upon yourself.

Real estate is a highly dangerous asset class at this time and into the future. Its typically bought with extreme leverage, increases living costs dramatically, and has the potential for large capital losses. In days of slow growth, quasi-deflation and debt there is no argument for capital appreciation. This is a lesson seven-tenths of the population, with varying degrees of heartache, will learn.

The next greatest risk comes with the flight from it. As people scramble to avoid risk they lock up money in dead-end investments paying less than even meagre inflation, like GICs, HISAs and savings bonds. They fork over usurious management fees for segregated funds which guarantee no loss of capital. They give money to financial packagers who promise to give it back with ‘guaranteed’ payments in retirement. And most folks (especially women, sadly) forget the greatest risk of all. Running out of money.

My posts of the last few days were intended to show how you can tap into the cash being spun off by banks or real estate trusts. How to be a real estate contrarian. How financial assets like preferreds can give stability, yield and low taxes at the same time. And how rolling the dice on Canadian real estate or trying to short systemic collapse with PMs is a high-stakes play.

Risk is the consequence of your own actions. Confront it.

Very disappointed

You are a coward. And now you think you’re an investment guru on the top of the world in a high rise tower… I say this. Enjoy the drop. You know it’s coming one day. Thing is, you lack the credentials and fortitude you claim to have. You are not a contrarian, you’re an opportunist. And no, I don’t think I’m hurting your feelings. Just calling you out as the sack of shit you are…

This, of course, is one of the side benefits of having a blog. Every eight or nine minutes some brave, anonymous hater lashes out. Over the last two days I have deleted more messages like the one above (they add nothing to our conversation) than in the entire last year. It’s so comforting to, you know, matter.

Hate’s a fairly predictable thing when I get too positive. In the last two days I wrote about raging bank profits (Scotia and BMO), aggressive REITs (H&R and Dundee) and rebounding US house prices. It’s obviously been too much to bear for the gang who comes yearning for collapse. That includes the precious metalheads, the god-and-guns rightists, the America-haters and those who want widespread social meltdown so they can afford a house in Kits or Leslieville.

They yearn for the good old days of February, 2009, when the world was teetering, and I was providing daily commentary on an unraveling capitalism. But, too bad for them, things have evolved massively. Sure, we’re in deep debt, Europe’s a mess, Canadian housing is at risk and a lot of unemployed 50-somethings will never work again, but the path ahead is starting to clear. Central banks will allow no sovereign defaults. No hyperinflation will destroy money. No chartered banks will topple. The US will slowly recover. Smart people will have financial assets which adhere to my divine trinity: balance, diversification and liquidity.

Here are a few more things to piss off the doomers. Bill from BC write me last night after reading my take on the nascent American real estate renaissance:

I hate to admit this but I tend toward the negative when looking at the big picture. I mean if I ran my finances like the powers that be I would be bankrupt with zero sympathy from anyone. But, when I read your post today about US real estate it made me curious enough to email a friend I have that left Vancouver last year to take a promotion in Phoenix, AZ. This guy is no dummy and I wondered if his promotion was well timed.

Here is his “man on the scene” response to my question on how is real estate doing in Phoenix.

“I have 10 houses I have bought in the last 12 months. Everyone at (his company will remain unnamed) is buying in the Phoenix area. Ex-pats living in Canada included. My houses returned 12% ROI cash on cash (rent). Add 17% appreciation to that and it is all sweet nectar. 52% of the homes sold in the last 12 months in Phoenix were to investors. People a lot smarter than me are buying in volume.”

It’s true. Phoenix house prices have been rising more than 1% a month, just like in Miami. And while buying and owning is hardly as simple as Bill’s buddy makes it sound, there’s a ton of evidence Canadian and US prices will be going in opposite directions. If American real estate does stabilize and slowly starts appreciating in most regions, those who bet against the country, hoarding rocks and ammo, will regret it.

As for the banks, they’ve just showered investors with a $563-million windfall. That’s how much will be shoveled into the pockets of bank shareholders through dividend increases announced in the last three days. That’s not all the dividends paid out – just the extra added this week

RBC has scored the biggest quarterly profit in the history of rapacious Canadian bankers, making $2.2 billion in just 90 days. TD raked in $1.7 billion (a record for it) while CIBC saw a big profit surge, to almost $900 million. Together the Big Six earned $8.2 billion in three months, and unleashed a storm of dividend increases. This has never happened before, so you can easily tell who’s profited from the country’s lusty obsession with real estate. Even if house prices tank and new mortgage lending dries up, most of this cash flow carries on. After all, there’s $1.2 trillion worth of home loans already in place, which will still be there even if condos crash and equity burns.

This is why it makes more sense to own the bank than owe it. And it’s sure wiser to collect 5% from stable bank preferred shares or 4% from bank stock, than keeping your ‘house money’ in a high-interest savings account paying 1.5%. Besides, interest is taxed at the highest rate, and dividends at the lowest. How hard is this to figure out?

Well, I must be off now. The Amazonian protection detail is ready to escort me safely out of the blog. I’ve added a few extra sinewy babes, er, warriors since hearing an ambush is highly likely. We expect to be pelted with Depends. And depreciating yellow rocks.