Entries from December 2012 ↓

Tuesday marks the dawn of the fifth year since the wheels came off. It opens in typical fashion. More volatility. Another political-economic slugfest. A chorus of doomers wailing the end is nigh, while most people just want to get by. What will 2013 bring, and what should you do about it? Here are ten things to start with.

Oh good. Another crisis. The year could well open as America goes over the fiscal cliff. Markets will roil as the politicians screw common sense and Tea Party zealots choose chaos over compromise. When they lose this fight they’ll start another over the debt ceiling. The results are predictable – weeks of turmoil and wild swings on Wall Street. Just as happened in 2011, it will be another buying opportunity. In September you will so wish you’d bought those equity ETFs in February. More below.

The condo virus spreads. As headline-grabbing as it was in 2012, the collapse in the condo market has barely started. In all major markets, Toronto, Montreal, Vancouver, Edmonton and even testo-drenched Cowtown,  projects will be cancelled, sales will melt and prices fade. But this is old. The real impact will be the chill that spreads to the SFH market in 2013, as armies of potential move-up buyers are trapped in their cement boxes in the sky. If you have a house to sell this Spring, in a middle price range and not in a traditional demand area, may God help you.

Born in the Seventies? Too bad. A grovely economy with imperceptible job growth, erasing white-collar positions and ongoing devaluation of a university degree – plus nine million desperate Boomers – means it sucks to be under 35. Get used to it. This is just the start. Plumbers are the new lawyers, and people smart enough to get MBAs should realize that borrowing money to start a business makes way more sense than investing in another degree. The contract IT guy who keeps the office online is the one who will get the Porsche first.

Fix your mortgage, now. When Mark Carney sails off in June look for the BoC to get way more interested in normalizing interest rates. Quarter-point hikes starting on October will be a modest start, but now that two-thirds of people have locked in to longer-term mortgages it’s the bond market you should worry about. Billions come up for renewal in 2014, and even more in 2015, when a five-year loan will be twice today’s 3%. If you have a VRM, lock it in by September and go long. If you have a renewal coming up later this year or in 2014, blend and extend.

Bonds’ big baggage. Carefully study what most people do. Ask the other daddies at the rink what they’re putting in their RRSPs this year. Probe [email protected] for her withering market insights and rapier recs. You’ll soon see that the Number One pick of most Canadians in woozy times is a bond fund, ‘because they’re safe.’ Wrong. A torrent of money will come roaring out of bonds and back into equities once it’s clear where corporate profits and US growth are taking us. Bond prices have only one way in which to move. More proof you will never, ever fail being a contrarian.

Why stocks are risky. Big S&P companies earned $1.75 trillion in the latest quarter, up about 12% from the same time a year earlier. These firms, in general, have paid down debt, become more efficient and productive (that explains unemployment), expanded markets and are sitting on mountains of cash. The biggest risk with stocks in 2013 is not owning a mess of them, preferably through well-diversified ETFs. Look for another year of double-digit gains, increasing dividends and preferential tax treatment. If you choose the orange guy’s shorts, however, expect negative returns after tax and inflation. And learn what ‘risk’ means.

Sell the ammo and tunafish. As this pathetic blog so richly demonstrates, a significant number of losers spend more time worrying about what happened in Zimbabwe, the US money supply or debt-to-GDP ratios than they do about their immediate lives. Big mistake. There will not be another 2008 in this generation as Europe has a further year of stabilization, the US economy grows, unemployment falls, American house prices and sales rise and corporate profitability augments. Hoard all the silver and toilet paper you want – at least one of them will be useful.

Strategy one: avoid tax. The feds and provinces have added more debt in the past five years than in the previous fifteen. Cutting the GST on the eve of a recession, for example, was a colossal mistake, helping achieve one mama of a deficit. With an aging population and more consumer debt than ever, Canadian families are vulnerable to what comes next: tax increases. Property tax, sales tax, user fees, clawbacks, surtax and bracket creep will inevitably follow on last year’s OAS attack. It’s not so much what you make, as what you keep. Tax avoidance is hot. I predict this blog will be full of it.

Why F will cave. In 2013 it will become apparent in Ottawa how much of a housing gasbag the government created, and how klutzily it was addressed. Just dropping mortgage amortizations by five years was enough to trigger a sales crash and plunge housing starts. Tossing CHMC insurance on million-plus homes and outlawing cash-backs was apparently overkill, as a staggering Vancouver will prove. Furiously lobbied by their developer friends, the feds will declare the housing market ‘fixed’ and throttle back. But the patient will still be dead.

The year Boomers bloat. If you think you’re sick of us now, just wait. In 2013 half a million people turn 60 in Canada for the first time ever. In fact in each of the next seven years another half million hit the same age – again, unprecedented. The greatest impact will be on the housing market since the majority of these people lack pensions or retirement nesteggs. Of necessity, many will sell, downsize or rent, ensuring a flood of listings and a glacial economy. Smart Boomers will exit now and embrace a balanced portfolio they can soon turn into an income machine. Dumb Boomers will check on the GICs, then drive their Kias to Costco.

Happy new year. Don’t blow it.

Those who root for the collapse of America think this fiscal cliff means something. It doesn’t. Well, perhaps that’s a rash statement – it could bring a hot little buying opportunity. It’s possible stock markets, after a winning 2012, could swoon like they did in the fall of 2011 when we had the last catastrophe and this blog was overrun with people begging you to buy gold at $1,900 an ounce. (It’s now $1,650.)

Remember that? It was the ‘debt ceiling crisis,’ when the fools among us said the US would default on its federal debt, triggering a systemic financial collapse and a plague of bats. It was, of course, political theatre. When the inevitable solution came, markets recovered and the economy marched on. Those who were smart enough to buy growth assets in the autumn of 2011 have seen them swell in value by about a third. Pay attention. A new gift could be coming.

With scant time left in the year it’s unlikely squabbling US politicians will cement a deal to stop robo tax hikes and spending cuts. Markets have lost ground as the deadline approaches. More significantly, the Vix – which measures volatility – has spiked. Given the big gains investors have scored in recent months, I can totally see a wave of selling that takes them off the table.

Nobody believes politicians will let the American economy fall into recession, and stay there. The tax increases and budget cuts will never hold. What markets do fear are changes to the tax code making investing less lucrative, since part of the cliff involves taxing dividends as income (bad) and raising capital gains taxes by a third (worse). Until that’s resolved, a mountain of money will stay on the sidelines.

This could mean 2011 comes back. That’s when markets were heaving by 400 points a day and the doomers among us predicted a tumbling economy leading to a banking collapse. Today the S&P is 22% higher and gold is 13% lower. US unemployment is down, corporate profits are up and American real estate has bounced off the bottom.

Look at the latest stats. Americans are buying houses again. More new deals than at any time since early 2010, when the government was paying people to make offers. Sales of new houses have just jumped to a four-year high. Bidding wars have returned to Boston, Phoenix, San Francisco and New York. As I mentioned this week, a fixer-upper townhouse in Washington just got 168 offers, and sold for $40oK over asking. Prices in Arizona are ahead 20% in a year. Mortgage rates are at rock bottom, and a jump in both jobs and consumer confidence has people thinking it’s time to pounce on houses which are 32% cheaper than in 2005.

This is exactly what I anticipated, and told you to expect. And look at business demand. New orders have jumped by the most in four months, commensurate with an increase in overall corporate profitability. In the third quarter alone US companies earned $1.75 trillion, after tax – that’s up 18.6% in a year. In the last four years corporate profits as a share of the US economy have risen by 300%.

Against these facts the people who’ve bet against America – telling you the dollar will collapse because of QE, society will disintegrate into food stamp hell, the unemployed will fill FEMA camps or the fiscal cliff is lethal – are wrong again. A recession ain’t in the cards. The American dollar will grow stronger, not weaker. And when rising inflation plus falling jobless numbers prove the Fed has printed enough money, then monetary stimulus will be withdrawn and interest rates will start their gradual ascent.

The contrast between our two countries will be fascinating. During four years of deleveraging Americans have paid off personal debt while we’ve wallowed in it. Home ownership rates there have tumbled while here they have soared. Mortgage borrowing Stateside has withered while here it’s hit one record after another. There houses dropped in value by a third. Here they rose as much. Meanwhile wage gains in both places have been similar, along with interest rates.

When it comes to risk, there’s no comparison.

In 2013 smart people will move money out of inflated Canadian real estate and into financial assets, with a growing exposure to the largest economy in the world. Next week could be a hell of a time to start.