Entries from December 2013 ↓

Garth vs 2013

Vegan modified

Yes, it’s that time of year. Power outages. New Miley vid. Futile resolutions. And a review of my DELETED comments file. It’s now official. At 284 pages, single-spaced, 12-point type, it’s the most in-depth, complete and exhaustive collection ever of people on this blog describing me as the most bad-assed, incompetent, egotistical, ill-informed mofo ever to terrorize a laptop, and an unsuspecting nation. I am humbled.

And 2013 started off with a tub of bile after I made a bunch of calls about the year to come. Just to refresh your memory, I said:

  • Tea Party zealots would futz Washington, roil markets and create a buying opportunity for investors.
  • Long-term mortgages would rise, as bond markets roiled. Anyone wanting to lock in should do it before autumn.
  • New condos would stutter, with cancelled projects and falling sales. The chill would spread to the detached world.
  • Anyone taking advice from [email protected] to buy bond mutual funds would regret it.
  • The biggest risk with stocks would come in not owning a bunch through a diversified ETF.
  • People hoarding precious metals and toilet paper would find only one of them useful.
  • F would chicken out on more house-cooling measures, declaring the market fixed.

Hmm. Some hits, some misses. As you know, the trouble with predictions is that they often involve the future. As it turned out, Tea Party nutbars did try to derail Obama, shut down Washington and cause global worries about default. But it passed. Equity markets rocked. The bond market got its panties in a knot over tapering (which I assured you would start. It did.). House prices and sales recovered from the 2012 swoon, except the new condo market collapsed. And for every time F said real estate would soft-land, another international report surfaced saying Canadians are house-lusty morons.

So, here are nine things this pathetic blog kept yammering on about during 2013, and how they all turned out.

Mortgage rates: When a 10-year, fixed-rate home loan was available for little more than 3.5% and a fiver for 2.99%, I said grab one. Shall not pass again. And when the snow melted, rates started creeping higher as the bond market pushed yields higher and prices lower. Today a five-year mortgage at the Big 5 is almost a full 1% higher. Hope you listened.

Gold: What an unmitigated disaster 2013 turned out to be for the bullion bunnies, metalheads and doomers who used to flock here like cameras to Rob Ford. The yellow metal plunged dramatically on two occasions and ended the year 27.3% lower than where it started – which was 12% lower than the year before. What did these guys expect? There’s no inflation, no financial crisis and no reason to own precious metals. BTW, more losses are coming.

US equities: All year I told you the American economy was in a slow but relentless recovery. Housing prices, job creation, corporate profits, productivity, consumer spending – it was patently obvious, unless you were blinded by ideology, which seems to be a common disease around here. And with every tick higher, the skeptics predicted a 2008 rerun, only worse. Get a life, I said. Or a dog. And a nice ETF. The results are in, with the Dow up 28.8% and the broadly-based S&P 500 ahead 30.8%. Those people who kept their wealth in the orange guy’s shorts, and widdled out 2% because they feared loss, just lost. And it’s not over yet, by miles.

US stocks modified

Canadian stocks: A miserable record in the early months, but a great catch-up performance in the second half of the year as money flowed out of US equities looking for value. Investors  ended up with a solid return, as the TSX gained almost 13%. Of course, while poor GIC-holders were getting 2% and paying marginal tax rates on it, equity players earned six times as much and paid 50% less to Ottawa.

Our economy: For a couple of years you’ve been urged here to buy America and sell Canada. US markets (see above) doubled the return of Canadian ones, and house prices in the States have been increasing at the rate of more than 1% a month from dramatic lows hit six years ago. Now the Canadian economy is slagging so badly the Bank of Canada dude has actually used the D-word. Yep, deflation is closer than inflation, and high-profile layoffs are underscoring the fact that while Canada escaped a lot of the GFC grief, it’s now time for pay-back.

Their economy: As mentioned above, the US is absolutely, irrefutable, irrevocably in recovery mode. It ain’t quick, smooth, pretty or conventional. But it’s real and will continue. Let me repeat: don’t bet against America.

The housing market: In 2013, I said I was wrong. I thought Canadians were smarter, but c’est la vie. Sales undulated dramatically, but real estate values finished higher than the year’s starting point.  At just over $390,000, the average house added 9.8% to its worth, and is now double the cost of a similar US home. But there’s a detailed backstory.  Some markets (The Maritimes, SW Ontario, Kelowna, Fraser Valley) are struggling. Others (Montreal, Saskatchewan) are going nowhere, while others (Toronto, Calgary, Van’s saucy bits) bubble away. But even hot markets are segmenting, with condos and high-end sellers begging for buyers while bidding wars happen in the yuppie middle. Pray for them.

What crisis? The biggest story that didn’t happen is the one this blog swore would never occur. There were no bank failures, no stock market meltdowns, no US collapse, no hyperinflation or depression, no credit crunch and absolutely no rerun of 2008. Nor will there be. Those paralyzed by fear missed a solid year of growth, recovery and advance. Let’s hope they learned something.

In praise of balance: So, how many times have I bored you with talk of a balanced, diversified and liquid portfolio? Not too aggressive. Not overly conservative. Neither too hot nor too cold. No individual stocks. No costly mutual funds. Half or less in fixed income assets like a variety of bonds, preferreds, and trusts. Half in growth stuff, like a bunch of equity ETFs. Rebalanced often, selling the winners and buying the losers. Doing everything normal people don’t. There was a reason I urged this. The return this year was over 11%. The four-year average exceeds 10%. The decade-long advance is now 8%, including 2008. The volatility was low. The sleeping, good.

Now, I predict abuse.

How to worry

SUCCESS modified

Tomorrow (Sun): How this pathetic blog did in 2013

People think in extremes. Like Thomas. And of all the key motivators – such as greed, sex, food or fame – fear is the greatest. Nothing makes us take action faster, or more profoundly, than flight from risk.

It’s why people invariably sell stuff that’s lost value instead of waiting for it to recover. The reason: they fear greater losses. The apex was March 9th, 2009, when millions of retail investors threw in the towel and bailed out of stocks and funds in an avalanche of selling that marked the piteous bottom of the financial crisis. The people who bought that day have seen gains averaging 152% since.

Fear of risk is why there’s many times more money in savings accounts or GICs than Canadian investors have in stocks, bonds and all investment funds combined. Most people are afraid of temporary declines, so they embrace the lethal but masked risk of running out of money.

And fear of risk has driven astonishing amounts of capital into residential real estate, which now seems safe because everybody’s doing it. Unlike stocks or funds, houses aren’t revalued every day with the prices posted online, which means most people think there’s no volatility. What a flaw that is.

Anyway, here’s Thomas. He’s afraid of REITs.

“Just wondering if you could comment on how you expect Canadian REITs to perform given the impending housing doom you are forecasting? Are they going to continue to pay their dividends/yield at current levels and only drop a little in value? Are they going to pick up lots of new assets on the cheap as individuals flounder in debt? Are they going to bomb like residential real estate, or is office, health care and apartment real estate safer? Is this housing collapse like a pestilence and the entire economy will be marked by the black death for years and only a portion of it will survive? Which limb will the market amputate in saving the economy? People gotta live somewhere right, businesses need a location to operate don’t they? So instead of owning they are going to rent? REITs to benefit? Any ones more so than others? Invest now or later?”

Real estate investment trusts are pools that buy office towers, malls, nursing homes, apartment blocks or industrial properties (among other things). They collect rents from these income-producing properties and pass them on to investors in the form of regular distributions, which are sometimes structured as return of capital – which means the income is taxless. Often investors buy a basket of REITs instead of trying to pick individual ones. XRE is an example, which currently pays 5.09%.

But XRE is down in price 8.48% for 2013 (after giving a 19.01% return over the past five years). So Thomas (who would probably never worry about REITs if prices were still going up) now frets about their future, when they’re on sale.

Is this valid?

First, nobody (except the Ashen Princess of Doom over at TAE) is forecasting Canadian real estate will crash, taking the economy with it. That’s not on. But it will certainly correct, destroying the financial strategy of millions of families who thought they were smart having only one asset. They aren’t.  And while their net worth will suffer – as it did with US middle class families – there’ll be no discernible impact on the 68-storey, billion-dollar granite building in which I have an office, owned by two REITs. Nor will people stop shopping for clothes or groceries, stop getting old, or cease going to work in commercial complexes.

In other words, good-quality REITS with cash flow-producing assets should do just fine for decades to come. In fact, if we do have a nasty little real estate correction, many REITs will do better – like those which own vast portfolios of apartment rental units.

So why are REIT prices down over 2013, even though they continue to send investors regular cheques? Simple. Interest rates went up – they popped almost a full 1% during the summer after the US Fed said it would start cutting back on its stimulus spending (that happened before Christmas). Many investors stampeded out of stuff that was interest-rate sensitive (bonds, preferreds, REITs), and into stocks, driving the value of those assets lower. That held until this week, when tax-loss selling reinforced things.

So what happens in future when interest rates inevitably normalize? Won’t REITs be crushed?

Probably not. Maybe the opposite. That’s because higher overall rates will only come when the economy picks up steam and inflation expectations swell. Those factors always have a positive impact on income-producing property fundamentals. Demand for commercial space increases. Rent pressures rise. Occupancy levels go up. Already across Canada the median occupancy is 95% (down from 96% in 2011). Meanwhile many REIT managers (unlike homeowners) have used this period of crazy-cheap money to pay down debt, or restructure high-cost financing.

So, Thomas, there’s certainly a lot to worry about. Love handles. Outsourcing. Cholesterol. Rob Ford. Hair loss. Miley Cyrus. Poutine. Climate change. Condos. Dementia. Kias. Hackers. Monogamy. Exploding balconies. Men. The Senate. The Leafs. YOLO. Identity theft. Zits.

It’s a long list. But no pestilence. No black death. And no REITs.