Entries from December 2013 ↓

The hedge

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When he sipped on his Starbucks and gazed out my 53rd-floor window at the crazed ants below, Seth Daniels was categorical. “There are going to be a lot of surprised people in Toronto” he said. “Even more in Vancouver.”

I told you about this guy. He’s a hedge fund manager from Boston, with JKD Capital. He believes since all the ants now have themselves up to their thoraxes in debt, the future’s a given. They’ll be squished. And that reeks of opportunity.

So Daniels came to see me as part of his research for a new hedge fund, to be launched in a few weeks, called the Spartan/Libertas Real Asset Opportunities Fund, which is betting heavily Canadian homeowners are but months away from an insecticide cocktail. And while it’s not easy to short the housing market here (as it was in the States), Daniels and his colleagues are determined to try.

As you know, lots of people (like them) think we’re insane.

While the Canadian economy decelerates, jobs are lost and incomes stagnate, housing prices continue to climb. Realtors claim the November year/year gain nationally was 9.8%, with sales romping in Toronto (up 14%), Calgary (19%), Vancouver (37%) and even Saskatoon (10%). At the same time more layoffs have been announced than in any period since 2010, while the Bank of Canada has started talking darkly about deflation.

The Economist says we’re idiots. So does the IMF. And Goldman Sachs. And Deutsche Bank. When measured against what people here earn, and what a house rents for, prices are overvalued (depending on the expert) between 30% and 60%, compared to global standards. Household debt is extreme and now that the Fed’s started the tapering process, it’s only a matter of time before fixed-rate mortgage costs bloat. Potash and oil and gold are not exactly hot, and inflation just died. So, what are the ants thinking?

On Friday, as news finally broke in the MSM (Globe and FT) I asked Seth and his buddies for the inside track on a fund which will be available on FundServ and RRSP-eligible, but only open to accredited investors (a.k.a. ‘wealthy’). Here are a few of the things they gave me to pass along…

On timing the market:

Daniels argues Canada is saturated in credit, thanks to crazy-low rates and CMHC insurance. So as credit dries up (through regulation and bond market yield moves) the number of new buyers will shrink fast, and the market cave – especially once the meme of rising prices is proved false in a country overweighted on real estate.

“Timing credit bubbles is notoriously difficult, and in Canada it is even more difficult due to CMHC, as well as global quantitative easing policies. That said, I think that 2014-2015 will be pivotal years fo Canadian real estate. I always come back to the basics: supply and demand. I think that both supply and demand will begin working against the industry over the next 2-3 years. On the supply side, we have an unprecedented number of Toronto condominiums due for completion in 2014-2015. On the demand side, it appears that most of the marginal buyers are already long housing (Canadian home ownership rates, household debt, and use of HELOCs rival or exceed those of the US at its peak in 2006) and new regulations are constraining the availability of credit.”

On when to invest. Here is Gary Ostoich, president of Spartan Fund Management:

“We believe that the real estate market will experience a significant correction which will provide investors of the fund the potential for significant gains. This is a matter of when (not if) the market corrects. Timing is always difficult therefore we believe that it is prudent to have a hedge in place beforehand and not wait in the hope of reacting to the correction as it occurs.”

On how they plan to do it. Here’s Michael Brown, portfolio manager of the fund:

“We have spent a great deal of time researching the potential repercussions of a deflating Canadian housing market and its investment implications. We search for investments that will suffer from small losses when we are mistaken and large gains when we are correct. We strive to minimize the carrying cost of these positions. We are not able to discuss specific investments, but our goal is to  construct a portfolio of investments across asset classes that we believe will most effectively hedge out portfolio exposure to the housing market for Canadian-based accredited investors. Unlike in the US in 2007-2008, there are no instruments that are perfect hedges to the housing market, so all of our investments are indirect hedges, however we do have more tools available at our disposal than the typical manager since we are able to invest across many asset classes beyond equities and equity options.”

I’m not endorsing this fund, of course. But it’s an interesting play. Remember that to invest you need the ability to sustain losses (accredited investors require an income of $200,000 and a million in assets) and Brown suggests, “we think that minimum of 1-2% may be prudent for investors with exposure to housing.” That’s right – it’s ideally for hedging against your own weighting in real estate.

Of course, if you have a million in financial assets, you’re probably no ant. For the rest of us, the real estate play is simpler. Sell.

Suck it up

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Days ago F shocked a room full of suits by shutting down three years of haggling over the national pension plan. Worse, the little devil was racked with a cold so nasty he was barely able to croak. But he made it clear, nonetheless. The CPP stays the way it is.

Like Al and Freda, most people have no idea what crumbs they’ll receive when they stop working and start wrinkling. After paying into the plan for an entire career, the average benefit received is just $700 a month. The self-employed may get nothing. Ditto for stay-at-home moms. And the Old Age Supplement at 65 gives a paltry $530 monthly.

“It’s a shocker,” Al told me from Winnipeg earlier this week. “Maybe it’s my fault for never looking at this stuff, but I just assumed the pension would be there for us when we needed it. And now, godammit, we need it.”

It’s still there. But nobody can live on the public dole. You might exist, but it won’t be fun. Nor was it ever designed to support you. The CPP was meant to be just one of three income sources in retirement, the others being personal savings (as in an RRSP) and a company pension.

For most people those corporate plans are either gone or morphed into a scheme whereby an employer matches your own RRSP contributions, which are then dumped into some dodgy mutual fund. In other words, the outcome’s totally unknown until you actually approach retirement and in most cases, is miserably inadequate.

Remember that 70% of people no longer have a traditional company pension plan. RRSP contributions have plunged since 2007. The amount of money diverted into residential real estate is epic. At the same time personal debt has exploded (thanks to housing), and our ignorance level has scaled new heights.

TFSAs, for example. I have a hard time believing it (actually, I don’t) but almost 90% of Canadians have no idea what can go into a tax-free account, while 81% don’t know the annual contribution limit, according to a new bank survey. How can folks be so dumb in an age when everybody Googles?

Because they don’t care, obviously. And so of the 48% of Canadians with a TFSA – the single most important retirement-savings vehicle in the land – only a small fraction actually use it. This means the chances are high that Al and Freda’s son, Brent (now 28), will end up exactly like his hapless parents.

As you know, over 40% of people within a decade of retirement say they’re not ready. Half of the other 60% are lying. The average RRSP is now less than $50,000 and the average age for owning one is 46. Four in ten tell survey-takers they have trouble making monthly payments, even at a time when debt rates are the lowest in three generations. Making it all more worrisome is the apparent wussification of our youth, with young people horny to buy condos using extreme leverage but scared poopless of investing in financial assets. Nobody understands risk any more.

It’s not hard to see where this is going. Especially in a nation where the economy’s slagging, youth unemployment’s 15%, degrees are meaningless and the one thing everybody owns – real estate – has a troubled future.

That’s what some politicians worry about. Ontario’s premier says she’ll probably make pension plan reforms part of her next election campaign, for example. But this is instilling false hope. Even if CPP contributions were almost doubled immediately, as the Canadian Labour Congress suggests, the average pension of $24,000 would not be fully in place for another 40 years. Making it all more urgent is the impact that nine million aging-by-the-second Boomers will have on public finances over the next three decades. Keeping the health care system functioning will be intense.

So, F just proved even a peckerettte can do the right thing. But for the wrong reason. CPP premiums should not be goosed (so payouts can rise many years from now) because it will hurt the economy. That may be true, but there’s a larger issue. The government’s simply not capable of paying people to retire. Period.

That’s why they get capital gains tax-free returns on their houses. Why they can deduct retirement plan contributions from taxable income. Why half of investment profits aren’t subject to tax. Why a couple can stick $62,000 in a TFSA by January and grow it for decades with nothing to pay. Why you can earn $48,000 a year in dividends, free of tax. Why you can sell yourself assets you already own and get a tax refund for doing so. Why you can income-split and pension-split.

The problem ain’t the system. It’s us.

This is also why I sucked as a politician.