Entries from October 2014 ↓

50 shades of taper

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Warning: The following post deals with explicit fiscal and monetary policy. It does not contain flogging or whipping. Jian Ghomeshi has left the site. The safe word is ‘yellen.’

Cast your mind back to the summer of 13. Fed boss Bernanke said his central bank would start to taper back on its stimulus spending, as the US economy was gaining strength. Of course, many people went nuts. Stocks turned volatile, bond prices tanked and yields spiked. Juicy assets like preferred shares and real estate investment trust fell about 15% in value. This pathetic blog was overrun by people screaming ‘sell’, while the contras said ‘buy.’

For years Washington has been soaking up massive quantities of bonds – $85 billion a month through most of 2013, for example. Why? To inject rivers of cash into the US economy so corps will create jobs, and keep interest rates low by Hoovering up bonds.

It worked. Unemployment went from over 10% to under 6%. Families paid off $1.5 trillion in low-cost mortgages. Corporate profits plumped to pre-recession levels. The stock market gained 160%. The American economy resumed growing at 4%, and inflation stayed under 2%.

After toeing to the edge of the economic abyss in early 2009, it all came back. Now the once-massive government deficit is at an eight-year low, plus consumer confidence has shot up with more jobs, affordable houses and cheaper gas. No, it’s not all ponies and rainbows. But by every measure that counts – productivity, employment, inflation, GDP (check out today’s news) – the storm is well passed.

The metalheads and bullion-lickers refuse to believe this, and were arguing up to 2 pm Wednesday that if the Yanks actually withdrew this stimulus, stocks would tank, the US cleave and the Z-times begin. Fail. Not even close.

For all of 2014 the Fed, now run by the sweet old lady, Janet Yellen, has been ratcheting back on its stimulus (known as QE, or Quantitative Easing). That $85 billion had been tapered back to just $10 billion by this week, and is now kaput. The Fed did exactly what it said it would, and this should have surprised nobody.

It’s a remarkable achievement. We’ll all benefit from it.

In an orderly fashion for a year, the tap has been turned off. Far from starving the economy of cash, ushering in recession, killing markets or precipitating a crash in bond prices and a spike in interest rates, it’s been serene. The S&P is 14% higher than a year ago this week, and the TSX is ahead 11% – even after its blow-off two weeks ago. The US dollar has surged along with the recovery, which has knocked commodities and gasoline prices lower. Over 80% of companies currently reporting quarterly profits are ahead of expectations. Over 60% have higher sales.

So, what now?

Easy. More of the same. US interest rates will rise, but not until later in 2015 when the bankers are sure the economy can take higher mortgage costs and tighter business loans. Yellen has made it clear there’s no rush. It all depends on jobs. But, without a doubt, rates will normalize. People borrowing to buy houses in Toronto or Calgary today will not be renewing at 3% or less.

As for investors, this might be a Goldilocks moment. Not too hot – with the removal of all that stimulus money and Fed hand-holding. Not too cold – with inflation expected to come back with oil prices and sustained growth. Stocks have weathered tapering just fine. Bonds, ditto. Investors who bought the dips – like REITs last summer or the TSX weeks ago – now look smarter than Jian in a frock. With a paddle.

Well, if you’ve been quivering in cash since 2009, believed the gold nuts in 2011, or haven’t built a balanced portfolio because you thought rates would rocket and stocks waver, it’s time to reassess. The US is fine. Europe is about to do its own QE, and the results will be similar. China’s weird, but unstoppable. Corporations are fat. There’ll be no pandemic, and the ISIS numbnuts are losing.

We’re running out of things to worry about. Unless you just bought a condo.

Too late

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Let’s review, class. The TSX is ahead more than 9% in 2014 and 12% from this time last year. Yes, even though oil’s tanked and kinky Jian Ghomeshi along with it. Eighty per cent of major US corporations have exceeded expectations for quarterly profits, and two-thirds have topped sales estimates.

That stock market meltdown lasted a few days, blew off some froth, was reversed even before the moaning and gnashing could end. Now cheap gas, lower mortgage rates and more jobs are a giant tailwind for the Yanks. Even the Ebola-in-Texas thing is over.

The Fed seems sure to carry out its commitment to end stimulus spending in a week or two, and yet the economy’s chugging. Now the S&P is up 15% from last autumn and within a whizz of its all-time high. American unemployment has gone from 10% to 5.9% and something profound has happened to our southern neighbours.

Americans have reduced their mortgage debt by $1.5 trillion over the last six years, while we’ve bloated ours. And the savings rate there has doubled since 2007, while ours has collapsed – and some places that shall remain nameless (British Columbia) now have a negative savings rate.

Yes, our house-horniness has overwhelmed personal finances, even while the home ownership rate in the States is at the lowest point in 20 years. (It’s at 70% here, 64% there, and still on the way down.)

I mention this stuff in light of the latest survey by the Conference Board of Canada on how screwed Canadians are becoming. Most of it’s self-inflicted.

The results: 60% (including the sexy 55-64 group) say they haven’t stored enough for retirement. Ironically, most of them save. But they can’t save enough. As a result, people are pushing out the age at which they expect to stop working. Now it’s over 63 years of age, with a fifth saying they’ll never be able to retire and half believing they’ll labour part-time. That Freedom 55 stuff with martinis on the yacht? We are so not there.

You may be wondering what all these things – stock markets, the Fed, US stats and failing Canadians have in common, not to mention Ghomeshi, handcuffs and udder cream. It’s simple. Most people (especially women, says the Conference Board) are on the wrong path, and things will not turn out well as a result. Americans learned the bitter lesson. While Canadians are house-huggers and bank account addicts, the Yanks have fallen out of love with real estate and embraced financial assets.

Granted, Boomers in both countries are somewhat pooched, given that corporate pension plans have evaporated and their kids have turned into human sponges. But the risk level for Canadians seems vastly more elevated, thanks to our slagging economy, personal debt levels and horniness. As this pathetic blog has argued, real estate peaked some time ago, and will not be delivering the returns most people expect. In fact, recent buyers could be in line for painful losses. Worse, expect illiquidity – exactly what anyone within years of retirement doesn’t need.

Combine this with the findings that 60% don’t have enough put aside, that 51% couldn’t survive a week with a missed paycheque, and 40% have trouble making the monthlies, and you can see where it’s all headed. Sadly, nothing will change unless everyone understands why they need to have more ETFs and REITs, and less Moen and Miele.

But that’s not going to happen. The masses will carry on until it’s too late. The 1% (and the aspiring) will invest and earn. The wealth gap will swell faster than a broadcaster in bondage.

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Yesterday you read a real-life example of why the BRA (buyer representation agreement) can ruin your day. Unless you happen to be a realtor. The document, pushed by organized real estate across the country as a way to ensure lame buyers don’t jerk around agents, can also entrap and ensnare unwary first-timers. Most reasonable people would never expect an agent to be owed commission on a deal they had no part of, but that’s exactly what a BRA can end up doing.

That seemed to be the case with Karan, whose story I told you. He engaged an agent to make an offer which failed. Then he bought a FSBO on his own, and received a $9,400 invoice because he’d signed a BRA potentially covering every property in the city.

After that blog post, there was considerable movement. The manager of the real estate brokerage called me to claim, “my agent introduced that property (the FSBO) to the buyer, and even sent him the phone number of the seller.” The company alleges Karan tried to wiggle out of his obligation to pay commission, “and now he’s trying to use you as well.”

Of course, I have no idea who’s telling me straight. Including Karan, who Tuesday night said he received a text from the agent saying, “I will let you go this time, but don’t ask any realtor in your life to give u any assistance.”

The horror.