The quick & the dead

BIG SMALL from Geoff modified

In a funk over lousy oil-induced earnings at Caterpillar, irritating Greek people and a blizzard, American stocks shed a few hundred points on Tuesday. In fact, so far this year (all 27 days of it), the S&P is down about 1%. In Toronto, despite the oil mess and the dingdongs at the Bank of Canada, the TSX is ahead 1.5%.

This volatility worries some people, especially those who waste their youth and kill brain cells reading sites like the Zero guy. (Suicide is far more efficient, plus you can cancel your Internet provider.) Well, days like these – when you have no idea what’s coming next – show exactly why a balanced and diversified portfolio works.

It’s simple. Take an account that has 60% growth assets (such as large-cap equity ETFs and real estate trusts) and 40% secure stuff (like bonds and preferred shares). When worried money comes out of dipsy stocks, it looks for a safe haven. So while equities get squeezed, bonds get plumped – and the price rises. Or when central banker poodles drop the interest rate, money looks for the best yields, jacking REITs, for example. Or when an unproven leftie who lives in a tenement with his unemployed spouse wins the Greek election, money moves into stable companies in safer lands. The TSX gains.

Since the middle of December, the ETF holding a basket of real estate trusts, XRE, has added about 13%. Bond funds (like XSB or XBB) are ahead 2-4%. Preferreds are up 2%. It all means a balanced and diversified portfolio is positive by several points in the last four weeks despite all the financial mayhem we’re reading about daily.

In contrast, if you like despair, moaning and endless nihilism as much as the wackos who post here daily, there’s always Calgary.

The situation just keeps getting worse, now with monthly sales plunged 36% and active listings swollen by 81.4%. There are 4,500 properties for sale, of which almost 2,700 materialized in the last few weeks. And while there have been Januaries when more houses were up for grabs, this sets a record for the greatest tidal wave of panicked sellers.

No wonder. It seems a safe bet now that oil prices aren’t going anywhere, except maybe down. Goldman Sachs says thirty bucks is possible. Other smarties are projecting a cheap-oil era lasting more than 10 years, with a semi-permanent imbalance between supply and demand. It’s the worst kind of news for the Albertan oil sands, where it costs a relative fortune to dig, heat and suck a barrel of the gooey stuff out of the earth. Of course, this is just what the carnivores in OPEC were hoping for. And are getting.

Suddenly the huge run-up in house prices in Calgary, and to a lesser extent Edmonton and across the line in Saskatoon, looks speculative and rash. When job security and incomes are at stake in a deflationary environment, it matters not how cheap interest rates get or if the banks drop their primes to 2.85% and mortgages to 2%. People used to six-figure salaries now contemplating EI realize quickly how easy it was to buy a house, and what a bitch it is to sell it.

This is the worst part of deflation. Real estate gets illiquid, and the debt grows more difficult to pay. Until you have been in a situation like this – and most people have not, especially the moist Millennials now clamoring for mortgages – you cannot imagine. It’s the deepest of wealth traps.

And expect it to grow deeper, says the brain trust at TD Bank. In fact these guys believe housing prices will fall in eight of 10 provinces this year, with only parts of Ontario and BC being supported by rate-induced hormonal house lust. Even there price gains will be in the 2-3% range

As for Alberta, says TD, expect a 20% sales plunge and prices lower by an average of 3.5% amid “extreme signs of weakness in the housing market.” Of course, it could be a lot worse. And I suspect it will be, given what’s happened in the last thirty days. The layoff avalanche, it seems, has not really started rolling yet. From the hottest province a year ago, Alberta is destined to be the most frigid in terms of growth, possibly slipping into recession.

Now, you may not be able to sell a house in Calgary this month, you also can’t live inside an ETF. So the message here is simple – buy real estate you can afford, as shelter, and never pretend it’s an investment strategy. Follow my Rule of 90 (ninety less your age = % of net worth in your home). Forget mortgage rates. They don’t matter. Ten-year home loans are 1.1% in Japan, and there’s no real estate boom. People in that land have learned in a weak economy nothing beats liquidity.

So, we now have a dangerous, two-city housing bubble, with every other market about to be spanked. Meanwhile, in a world of freaking bankers, morose cowboys, crashing loonies and swooning, house-horny virgins, the dude with the balanced portfolio swaggers serenely through the financial detritus. Make my day, he says.