Entries from June 2015 ↓

It only looks big

BIG DOG modified

Imagine going to the bank. But it’s closed. You try the ATM. It’s empty. That’s the deal in Greece today. Every bank is shuttered, and could stay that way for a week. By Saturday morning 500 of the country’s 7,000 ATMs were out of cash. Twenty-four hours later, half of them were dry. Credit has evaporated. The central bank doesn’t have the money to support the commercial banks. It’s a mess.

(In fact overnight Sunday capital controls were imposed. No citizen can withdraw more than $66 a day.)

None of this is a big surprise after the country’s new socialist government bolted form last-minute rescue talks two days ago. Last week it looked almost certain Europe’s biggest deadbeat debtor nation would agree to reforms lenders were insisting on, so stock markets rallied. But that was a sucker punch, and now Monday could be ugly.

Kicking leadership to the curb, the crew in Athens is opting for a public referendum on the bailout, set for next Sunday. In the meantime, out of money and pickled in debt, the country will spiral and decay for a week. Depending what the vote yields, it could be kicked out of the Euro zone, default on a mountain of debt, or self-destruct.

By the way, here is what Greeks will be voting on next week – a complex, inter-connected series of reforms that would goose the existing 23% GST, increase personal and corporate income taxes, delay retirements and crack down on tax evasion. Plus lots more. So, a government elected because it promised it could end austerity measures and tell Europe to get stuffed, now looks more like Twitter. Will the Greeks vote for more tax and greater penury? Don’t hold your breath.

The banks are shut on the assumption that Monday (one day after the European Central Bank turned off the tap) there’d be a giant run as citizens clamour for cash. There are caps on ATM withdrawals, as well. And the stock market is dark. The country therefore moves rapidly towards an irreversible financial and economic meltdown. Complete default could happen on Tuesday, if the country misses a multi-billion debt payment – which it will if no more credit is extended.

So what does all this mean to us? Should you be freaking out, too, running to the closest banking machine, selling your ETFs or buying gold?

Nah. Don’t think so. Expect volatility until July 5th is over, but it’s highly unlikely a country crash will send shock waves rippling through the world. For starters, Greece is old. This has been going on for years, and markets long ago priced in an economic and fiscal collapse, along with the potential damage to Europe as a whole. While Spain, Portugal and Italy are also dogs when it comes to living within their means and fostering economic growth, nobody seriously expects some virulent form of contagion to develop.

And Greece is tiny. Just eleven million people and an economy less than half that of Ontario. This is a mere whizz in the Eurozone bucket, which at $18.5 trillion is the second-largest in the world. The trouble with the current Greek government, in fact, is that it thinks it matters.

Well, the point is that you should never, ever read doomer web sites which today are calling for a Holocaust-like apocalyptic Armageddon which will, a la Lehman, lead quickly to nations falling like dominoes, a systemic financial collapse, banking crisis and bail-ins which end up confiscating your wealth. But this is not on.

Of course, the weekend collapse could mean stock market volatility, especially as short-term investors move to protect the stretched positions they took last week. Between now and next Sunday some big swings are likely to occur – meaningless moves for anyone building wealth for retirement, their kids’ education or the rest of their lives.

Still on track is American expansion, higher interest rates this autumn and an unhappy spring real estate market. The best way to deal with change you cannot control – like the political nutbars now driving Greece into the sea – is to have a balanced and globally-diversified portfolio. When stocks swoon, money rushes into fixed income and plumps that part of your portfolio. When euro equities (which have been greater performers this year) stumble, you have lots of exposure to the bustling US economy. Meanwhile real estate trusts continue to churn out distributions and your preferreds pay you 5% with a big tax break just to own them.

Hey, it’s also summer. Canada Day. Beer ‘n babes. BBQs, bikes and the beach.

Who’s got time to panic? Silly doomers.


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Eight years ago, when we thought everything was okay and feisty, Garth-bating Dean Del Mastro was the prime minister’s Parliamentary Secretary, the rate on a 5-year Government of Canada bond was 4.5%. Fixed-rate five-year mortgages were 7% – about 1% below the 10-year average.

This week Mr. Del Mastro was led out of a courtroom in handcuffs and leg shackles after being convicted of electoral diddling (although I don’t like the guy, it was a complete and unnecessary humbling) and the current bond yield is 1.02%. Fixed half-decade mortgages are down to 2.48%, if you deal with a broker and borrow from a food truck, or around 2.74% at the most competitive banks (TD and BeeMo). The only better rates (0%) are available at the bank of Mom.

By the way, in 2007 the average GTA house cost $376,236, and today it’s $650,732. That’s an increase of 72.9%. The median household income in Toronto in 2007 was $61,900, and today it is $73,120. That’s an increase of 18%.

And noodle this: in 2007 a GTA house cost six times what a typical family earned. Today a house is worth almost nine times income. (In urban Vancouver it’s 12 times median income. Yikes.) So the conclusion is obvious – real estate has bloated dramatically as the cost of money collapsed – and not from an explosion in incomes. This is why there’s nothing more important for every homeowner to fixate on than interest rates.

Rates are low, of course, because the economy has sucked since the GFC. Central banks here (the Bank of Canada) and the US (the Federal Reserve) brought in emergency interest rates back in 2009 in order to flood the system with money and solve a credit crisis that threatened to paralyze society. Low rates were also an attempt to get consumers borrowing vast amounts of money, so a burst of spending would stimulate the economy and governments wouldn’t have to do as much.

In the US, it didn’t work. The middle class was so fried by the collapse in house prices that all people wanted to do was get out of debt, no mind what it cost. But here, a different story. We turned into little debt oinkers, snorfling up as much as the bankers would allow, then blowing it on ‘safe’ assets – houses.

You know the rest of the story. Today real estate’s not worth more because it is rare or precious (we’ve actually built too many homes since 2007) with current prices guaranteed to hold. Instead, houses cost what they do because you can borrow bags of money for five years at 2.5%. If mortgages were 7% again, as they were in 2007, the average Toronto house price would be $443,959 – or almost exactly $200,000 less than today (31%).

Now, rates will be rising. So real estate will be worth less. Get ready.

The question is, how much and when?

Last week I told you what the Fed is selling the world. The first US rate hike happens this autumn, and there may be another by December (according to a senior bank official). Fed chair Janet Yellen says we should then expect 1% more in each of the next two years, taking the rate from about one-tenth of one percent to 2.65%. That would arouse the bond market, and likely mean five-year fixed mortgages in the 5% range long before today’s borrowers have to renew.

If incomes remain flat (the likely bet) then we could reasonably expect that average Toronto house to cost about 80% of today’s price, or $520,500. However, real estate is emotional. It will end up costing what people think it should, as well as what they can afford.

Most mainstream economists, like the eggheads at RBC, think the Bank of Canada will start to follow the Fed’s lead after a healthy waiting period – maybe as long as six months. So the central bank rate here will advance, beginning in the Spring of 2016. That will increase the prime, making business loans, your HELOC and all variable rate mortgages cost more. In the meantime, fixed-rates loans, which are priced in the bond market (and which 67% of Canadians have) will start to rise along with the Fed.

Capital Economics’ David Madani, a notable housing bear, disagrees.

“Domestic investment in Canada’s oil sands is still tanking,” he writes. “Governments remain focused on balancing budgets, so there’s little hope for any offset from public sector spending. Meanwhile, the scope for a lift in household consumption seems limited, since they are already heavily indebted. What’s needed is a much firmer US economic expansion buoyed by a far more competitive exchange rate to boost Canada’s exports and growth prospects more generally. This begs the question: will the Bank of Canada cut interest rates again?”

His answer: Yes. Twice. A quarter point on September 25th and another in December.

Is this credible? Beats me, but Madani is the odd guy out right now. If he’s correct, with our bank cutting the cost of money while the Fed increases it, then we should get ready for two things: a sideswiped loonie and an autumn real estate rush. That will likely be followed by a spring massacre.

Talk about criminal behaviour.