Entries from September 2016 ↓


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While we all wait with baited (sic) breath for that moderate correction in the Toronto real estate market (I believe that is what you are calling for) do you have any comments on what may be far more important – the decline of Deutsche Bank? You spent a fair bit of time clarifying the bail in clause for Canada…but what about Europe as Merkel stares down the barrel of whether to bail-out or kill the Euro? Regardless….if Deutsche goes down the contagion into the financial system will be severe. — Blog comment

So many doomers. So much angst. Such quivering. So much to go wrong. Decline, collapse & contagion. The comments section of this pathetic blog is a Greek chorus of despair some days, scaring the poop out of innocents who wander in here just looking for a tummy rub.

This Deutsche Bank thing is a great case in point. Germany’s an over-banked place, and DB is not a superbly-run company. Worse, its knickers got caught in the US justice system and American regulators have been mercilessly pursuing it to settle charges related to bad mortgages. Between higher state-imposed capital standards and runaway legal bills, DB’s stock has lost half its value. Finally, with a market cap of about $14 billion (what all the shares outstanding would sell for), the bank was staring at a fine of exactly that amount – effectively wiping its equity out.

Meanwhile tough-gal Chancellor Angela Merkel, facing an election and Trumpian forces, had made it clear Germany wouldn’t be bailing out bankers. So the stock sank further. The GreaterFool steerage section wailed piteously. Breasts heaved. And we got dark warnings of a contagion in the financial system that would surely punish your portfolio. Worse than Bear Sterns, baby, they cried. This sucka’s goin’ down.

Well, not so fast. The latest news is DB will owe US regulators about $5 billion, not fourteen. “Deutsche Bank is not Lehman,” a fancy Wall Street strategist commented, stating the obvious. After all, eight years of increased regulation, higher capital requirements and international controls have hardened all big banks against barbarians. This is not 2008.

Well, DB stock soared Friday. Up about 6.5%, with stock markets following. The S&P is ahead 6% this year while Bay Street has added 13%. Preferred ETFs are up 16% since January and even bond funds have gained three times more than a GIC, while being liquid and less taxed.

In short, Investors 1, Doomers 0. The same happened with Brexit, and it’ll occur again with Trump. Ditto for Deutsche Bank, ISIS attacks and even next week’s four sold-out Adele shows in Toronto. Balanced portfolios are designed to withstand whatever horrors modern life can throw at them, and stay standing. Ignore the fools telling you to go to cash before the US election, for example, which would do nothing except waste time and create anxiety.

History proves that missing the best days in the market is far more consequential than avoiding the worst ones. But fear’s the most dominant of emotions, so many people would rather hide from danger than build a logical portfolio and ignore volatility. Worse, the financial landscape’s full of questionable advisors who truck on trepidation. They tell clients market-timing works, they can avoid unforeseen declines and that it’s prudent to sit in cash.

Some of them keep people on the sidelines for months, or even years, while markets move to new highs. All the while, they collect fees. Sad.

Timing markets really doesn’t cut it. Over 90% of mutual funds which pay managers big bucks to add ‘alpha’ end up crapping out. Just buying an index fund gives you a far better chance of making money, especially when the 2%+ mutual fund MER is stripped away.

Similarly, stock-picking advisors, financial cowboys and suspender-snapping, bow tie-twiddling Bay Street dandies are in the same game. They use fear of loss and greed for gains to lure people into believing they have a special insight and can outperform the rest of humanity, plus high-frequency-trading algos. But they can’t. It’s all guesswork. And meanwhile decades of experience show a balanced and globally-diversified portfolio, rebalanced once or twice a year, keeps investors on an upward path.

As a rule, actively-managed funds suck. So do alpha-seeking equity flippers. Most DIY market timers drown. And at the bottom of the pond live the doomers.

The most valuable asset you have is time. Don’t let some insecure flake – or insincere fake – steal it from you. Invest carefully, then take your dog out. Don’t look back.

The inevitable


“At some point it will become clear, even to the “America is BOOMING” crowd that the Fed’s next move will be a rate cut. The double-talk and excuse making will be a thing of beauty.” — Omniscient blog dog

Will interest never go up again?

That’s the meme among the moisters, doomers and the dearly-indebted who’ve convinced themselves the cost of money will not rise because (a) the government would never dare, (b) everybody would be screwed, (c) housing would crash, (d) the economy would seize up, then croak, (e) the US is a failed state about to be run by (pick one) a criminal or a psycho and (f) it’s, like, unfair – that’s not why we elected Justin!

Well, guess what. Rates will go up. It’s absolutely inevitable. The only uncertainty is the schedule. Here’s a likely scenario: the US Fed hikes on December 14th, then twice during 2017, and more frequently thereafter. Remember, the average tightening cycle by the US central bank involves 10 to 12 increases and lasts up to four years.

As for Canada, the central bank here follows the Fed lead 93% of the time, and ditto for the bond market. Given our flaccid economy, there could be a lengthy lag between them and us, but it’ll come. If you’re pickled in epic levels of debt (recall that four in 10 buyers of $1 million+ houses in Toronto have debt equaling at least 450% of income) you have a unique window of opportunity to get ready. If you ignore it, good luck.

Here’s why central banks in both countries will surprise you.

First, it’s been eight years since anything was normal. Almost a decade of in-the-ditch rates succeeded in avoiding the deflation and depression that threatened us in 2008, but with unintended consequences. The effectiveness of cheap money (in stimulating growth) has worn off. Inflation has crept back into the picture. Assets bubbles have formed (look no further than Canadian real estate). Governments, corps and especially households have become indebted as never before. In fact a whole new generation has grown up with no fear of borrowing. Low rates now threaten to turn into a negative, rather than a positive.

This means rates must rise. If not, inflation will advance, putting pressure on wages and prices. Asset bubbles could inflate then erupt, with dire consequences. And should conditions worsen, central banks would be unable to lower rates as a temporary stimulus, since they’re already close to zero.

Second, unelected central bankers are running the global economy because too many weenies, populists and milquetoasts hold political office. Low rates alone cannot blow wind into an economy, nor can spending cuts and balanced budgets work when deflation threatens. There’s a role for government in days like these, to spend big on infrastructure, job creation and public assets. T2 got elected on exactly such a promise, for example. Thus far, nothing.

So long as central banks continue to shovel out nearly-free money, governments are less likely to enact fiscal stimulus (as opposed to CBs’ monetary stimulus).

This brings us to Brexit, Trump and the anti-globalization sentiment now sweeping western society. Both US presidential candidates are promising massive spending, so it’s a certain bet the pressure will be off the Fed starting in 2017, making rate hikes far more likely. But there’s more.

Trump would build walls insulating America from its neighbours, rip up established trade agreements (like NAFTA) and withdraw from foreign alliances. Make America Great Again is code for getting a country which is more homogenous, nationalistic and independent. Britons voted themselves out of Europe for the same reasons. And all of that is intensely anti-global and anti-free trade.

Why does this matter to the cost of your mortgage?

Because free trade and porous borders, outsourcing jobs and filling Wal-Marts with crap from China has helped keep inflation low, prices falling, wages depressed and supported the cheap cost of money. Brexit will change some of that. Trump’s changing more. And across Europe there’s a growing tide of rightist emotion that will push the agenda ahead.

The bottom line, as stated here yesterday, is that we probably at, or close to, the bottom in terms of the cost of money. It’s seriously naïve to think the Bank of Canada will slash its key rate further, or to believe the Fed won’t resume its stated course of normalization. No, rates aren’t going to back to levels of a decade or two ago. But they will be doubling.

If that stresses you, then get on it.