The unwind

This pathetic blog is not actually about real estate, house lust and your tormented spouse. Rather it’s all about financial security. Sometimes owning a property gives you that. Lately, not so much. Let’s dive off the deep end for a few paragraphs, and yak about what could go wrong. Not just with a home, but everything.

To assist us in this miserable, depressing and scary task we have an outfit called the BIS. Whazzat, you ask? Why should I care?

The Bank for International Settlements is essentially the central bank for the world. Birthed during the darkest moments of the Great Depression, it’s owned by 60 central banks (including the Bank of Canada) accounting for 95% of the economic activity of the planet. Therefore it’s more influential than Justin and the Trivago guy combined!

The BIS has one goal: keep things from getting too screwed up. It wants central banks to coordinate stuff like interest rates and money supply. It also serves as kind of a ER doc to the international economy, diagnosing current conditions and doing interventions as necessary. Right now the BIS says its patient weighs 620 pounds, is grossing out on a super-carb diet, with high blood pressure, diabetes, gout, heart disease and a badass attitude. Only a matter of time, it concludes.

Here’s the scenario. We never really solved the 2008 credit crisis, just papered it over with cheap money. After ten years the amount of new cash created by central banks to buy up bonds and try to stimulate growth is epic. The only way these banks – like families with giant mortgages and nations with big debts – can keep rolling along is if rates (and payments) stay low. Meanwhile all this debt has encouraged humans to borrow massively, which in turn wildly inflated the price of assets – like houses.

Rates have to rise, or ‘normalize’, or the problem grows continually worse. And that’s what the Fed has also concluded. So up she goes. Three pops in the last six months. That makes the over-indebted very vulnerable to ending up in a serious mess as rates across the world move in response. Near the top of the list of looming victims is Canada, where debt ratios are 70% higher than a decade ago (the US, in contrast, is up 29%).

Why a rate hike of 2.5% would mean 'serious trouble'

This is called the “great unwinding.” It’ll come as shocking news to millions of Millennials who have grown up believing they deserve 2% mortgages and the government will never let the cost of money rise.

So what happens if the BIS s right? A new crisis, it says. Serious one. “Unprecedented challenges.” Credit growth in Canada is at red-flag levels, along with Hong Kong, China, Thailand, Mexico and Turkey. If rates eventually rise by 2.5%, then the BIS says we’ll be “in serious trouble.” That would take the Bank of Canada rate from its current 0.5% right up to 3%. For some context, the rate was 4.5% back in 2007, 21% in 1980 and 10% in 1990. So three percent would still be well below the long-term average.

The consequences of a rate-tightening cycle that lasts for three, four or five years are predictable. Debt service costs would march higher, economic activity would fall, stocks would lose value, employment would get harder and houses would tank. Among the places with most damage, the BIS suggests, would be Canada – largely thanks to the property boom which has reshaped society, driven family debt to $2 trillion, wiped out personal savings and concentrated net worth in a single asset.

Meanwhile two billion more people around the world have entered the workforce, keeping wages depressed, while free trade – essential to economic growth – has allowed them to directly compete with workers who live in expensive places, like here. So the response has been predictable on the part of many voters. Build walls of concrete and tariffs. Keep rates low and elect guys like Trump.

How credible is all this doomer talk?

Very. But that doesn’t mean it’s going to happen soon. No central bank wants to destroy its economy, even if this leads to a better place. Having stated that, swelling rates will be with us for years to come. In 2020 nobody will be renewing mortgages at 3%. House prices will be lower down, not higher. People with a one-horse portfolio will regret that in 2017 they didn’t start dealing with the great unwind.

So, sell assets and lighten up on debt. Have a balanced and diversified portfolio of the kind described here so often – which saved people’s butts back in 2008-9. When the TSX dropped 55% and took seven years to recover, that portfolio declined less than half and recovered within twelve months. Over the worst three years of our financial lives (to date) it averaged a positive 5% average annual return.

If you believe the storm will return, prepare. If you don’t, wrong blog.

185 comments ↓

#1 Paully on 06.26.17 at 6:35 pm

If reading you is wrong…I don’t want to be right!

#2 Andrewski on 06.26.17 at 6:36 pm

My family endeavours to always live below our means, which translates to less stress, because life is already stressful enough, thereby allowing us to focus on what’s important to us, family & friends.

#3 the other side of the Rubicon on 06.26.17 at 6:42 pm

The global scam that is BIS started as a collection agency for war reparations, that’s why we have never ending war.
‘normal’ interest rates?
Interest rates are abnormal
I’m not aware of any ‘crisis’ in 08, it was a transfer of wealth

#4 Doug t on 06.26.17 at 6:44 pm

Something wicked this way comes

RATM

#5 Doug t on 06.26.17 at 6:44 pm

But but but we gots a glow in the dark toonie

#6 TWO FINGERS WATSON on 06.26.17 at 6:45 pm

So what happens if the BIS s right? A new crisis, it says. Serious one. “Unprecedented challenges.” Credit growth in Canada is at red-flag levels, along with Hong Kong, China, Thailand, Mexico and Turkey. If rates eventually rise by 2.5%, then the BIS says we’ll be “in serious trouble.” That would take the Bank of Canada rate from its current 0.5% right up to 3%.
///////////////////////////
That’s why it ain’t gonna happen. Maybe in 10 years but not any time soon.

#7 CL on 06.26.17 at 6:46 pm

I agree with your post and am aware of the BIS and its function. However, while the fed raises, bond yields plop further downward. Something doesn’t add up. Same with Canada. I’ve said repeatedly the BoC will have no choice but to raise rates, because of Trump and NAFTA negotiations, but yet even talk of it only produces a small temporary bump in the 5year yield.

#8 crowdedelevatorfartz on 06.26.17 at 6:50 pm

Time for more pink lemonade

#9 Suede on 06.26.17 at 6:53 pm

Once houses correct, a generation of people (youngest millenials) will be scared off.

They’ll realize they don’t really need a house and that boomers and Gen Xers screwed up the planet. Just like the people before them screwed it up, and before them, etc..

Then the rotation into and melt up in equities will begin.

Hold on to your hats people…

#10 Smartalox on 06.26.17 at 6:53 pm

I read the FP article on the Bank of International Settlements (BIS) when one of the blog dogs linked to it a couple of days ago.

The article implied that the way out of the situation was to increase GDP, by increasing competitiveness.

Anyone have any ideas on how to make that come about?

Other than making first-world robots to compete with third world labourers?

#11 MF on 06.26.17 at 6:56 pm

The worry is if -or more likely when -the next crisis hits will a balanced portfolio behave the same way it did as the last time when central banks were able to drop rates to zero? They do not have that luxury anymore, and have shown that they are very nervous to raise rates by any meaningful amount.

MF

#12 Doug t on 06.26.17 at 6:56 pm

People who have never experienced hard times are going to get an education

RATM

#13 Guy in Calgary on 06.26.17 at 7:00 pm

Stocks will go up, then they will go down. Then, they will go up, and back down again they will go. Ditto for houses. As long as we keep making more people, the demand will be there for houses. So long as people want to be wealthy, the demand will be there for stocks.

Index investing is a bubble. Everyone owns the index so we all own the same securities essentially making us less diversified then we think we are. What happens in a correction when everyone starts selling off the entire index? We face a great amount of systematic risk and algorithms call the shots. Prepare yourself and your portfolio accordingly.
We saw a mild correction in housing prices here in Calgary but nothing drastic. Most of it was due to the high end homes losing significant value. The high end homes will never sell but the more modest homes continue to sell quick if they are quality homes and priced right. It may be slow here in Calgary but Banff campsites and hotels sell out a year in advance.

Visited family in Ontario and could not wait to get out of that place. It smells and the 401 is a disaster. Hamilton still smells too. People are in too much of a hurry and are out for themselves. Moving here was the best decision of my life. Missed an opportunity to stop by the Belfountain General, but will one day.

I am enjoying the less frantic pace of life and will be off to the beautiful Canadian rockies, God’s country, for Canada Day. Cost of my vacation: $30 in gas.

#14 ANON on 06.26.17 at 7:06 pm

Time for the squirrel recipe swapping, I see…

#15 Sitting on the toilet thinking on 06.26.17 at 7:12 pm

All the central bankers have done in the last 8 years is kick the can down the road. We are almost at the end of the road. Whenever people manipulate markets you get unintended consequences. The world is filled with asset bubbles. When are they going to pop? Who knows but they will eventually pop.

#16 calgarytran on 06.26.17 at 7:13 pm

Cryptocurrencies give your financial security in the long run.

#17 Entrepreneur on 06.26.17 at 7:14 pm

Most people are poor in a nation and do try to live within their means with what job is available to them. (Except for the real estate where it is encouraged to buy instead of renting.) And other nations are more or less similar to us.

And the people of that nation, the ones at the bottom of the chain that have to work close to mother earth to survive, should be respected and by that, local consumers come into play.

So “while free trade-essential to economic growth-has allowed them to directly compete with workers who live in expensive places, like here” above…I have trouble with.

So people from another nation come into our country to “compete with workers” here. What, take over a Canadian citizen job and that Canadian has to find another job.

And not only that but free trade worker needs work as we do but who is to say that that is the correct road for our nation.

Sometimes it is better to fall to the bottom and work our way up. Not envision how the nation should look like by bringing in competition.

#18 unbalanced on 06.26.17 at 7:15 pm

You can thank the USA for good old quantative easing. How many times did they save the so called system? They can and will do it again. Rinse and repeat. What’s Canada gonna do to save the foolish?

#19 common sense on 06.26.17 at 7:19 pm

Best article to date…

#20 Nonplused on 06.26.17 at 7:19 pm

I believe we are in for a dozy of an economic correction at some point, but the timing is difficult to say.

The true nature of the economy is actually physical. It has to do with energy, resources, labor, and food production, that kind of boring stuff. All the banking and money is just an accounting system. Money isn’t real, it’s an abstraction used to keep track of who owes who how much.

When a bank creates money say to fund a mortgage, which is kind of what they do, all they are doing is monetizing the asset, house or whatever. That’s why title to the house is attached to the mortgage. If you don’t pay them back the take the house. If they didn’t do that they would literally be printing money.

So the job of a central bank is to make sure all the money they create is backed by some sort of asset, be it a bond, title or whatever. This system has been working well since 1913 with one caveat, that being it is highly vulnerable to deflation because declining asset values would undermine the backing of the debt.

But happens when something happens in the real economy that undermines the ability to service the debt. That’s what we saw in 2008. Rising energy prices in the 2000-2006 period were putting strains on the economy and diverting funds. That is what was the pin that pricked the bubble in the housing market not the subprime crises. The subprime crisis is just where it showed up first.

When oil was at $100/barrel and natural gas was north of $6 per GJ, times were good in Alberta and Saudi Arabia but it was a real burden for households and businesses in the consuming regions. Everything cost more to do from driving to work to eating lunch to running the machines and computers. Something had to give and it did.

Now that energy prices are at more tolerable levels due to the shale oil and gas thing, we have some breathing space. But what has to be kept in mind is that the shale oil revolution was never profitable due to low energy return on energy invested. The oil and gas companies took advantage of low interest rates and over invested in a marginal supply. I think the powers that be knew this was happening but allowed it because it was a small price to pay, relatively speaking, to put a lid on energy prices. Sure some loans would go bad and some energy companies would go broke, but the cost of energy affects the cost of everything, so it had to be done. And they only had to oversupply the oil and gas markets by a few percent to affect a dramatic reduction in prices because there is only so much storage and it’s based on managing seasonal changes in supply and demand not long term changes.

However, this is not a long term strategy. Exponential growth in the economy demands exponential growth in the energy supply from whatever source and that looks increasingly difficult to maintain as the Energy Return on Energy Invested continues to drop.

To explain the concept of EROEI (Energy Return on Energy Invested), in the early days of the oil revolution you could strike oil using a wooden rig powered by a wood fueled steam engine and you got about 100 barrels of oil for every 1 barrel of equivalent energy. That’s a hell of a return! But there was a lot of shallow, easy to get oil around so it made sense. That oil is mostly gone or already in production now, we have to go after the hard stuff. Shale oil drilling is truly epic in terms of capital intensity by comparison. So is off shore drilling. Solar and wind as well. The EROEI for shale or tar sands is probably no better than 20 and will decline as the best spots are drilled out. Long term this is the single biggest obstacle facing the economy. It’s bigger than AI taking jobs, bigger than debt, bigger than outsourcing, bigger than the internet. But it is a ways off in the future. There is still a lot of oil out there.

#21 chopstix on 06.26.17 at 7:21 pm

greasy christy clark and the bc libs…their about face and plagiarism of of the ndp/greens ‘ platform is shameless…they make snakes look positively cute and cuddly. (and hell i voted bc libs the last time…but this time like many BC voters, esp in the lower mainland, I’d had enough.
http://vancouversun.com/news/politics/daily-poll-did-the-flip-flop-throne-speech-cost-premier-christy-clark-her-credibility
”Daily Poll: Did the flip-flop throne speech cost Premier Christy Clark her credibility?”

#22 The Limited Sage on 06.26.17 at 7:21 pm

Canada needs a “Great Reset” and if the only way to achieve this is through the “Great Unwinding” then so be it. It’s about time the crows come home to roost.

#23 Pete on 06.26.17 at 7:26 pm

BIS is NOT the central bank of the world. There is NO central bank of the world. Just like the United Nations is not the government of the world. It is what it is, a settlement arrangement of banks.

As close as we’re going to get. — Garth

#24 Jungle on 06.26.17 at 7:32 pm

We are getting getting mature in stock market bull run, we could easily see correction coming the next recession will be about the great debt unwind, robots and globalization taking all jobs

#25 Damifino on 06.26.17 at 7:32 pm

This pathetic blog is not actually about real estate, house lust and your tormented spouse. Rather it’s all about financial security.
——————————————

I’ve always thought this blog was, in a nutshell, about the sane and sensible management of risk in all forms.

Just to be alive is to assume risk. We all must make peace with risk, moderate it’s negative effects and take advantage of its potential. In between, we should try to carve out an enjoyable life that goes somewhat beyond endless money grubbing and the accumulation of toys. Once you stop having to think about money, time looks terribly precious in comparison. Get your time/money/toys balance right and be happy.

Its hard to do in the absence of relevant information untainted by the MSM, real estate boards and dare I say [email protected] Most people don’t freely offer useful guidance. And they especially don’t do it for any length of time before they expect their palms to be greased.

This blog is a fantastic, anomalous exception. You can set your watch by greaterfool.ca and it’s still offering excellent and free advice after all these years.

And still they complain.

#26 Nik on 06.26.17 at 7:36 pm

This question has been raised before and you may have answered this but can you please share what part of the portfolio did better than 5% in order to give an average return of 5% during the 2008-09 crisis? I am guessing its not stocks

The 60/40 balanced portfolio lost 20% in 2007-8 (when the TSX declined 55%), ragained it all in 2009-9, and advanced 17% in 2009-10. So if you snoozed through the crisis, you made about 5% per year. The fools were bailing out in March of 2009, maximizing their losses. — Garth

#27 S.Bby on 06.26.17 at 7:38 pm

So it sounds to me like deja vu all over again.

#28 WUL on 06.26.17 at 7:43 pm

Fort McMurrayites set the bar higher. Lead Equifax in personal non-mortgage debt. $37K and growing. Living large in Athabasca.

http://www.fortmcmurraytoday.com/2017/06/23/fort-mcmurray-residents-more-than-37k-in-debt-topping-equifax-list

#29 Ace Goodheart on 06.26.17 at 7:51 pm

“We never really solved the 2008 credit crisis, just papered it over with cheap money. After ten years the amount of new cash created by central banks to buy up bonds and try to stimulate growth is epic.”

Interesting anaylsis. Take an international outlook from a bank that deals with Central banks, and make it into an “interest rates are rising” argument.

I don’t agree entirely. I think you mostly missed the point.

There is a thin, thin and rapidly thinning wet paper wall between the overpaid, under worked, pampered, entitled, coddled, babied, western european and north american middle class, and the rest of this planet.

They are knocking at the door.

If you think an interest rate hike or two will solve the problem, or that the problem is people have too much debt, really you have to look a little closer.

They are smarter than us, way harder working, and they produce everything we consume.

The only thing they have to fear, is fear itself. And they are not afraid of that anymore. We introduced them to socialism, which means they have rights now. Look out…..

#30 AK on 06.26.17 at 7:55 pm

Jim Rogers Predictions:

2011:   100% Chance of Crisis, Worse Than 2008: Jim Rogers

2012:   Jim Rogers: It’s Going To Get Really “Bad After The Next Election”

2013:   Jim Rogers Warns: “You Better Run for the Hills!”

2014:   JIM ROGERS – Sell Everything & Run For Your Lives

2015:    Jim Rogers: “We’re Overdue” for a Stock Market Crash

2016:    $68 TRILLION “BIBLICAL CRASH” Dead Ahead? Jim Rogers Issues a DIRE WARNING

2017:   THE BOTTOM LINE: Legendary investor Jim Rogers expects the worst crash in our lifetime

#31 0akville stinks on 06.26.17 at 8:02 pm

The rates of the past do not necessarily reflect the rates of the future….just like stock prices…

The reality today is greatly different from the past. People will self The credit tightening will happen when the baboons have maxed

#32 Stone on 06.26.17 at 8:05 pm

If rates are supposed to go up, why don’t long term bond rates go up? What’s holding them back?

#33 Sue on 06.26.17 at 8:16 pm

Kinda worrisome…So would you consider a large position in cash being prepared? Doesn’t sound like money is safe anywhere anymore. What does everyone think is a safe investment does it even exist anymore?

Don’t be foolish and stick your wealth in any one asset, including cash. Did you not absorb what I said about balance and diversification? — Garth

#34 0akville stinks on 06.26.17 at 8:19 pm

The reality today is greatly different from the past. The baboons will do their own credit tightening by borrowing themselves to the max. Rates cannot change….it will defeat the purpose of monetary policy the last ten years.

We currently are very close to that point

#35 0akville stinks on 06.26.17 at 8:27 pm

Side note…

Asking prices in my subdivision have been reduced by $100k to 200k in the last month here in Oakville…and still no takers!

#36 Smoking Man on 06.26.17 at 8:32 pm

When your at some casino in up state NY next to the pensilvania boarder and the wife sends you a text saying come watch my machine I need to pee.

It means she’s out of loot and is heading for the ATM.

Im such a good hubby.

#37 I thinks I know something on 06.26.17 at 8:33 pm

“The only way these banks – like families with giant mortgages and nations with big debts – can keep rolling along is if rates (and payments) stay low.” – Garth

————————————————————

Exactly! And that’s exactly why rates will NOT be going “significantly” up for a very long time. It’s party-on dude. Until we drop.

#38 Freedumb on 06.26.17 at 8:35 pm

You blog dogs are my favorite imaginary friends. It’s almost like we know each other and share special moments together over the internet. It’s almost real. I love you all…imaginary friends.

#39 I thinks I know something on 06.26.17 at 8:38 pm

“Rates have to rise, or ‘normalize’, or the problem grows continually worse. And that’s what the Fed has also concluded. So up she goes. Three pops in the last six months.” – Garth

———————————————————-

I don’t believe anything the Fed says (not since Greenscam) and I strongly suspect their agenda is to fool the public into thinking the economy is doing better than it is. The will soon lower rates again when the economy falters badly.

#40 Reximus on 06.26.17 at 8:40 pm

I suspect the next BoC move will be about NAFTA renegociation, i.e. Mnuchin told Morneau to get CAD closer to .80ish USD/CAD or else they will play hardball

#41 I thinks I know something on 06.26.17 at 8:40 pm

“That would take the Bank of Canada rate from its current 0.5% right up to 3%.” – Garth

————————————————————

Notice to anyone that believes this could possibly happen, I have a really nice bridge for sale.

Of course it will happen over time. — Garth

#42 Pete from St. Cesaire on 06.26.17 at 8:42 pm

Cryptocurrencies give your financial security in the long run.
———————————————–
No, nothing will. Not even gold (because private ownership will be outlawed), although it may give you a way to pay smugglers to get you out of a hotspot where your family is in danger, so it’s worth having.

Extreme much? — Garth

#43 TWO FINGERS WATSON on 06.26.17 at 8:43 pm

#30 AK on 06.26.17 at 7:55 pm
Jim Rogers Predictions:

2011: 100% Chance of Crisis, Worse Than 2008: Jim Rogers

2012: Jim Rogers: It’s Going To Get Really “Bad After The Next Election”

2013: Jim Rogers Warns: “You Better Run for the Hills!”

2014: JIM ROGERS – Sell Everything & Run For Your Lives

2015: Jim Rogers: “We’re Overdue” for a Stock Market Crash

2016: $68 TRILLION “BIBLICAL CRASH” Dead Ahead? Jim Rogers Issues a DIRE WARNING

2017: THE BOTTOM LINE: Legendary investor Jim Rogers expects the worst crash in our lifetime
////////////////////////////////////

Jim Rogers would be right if they were to raise interest rates in any meaningful way.

#44 Bottoms_Up on 06.26.17 at 8:44 pm

#17 Entrepreneur on 06.26.17 at 7:14 pm
—————————-
No, because of free trade our workers (in Canada) have to compete with workers in India and SE Asia…workers that get paid pennies…we can’t compete unless we implement tariffs (ie, non-free trade).

#45 Raj on 06.26.17 at 8:45 pm

No worries
We got central banks, negative rates, quantitative easing, money printings, rabbits out of hats, minimum income and k. Wayne

#46 TCContrarian on 06.26.17 at 8:52 pm

“How credible is all this doomer talk?
Very.” -GT
***********************************************

Nice!

Next you’ll be recommending gold as hedge to the doomsday scenario you’re alluding to (for the over-leveraged and unprepared).

And then?

Well, I predict you’ll be joining ‘us’ and become a (dare I say it?), gold-licker! :-)

TCC

#47 60 seconds approval for mortgages on 06.26.17 at 8:52 pm

https://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjfnPup59zUAhVS12MKHdb1CLQQFghYMAA&url=http%3A%2F%2Fwww.rbcroyalbank.com%2Fdms%2Fmortgages%2Fbuying%2Fthat2017%2Findex.html%3FProspectID%3D19AE37A98E6F42E8BD7A3DAE3E86271E&usg=AFQjCNHTGGjP3M6dPetiv2pXVAwUyeHTSg

#48 Homeowners get approved, renters not so much on 06.26.17 at 8:55 pm

https://www.googleadservices.com/pagead/aclk?sa=L&ai=DChcSEwiRnoGq59zUAhULZn4KHRbeB04YABAMGgJwYw&ohost=www.google.ca&cid=CAESEeD2Zoe6BEBeIQfrxfb4f_ju&sig=AOD64_31cBwNrh-HHboDqZxCmET4Lt3wCQ&q=&ved=0ahUKEwjfnPup59zUAhVS12MKHdb1CLQQ0QwIQw&adurl=

#49 greyhound on 06.26.17 at 8:58 pm

The BIS article made me think of the likely coming excitement caused by everybody being on the same side of the boat in index funds and “passive” strategies. Active management will likely be the thing a lot of folks will wish they had. Passive ETFs don’t lighten up in advance of the storm — they drop like cement blocks when it hits.
I remember that one of the few things that actually went up in the panic in 2007 was gold, which was up 5% for the year. Maybe 5-8% of the portfolio in gold still isn’t a bad idea. Precious metal mining equities are cheap at a time when most other things, even govt. bonds, are way overpriced; inexpensive diversification.

#50 We must be near ... on 06.26.17 at 9:00 pm

A top of the advisors are getting nervous .

Gold has been up trending since dec 2016 . The market Trump euphoria has settled .

I’ll believe a storm is own it’s way If GLD breaks $130

You guys never learn, do you? — Garth

#51 Fish on 06.26.17 at 9:00 pm

the LCBO worked it out, we can all look at our glow in the dark toonies with a refreshment

#52 TCContrarian on 06.26.17 at 9:06 pm

The times are a changing…some think:

“A 60:40 allocation to passive long-only equities and bonds has been a great proposition for the last 35 years … We are profoundly worried that this could be a risky allocation over the next 10.” – Sanford C. Bernstein & Company Analysts (January 2017)

TCC

This blog has never recommended a 40% bond weighting. Irrelevant. — Garth

#53 Interest rates going UPPA UP UP on 06.26.17 at 9:07 pm

Most of you realtors shysters must be stupid. Rates are going UPPA UP UP all over the world. Low rates experiment was a failure. It didn’t work so they are GOING TO RAISE INTEREST RATES. This mean houses will remain UNSOLD. For sale signs ALL OVER the GTA and NOTHING is selling….NOTHING. Interest rates haven’t even started it climb up yet. Many will lose their homes and investments JUST LIKE 1990. In 1990 many had 2-5 houses/investments and guess what? THEY LOST IT ALL! Realtors and speculators your future spells BANKRUPT. :-)

#54 InvestorsFriend on 06.26.17 at 9:08 pm

About that U.S. to Canada House Price Chart:

I have no argument on the main theme that having too much of one’s assets tied up in a Canadian house is very risky. Yes diversify.

With no argument on the main point I will pick on the chart a bit.

To view trend over decades it should (must) be a logarithmic scale. ANY asset that rises by some average annual percentage over time will tend to hockey stick if viewed over decades. A log scale shows if the rate of increase is accelerating.

But okay fair enough even on a log chart Canadian home prices surely rocketed up. And the regular arithmetic scale shows how much higher Canada is than the U.S.. It does that better than a log chart actually. An arithmetic chart going back to only about 2005 would be okay.

When this graph first appeared on this blog circa 2008 I opined that the lines would meet not by Canada falling but by the U.S. rising. The U.S. DID rise as I thought it would (and I bought a U.S. home builder to benefit as I was not in a position to buy U.S. houses).

But Canada went apeshit and, far from following the U.S. down, about doubled again since 2008. I don’t recall anyone predicting that. A lot of people gambled and won the house lottery. Some of those should now collect their winnings and leave the table. Those who can handle a huge house price drop and who just don’t want to move can stay at the table.

And remember back when U.S. houses hit bottom around 2011? This blog was FULL of people predicting U.S. house prices would continue to crater down. Meanwhile smarter people including one closely related to me were buying a house in the U.S. Our dollar was at par!! It was a golden opportunity. It was never suitable for everyone but many snowbirds should have pounced and most did not. Typical. Around that time Garth said, Buy America sell Canada.

#55 SimplyPut7 on 06.26.17 at 9:13 pm

#21 chopstix on 06.26.17 at 7:21 pm

That’s what the Liberals in Ontario are doing. Wynne has copied most of her new ideas from the NDP.

#56 ooh ooh that smell, can you smell that smell? on 06.26.17 at 9:15 pm

Question:
Hitler invaded all his neighboring countries, so why did he leave out Switzerland? Many spoke German, they were sympathetic to his Pan German rhetoric. A red carpet? at least no resistance.

Answer:
BIS

Who would rob their own bank?

#57 Jacques Strappe on 06.26.17 at 9:17 pm

Years of reading this blog and I’m still 100% in equities. Not becomes of stupidity or obstinacy, but because of inertia. Just plain ole laziness. And it’s worked out pretty well so far.

#58 akashic record on 06.26.17 at 9:23 pm

Bear Song – Ojibway Women
Skownan First Nation, Manitoba

https://www.youtube.com/watch?v=ynCh3_2skEw

#59 WUL on 06.26.17 at 9:32 pm

And Albertans spend a record amount on home renovations of late. We’re plucky.

http://www.cbc.ca/news/canada/calgary/home-renovations-calgary-surge-spike-atb-financial-recession-house-economy-1.4177871

#60 Pig Without Lipstick on 06.26.17 at 9:32 pm

You sound like a bullion licker tonight, Garth. Which is to say there have been good reasons to first, be skeptical about the economic recovery and, second, look for alternative assets that are free of counter party risk.

#61 45north on 06.26.17 at 9:39 pm

guru: from yesterday: The commuter towns will melt away first and rapidly, i’m projecting 50-70% decrease in prices by Christmas for areas in Barrie, Milton, Brampton, Oshawa, Guelph etc.

the most important factor is the stability/ safety of the street you live on and I’m thinking that’s pretty much a function of the debt levels on the street

then there are three factors:

transportation to downtown

internet access, this is more important than it was in 2007

access to an international airport: this is more important than it was in 2007

Somehow, Georgetown comes to mind. If you have sought-after skills and you don’t much like the street you are on you will sell at a loss to get out. And move to Ottawa.

#62 Joe Schmoe on 06.26.17 at 9:44 pm

So my wife and I after 8 years of pushing it off, bought a rec property at peak housing.

As dumb as that sounds, here is the interesting part:

Our gross annual earnings are 2X the value of the house.
We have no debt.
Our net assets are 9X the value of the house. (7X of it a balanced portfolio)
Our RE assets are currently 2X the value of the house.
We didn’t need a mortgage
House is a new build, recent permits/inspections/third party appraisal/subsequent inspection etc etc

It was like pulling teeth to get a lender on board. We didn’t care about the mortgage but at 2.3% interest for a 5 year fixed, was an easy call.

We had 3X the downpayment in cash and two lenders poured through bank statements like it was an audit.

I can’t see a young family with squat and a gift from their parents for a downpayment getting a loan in this tightening environment.

#63 TWO FINGERS WATSON on 06.26.17 at 9:47 pm

Buy the Big Five. Collect / reinvest the dividends and fuggeddaboutit. You will do as well as anyone over the long haul. Check out the charts for the last 10 years.

#64 Sixtyfourk on 06.26.17 at 9:49 pm

Reading today’s post I had to do a double take to see if I was on Zerohedge.

I’m not sure what to make of Garth and the zero guy agreeing on how fubar we are.

#65 Asterix1 on 06.26.17 at 9:49 pm

I know its very difficult for many people posting on this blog to accept, but rates in Canada will go up.

FED RATES
Dec 2015 = 0.37%
Dec 2016 = 0.62%
Apr 2017 = 0.87%
Jun 2017 = 1.12%
1 more rise in 2017
3 more planned in 2018

Do you really believe that Canada will maintain its 0.50% rate (a historic farce of a rate) as the USA moves up? Very unlikely!

The Parliamentary Budget Office estimates rates in January 2020 will be at 3.5%.

Rate increase are needed and are unavoidable at this point!

#66 Post on 06.26.17 at 9:50 pm

I was listening, this morning, to the the same discussion about the BIS’s concerns – except, they were talking about substantial pull back and a multi year melt in the stock markets. It was on CNBC.

#67 DownUnder on 06.26.17 at 9:58 pm

5 Reasons why the Toronto housing market won’t crash

http://www.huffingtonpost.ca/nathan-dautovich/5-reasons-why-the-toronto-housing-market-wont-crash_a_22492197/

In fact: “… the Toronto housing market is just taking a brief pause before prices and activity continue to climb”.

Well, there we have it. The HuffPost says so, so it must be true.

#68 careful on 06.26.17 at 10:05 pm

you’re going to wake the gold bugs

#69 InvestorsFriend on 06.26.17 at 10:12 pm

BONDS?

#52 TCContrarian on 06.26.17 at 9:06 pm
The times are a changing…some think:

“A 60:40 allocation to passive long-only equities and bonds has been a great proposition for the last 35 years … We are profoundly worried that this could be a risky allocation over the next 10.” – Sanford C. Bernstein & Company Analysts (January 2017)

TCC

This blog has never recommended a 40% bond weighting. Irrelevant. — Garth

******************************************
True, but some experts recommend a heavy allocation to bonds.

Long term bonds are 100% guaranteed to offer an abominable return over the next 30 years (Precisely whatever a 30 year bond yields to maturity, about 2.0% for a government bond)

They DO offer some stability, but at that rate it would be far better to use something like a short GIC for stability. Long government bonds offer no real compensation for tieing up money for so long. And high-grade corporates are not much better.

This is why wiser advisors including Garth have substituted preferred shares for a big chunk of what was traditionally a 40% bond allocation.

ONLY cash or a cash equivalent (high interest savings account, very short term deposit) can offer totally guaranteed stability. Investments are measured in cash. Cash is the only asset that cannot fluctuate in value against, well, cash.

Stability in terms of purchasing power is another matter and cash can fail there due to inflation. But over the short term it rarely does to any degree.

#70 mark on 06.26.17 at 10:13 pm

Nik @26

Garth you did not answer his question, i don’t think you understood his point, what did the best in the balanced portfolio? He assumed it was NOT stocks?

Over the course of three years that varied considerably. The point is, by owning diverse asset classes in the correct weightings, who cares? — Garth

#71 Smoking Man on 06.26.17 at 10:17 pm

Roger waters my hero my entire life who hated Abba.

Screw you Roger, Donald Trump rules, to try and incite the mind of the lunatic messed by globalist communists and teachers.

https://www.youtube.com/watch?v=cvChjHcABPA

#72 Smoking Man on 06.26.17 at 10:21 pm

Abba rules.

https://www.youtube.com/watch?v=YFk6-Mn-8yg

Sorry Roger Waters Trump hater.

Not on your team anymore.

#73 Smoking Man on 06.26.17 at 10:24 pm

More pain for you roger waters

https://www.youtube.com/watch?v=JTuFX0HIs_A

#74 A place to call home on 06.26.17 at 10:25 pm

G’evening blog dogs. Been reading here for a while, slowly helping to relieve my financial/RE ignorance – thanks! – I’m a work in progress.

Have a question for y’all that I hoped you could help with, although I’m sure I’ll get some heat after today’s post.

Im from the YVR and living here with my family of 6 and scraping by. We were evicted last year and ended up in a fixed-term, move-out-clause rental. We’re all sick of the instability and so we’re looking into buying in the Okanagan (some family up there). I don’t want to buy at this point in the market, but it would be for the stability of a long term home. (Frankenumbers show average selling is up 7.5% y/y and supply is super low – another con for buying now in the OK)

We’ve been looking at options through Vancity (yes we bank there, and yes I know y’all think there’s risk there, but I believe in their principled approach – for better or for worse).

Option 1 would be a 25 year mortgage with the CMHC premium.

Option 2 would be a 20k LOC @ 5.7% variable to make 20% down for a conventional mortgage over 30 years, avoiding CMHC. We would hope to pay the LOC in 5years, making the cost of it cheaper than CMHC, but the variable rate worries me.

Our savings are smallish, but we are debt free. What we pay in rent here would be comparable to buying a SFD in the Okanagan (including property tax, insurance, maintenance, utils). Salary is slightly lower up there, but doable.

Any advice would be most appreciated. Thanks all.

#75 dakkie on 06.26.17 at 10:29 pm

Canada: a first-world country with spiking household debt. 2008 all over again?
http://investmentwatchblog.com/canada-a-first-world-country-with-spiking-household-debt-2008-all-over-again/

#76 FreeMan on 06.26.17 at 10:32 pm

The Rulers cannot accept that the ruled join the ‘financially independent’ club for too long, such as through real estate ownership. The show was good while it lasted. Soon the ‘investors’ with ‘investment/rental properties’ will bite the dust. A hole that is about to be plugged by all three levels of government. It’s inevitable.

#77 Smoking Man on 06.26.17 at 10:33 pm

Basterds can’t walk in there home town at night anymore.

https://www.youtube.com/watch?v=5DkQBPpun0M&list=RDJTuFX0HIs_A

But Roger Waters, my former hero will save you. He’s an idiot

#78 Silent the people on 06.26.17 at 10:40 pm

Smoking Man is an idiot!

#79 Silent the people on 06.26.17 at 10:45 pm

“A place to call home” best advice is to try and stay put. Keep your job and find the best rental you can. Any job,Government or Private will be very vunerable right now! Save your money, lower your debt and watch.

#80 Asterix1 on 06.26.17 at 10:57 pm

That HuffPost joke of an article was written by a:

PropertyGuys.com Franchise Owner

Like I really trust his unbiased opinion! His arguments are all washed up propaganda from the RE industry.

#81 Smoking Man on 06.26.17 at 11:15 pm

#77 Silent the people on 06.26.17 at 10:40 pm
Smoking Man is an idiot
….

You have idea how good that post makrs me feel.

#82 millmech on 06.26.17 at 11:18 pm

#73 Make sure that your job has long term stability, because if you lose it you will not find another as there is high unemployment. You will notice once your there for a while that there is a lot of poverty in that area partly from paying the sunshine tax and there is always someone willing to work for less.

#83 InvestorsFriend on 06.26.17 at 11:30 pm

Avoid CMHC

#73 A place to call home on 06.26.17 at 10:25 pm
asked about using a line of credit to get away from the CMHC fee.

My theory and practice was always to avoid the CMHC fee. Why pay thousands to insure your lender?

I have bought three houses in my life. Avoided CMHC each time. It was basically non-negotiable. I had to borrow from family to do it on one occasion. So did that paid it back fast.

Not sure that debt on a Line of credit is going to qualify as a down payment. But if it does I say do it and then pay off the LOC fast.

#84 Chickens, not crows, come home to roost on 06.26.17 at 11:34 pm

See #22.
Why crows?

If you can’t use it correctly then don’t, especially an old outdated expression. Are you aware of what you are saying if it does not not matter to you as to whether it’s a crow or a chicken.

#85 Drunken Stupor on 06.26.17 at 11:36 pm

Well, just curious, what if balanced portfolio also worked mainly because it is practically all financial assets and the printing presses simply also propped it up? If indeed epic collapse ahead what’s gonna actually work? Gold? Bit(or other similar)coin? Cash?
Apparently during the Balkan (ex YU) wars gold didnt help much, i.e. how many gold chains for loaf of bread? Bitcoin for food? Cash until next Weimar then?

#86 Ronaldo on 06.26.17 at 11:54 pm

#62 TWO FINGERS WATSON on 06.26.17 at 9:47 pm

Buy the Big Five. Collect / reinvest the dividends and fuggeddaboutit. You will do as well as anyone over the long haul. Check out the charts for the last 10 years.
—————————————————————-
This is the worst time to think about buying the big 5. They are long overdue for a correction. Wait awhile.

#87 Smoking Man on 06.27.17 at 12:01 am

Something I’m Into

https://www.youtube.com/watch?v=UP4N0irJ-gM

#88 Tony on 06.27.17 at 12:10 am

Re: #26 Nik on 06.26.17 at 7:36 pm

U.S. or American bonds especially long term American bonds returned around 30 percent in Canadian dollars.

#89 Ronaldo on 06.27.17 at 12:24 am

#72 Smoking Man on 06.26.17 at 10:24 pm

More pain for you roger waters

https://www.youtube.com/watch?v=JTuFX0HIs_A
—————————————————————–
Brought back great memories. They were the best.

https://www.youtube.com/watch?v=LMLBji4DoWM

#90 Smoking Man on 06.27.17 at 12:26 am

CANADA

https://www.youtube.com/watch?v=wJVpihgwE18

#91 Tony on 06.27.17 at 12:32 am

Re: #58 WUL on 06.26.17 at 9:32 pm

Its been that way for almost a decade in Alberta as people fix up their homes only to find out it’ll never sell. So they spend more money to fix it up some more and it still won’t sell. It certainly isn’t because “people want to stick with their homes”.

#92 Evan on 06.27.17 at 12:34 am

I completely agree with Garth and this is a problem I have been thinking about for a long time.

Most people invest in hot firms, or firms that are doing well from an earnings point of view, when it comes to stocks. These are fun to buy and hold but since prices in the stock market come back to underlying value, you have to make damn sure you’re not overpaying and that the source of value you’re relying on is rock solid.

The pitfall that Garth mentions with housing can equally happen in the stock (or bond) markets. These assets are priced relative to interest rate levels, for the most part, which means that when rates rise, your investments tank.

I prefer to buy deep value investments which can completely sidestep this trap because they are trading at ridiculously cheap prices relative to underlying value or valued based on a conservative estimate of liquidation value – not earnings!

https://www.brokenleginvesting.com/what-is-deep-value-investing/

Us Canadians can often have the “it can’t happen here because _______” mentality which is financial suicide when hard times do eventually hit. Invest wisely!

#93 Newcomer on 06.27.17 at 12:35 am

There is always someone saying, you can’t rent when you have kids because you would have to move house. They forget:
1) if you research your landlord and know what their intentions are, it is possible to virtually eliminate moves over a span of less than 5 years;
2) moving house does not have to mean moving neighborhoods, so other than the actual moving a couple of blocks, there is no disruption;
3) families routinely move to different cities and even different countries to no ill effect, so why all the angst about moving from one house to another;
4) among all the things that can mess up a family, including health crises, marital strife, mental health problems and so on, money problems have much more impact on family happiness than having to get used to a new house, so when you are stacking up things to be worried about, make sure you have everything else locked down before you start worrying about moving.

In the end, these people see renting as a type of servitude that they must grovel to be allowed, rather than a type of service of which they are the customer and imagine that the unlikely inconvenience of having to pick another service provider at a time that is not of their choosing is a life-altering event that they cannot handle when, in fact, they routinely deal with much more.

#94 Long Branch Apprentice on 06.27.17 at 12:36 am

Everyone in this section should watch Mr. Robot.

Just do it.

#95 TRT on 06.27.17 at 12:38 am

50-50 chance of 1 rate hike until next June! 10% chance of 2.

Thats the money markets talking.

#96 TRT on 06.27.17 at 12:41 am

#41 I thinks I know something on 06.26.17 at 8:40 pm
“That would take the Bank of Canada rate from its current 0.5% right up to 3%.” – Garth

————————————————————

Notice to anyone that believes this could possibly happen, I have a really nice bridge for sale.

Of course it will happen over time. — Garth

————————————————————

Only one more 0.25% hike in next year. Then USA will probably enter recessionary phase of cycle. Canada will stand pat. Even with Oil going down, Canadian $$ holding its own.

Expect a rebound to 80 cents…

#97 waiting on the westcoast on 06.27.17 at 12:43 am

#55 ooh ooh that smell, can you smell that smell? on 06.26.17 at 9:15 pm says… “Question: Hitler invaded all his neighboring countries, so why did he leave out Switzerland? Many spoke German, they were sympathetic to his Pan German rhetoric. A red carpet? at least no resistance. Answer: BIS Who would rob their own bank?”

The Germans did not invade Switzerland because it is extremely difficult to take due to its terrain and because they were neutral and even slightly friendly. Note, Sweden also remained neutral without the same strong natural defences but were also not working to hurt the German war effort so valuable as a neutral party. It’s not like the Germans had infinite resources.

#98 Stock Picker on 06.27.17 at 12:47 am

My strategy in 08/09 and 14/16….. as always, was to buy more dividend paying stocks. Regardless of stock price dividend is paid. As bond yields have zeroed, dividend equities have quadrupled and more…. as people came my way. Look at the BCE’s etc and see that picking the right dividends and the steady dividend increases have far out performed the general index. I have dozens of equities that have gone from $14 to $60 , yes I have a few that were killed by Trudeau and Obama, what will their fate be under your prognosis for disaster? Will the market just rotate into cash flow instead of sitting in dead money portfolios that seek security above all?

#99 Financial Samurai on 06.27.17 at 12:58 am

Gotta say, I’m SUPER impressed with how much crazier Canadian real estate prices is versus the US.

The US is terrific value in comparison!

#100 TWO FINGERS WATSON on 06.27.17 at 1:35 am

#73 A place to call home on 06.26.17 at 10:25 pm

I live in Kelowna. My advice to you is find good secure employment BEFORE you come to the Brokenogan. Good paying steady work is hard to find here. I have known lots of people over the years that moved here to live the dream but had to leave cuz they could not make a decent living here.

#101 Sue on 06.27.17 at 1:41 am

#33 Sue
Kinda worrisome…So would you consider a large position in cash being prepared? Doesn’t sound like money is safe anywhere anymore. What does everyone think is a safe investment does it even exist anymore?
Don’t be foolish and stick your wealth in any one asset, including cash. Did you not absorb what I said about
balance and diversification? — Garth

Actually Garth thats exact reason I come back here to read daily, for the reassurance! As probably alot of others do. But is it not a big deal that the BIS even mentions us? There seems to be so much uncertainty about everything. And I sense (perhaps wrongly) that even you may feel a little more bearish lately. I understand balance and diversification, but darn its hard to not want to try benefit from what seems like an inevitable correction when/if we ever revert to the mean of reality. It’s not said enough, thank you for your voice of reason. Maybe tomorrow might I suggest sunshine, rainbows, and puppies for a topic? or perhaps a countdown on how many more sleeps til our next provincial and federal election, that would brighten up some of us Albertans.

#102 april on 06.27.17 at 1:53 am

#73- Your being naive if you believe what the bankers and realtors are saying. Do your own research.

#103 Andre on 06.27.17 at 1:58 am

Garth,

I agree with your analysis but I am not following your advice of staying invested. I have recently (after the DOW went higher than 20K points) transferred my locked in retirement investments to cash equivalents, sold a good part of my portfolio (mainly invested in stocks and ETF) and paid a good chunk of my mortgage. I am now holding a mortgage that equals 30% of the price we paid for the house in 2015. We have about 70K left on not locked in investments (20% stocks and 80% bonds). I am now seriously considering to use this + additional income to pay out the mortgage by the end of next year. I would be totally debt free if I decide to use this strategy…. that would be the most bearish strategy I could use …. :)

#104 The Totally Unbiased, Highly Intelligent, Rational Observer on 06.27.17 at 2:08 am

On June 26, 2017 the Supreme Court of the USA wisely and justly and unanimously (9 to 0) ruled that President Donald J. Trump was absolutely, conclusively, scientifically right beyond the shred of a reasonable doubt to try to ban the Muslim extremist terrorists of half a dozen nations from entering the USA and destroying property for 90 days. A lower court had previously played politics and allowed terrorists to enter the country, but the Supreme Court somehow managed to realize that the safety of Americans was even more important than playing political games.

President Donald J. Trump is from the city of New York. He lived in a beautiful penthouse with a spectacular view. He looked out over the city and thought about what he could do for the people of the United States. He could not help noticing that the two World Trade Center towers were suddenly missing after Tuesday, September 11, 2001. That seemed most unusual and disturbing. Donald Trump wanted to stop any more tall buildings from suddenly going missing. He had a personal interest in this, since he himself liked to build tall buildings. It costs a lot of money, so builders really hate it when their buildings get lost.

Though personally living quite comfortably, it grieved the great and majestic Donald Trump to see the way other countries and people took advantage of the USA and treated it so badly. For many years he had hoped that someone would step up to save America. When nobody else rose to the occasion, Donald Trump decided to sacrifice his own time and lifestyle to do what needed to be done. Like a great American hero, he humbled himself and descended from his palace among the clouds, and came down to live like an extraordinary man in the White House.

The opponents and obstructionists do not have the same good, clear, sensible view that Donald Trump has. They do not share Donald Trump’s love of tall buildings. They do not share Donald Trump’s love of America. They cannot see the big picture from on high like only The Donald can. They live at a much lower level, and have a much more limited view of their surroundings, and have no real understanding of how the world actually operates. Sometimes they lift the manhole covers over their heads, poke their heads up out of the sewer, and ignorantly criticize the vastly superior wisdom that comes down from above, that comes down from The Donald.

#105 SoggyShorts on 06.27.17 at 2:16 am

#61 Joe Schmoe on 06.26.17 at 9:44 pm

I’ve been trying to guess at numbers from your post, and nothing really makes sense.

The only thing I can get for sure is that your net assets are equal to 54 months gross income, which depending on your age is anywhere from a great start, or a bad situation.

Spending 6 months gross income on a (cottage?) is nothing if your disposable income is 50%, but might be a massive chunk if you are just paying bills.

more info pls?

#106 Sour Lemonade on 06.27.17 at 2:38 am

2447 E21st Vancouver

Sold May 2016 1472000

Sold June 2017 1468000

And they renovated somewhat

#107 Could not agree with you more about BIS on 06.27.17 at 2:38 am

Yesterday, posted to my Facebook page a warning about what BIS said yesterday to my friends. I trust BIS over any bank, Government, Realtor et. al. These are the people that watch over and facilitate cash transactions across the world, every second of the day.

They also talked about Schumpeter’s “Creative Destruction” and noncompetitive Zombie companies allowed to hang on in a low rate environment.

Rather and in Canada, it is more like “Zombie Debtors & RE Investors” that will suffer the consequences of what BIS predicts is inevitable as they are hanging on by the thinnest of threads financially.

Canada’s Zombie Debtors & RE Investors will be purged from the economic system for years or a decade to come; hence, Creative Destruction – out with the old and replaced by something new and better (bad economic players out and good economic players prosper).

Hope our plucky economy, as of late, can continue to offset RE & Financial Sector GDP losses, that are inevitable.

If not, we are indeed screwed.

#108 Mark on 06.27.17 at 2:43 am

“If rates are supposed to go up, why don’t long term bond rates go up? What’s holding them back?”

Deflationary expectations. Rates on risk-free debt aren’t going anywhere. Of course this won’t save residential RE borrowers, who will face higher risk premiums on account of increasingly diminished values and credit-worthiness of the asset class itself.

#109 Freedom First on 06.27.17 at 3:00 am

Rather it’s all about financial security.-Garth.

This statement is pure gold.
………………………………………………………………….

And, for myself, I look after everything to do with me as much as I do my financial security. For decades. Sometimes, I have to just pinch myself. I envy no one.

And I believe I still have much to learn. I love it.

Freedom First
Master of Freedomonics.
It’s my life

#110 Ed the Sock on 06.27.17 at 4:35 am

Our PM spends more time choosing socks than worrying about the economy – what can go wrong?

#111 Wrk.dover on 06.27.17 at 7:18 am

Another financial crisis? I thought the bailouts, printed money, and ponzi borrowing fixed everything

(irony copied and pasted from Ponzi World blogspot)

#112 Trumpocalypse2017 on 06.27.17 at 7:25 am

“If you believe the storm will return, prepare.”

Exactly. And now the geopolitical chaos and war will complicate things much more.

BREAKING NEWS!!!!!!!!!!!!!!!!!!!!

White House says Syria “…will pay a heavy price…” for chemical weapons attack said to be imminent.

http://www.cnn.com/2017/06/26/politics/syria-chemical-weapons-white-house-warning/index.html

Perfect.

Trump gets the distraction he desperately needs from health care fiasco and Comey/Mueller about to take down his administration.

War. The perfect refuge for despots.

By the weekend.

July 1, July 4 celebrations coming up.

You should consider your plans carefully.

Prepare.

#113 Murray723 on 06.27.17 at 7:25 am

#108 Freedom First on 06.27.17 at 3:00 am

Rather it’s all about financial security.-Garth.

This statement is pure gold.
………………………………………………………………….

And, for myself, I look after everything to do with me as much as I do my financial security. For decades. Sometimes, I have to just pinch myself. I envy no one.

And I believe I still have much to learn. I love it.

Freedom First
Master of Freedomonics.
It’s my life

___________________________________________

You’re quite a gal. Can we meet up sometime? Please send me a photo.

#114 John on 06.27.17 at 7:29 am

Well, the penny drops. Please note that on June 26, 2017 Garth wrote “the unwind” post with a photo of sign pointing to a restroom…. the BIS was discussed and that poster #20 fingered our basic dilemma.. we don’t have enough net high energy to kickstart the economy into a high enough gear to blast out of this debt quicksand mess. All asset classes in balanced and unbalanced portfolios (and real estate) are going to get rammed like the USS Fitzgerald. Looks like Bay Street and Realtors are lining up to use the same restroom. Things might be deteriorating faster than we know, hence Garth’s post. So, what kind of socks will T2 be wearing for this global sh*** storm? Let’s start with brown socks and work our way over to work socks.

#115 NoName on 06.27.17 at 7:42 am

#109 Ed the Sock on 06.27.17 at 4:35 am

Our PM spends more time choosing socks than worrying about the economy – what can go wrong?

—-

I am not fan of our pm, but saying that he is not doing anything isn’t true, could he do more perhaps, but he’s tactics are very interesting.

https://www.nytimes.com/2017/06/22/world/canada/canadas-trump-strategy-go-around-him.html

Friend from Montenegro emailed me this, she sad your guy is smart, not like ours….

#116 pBrasseur on 06.27.17 at 7:49 am

Of course there’s is going to be a crisis, somewhere, eventually. Yes humans do crisis, Gee what a find!

But Warren Buffet didn’t get rich by hiding under the bed!

He also did not use extreme leverage and all his savings to buy a $1.5 million junk house in East Van. — Garth

#117 pBrasseur on 06.27.17 at 7:52 am

#111 Trumpocalypse2017 – “If you believe the storm will return, prepare.” Exactly. And now the geopolitical chaos and war will complicate things much more.

If you base your investment decisions on geopolitics it sure as hell going to be «complicated». And you’ll get the results you deserve…

#118 pBrasseur on 06.27.17 at 7:56 am

He (Buffet) also did not use extreme leverage and all his savings to buy a $1.5 million junk house in East Van. — Garth

No (of course) but he never rushed to safety either, rushed to quality and opportunity instead. Buffet is currently saying Bonds are a losing proposition.

You seem to enjoy selective hearing (or reading). My advice is not to ‘rush’ to anything but continuously employ a balanced approach to investing. As for bonds, a small but strategic weighting reduces the volatility for people who lacks billions of dollars and worry about temporary portfolio fluctuations. Try to be constructive, as much as I know it pains you. — Garth

#119 Incubus on 06.27.17 at 8:03 am

“Meanwhile two billion more people around the world have entered the workforce, keeping wages depressed, while free trade – essential to economic growth – has allowed them to directly compete with workers who live in expensive places, like here.”

You forget automatisation with robots that will destroy a lot of jobs.

#120 SimplyPut7 on 06.27.17 at 8:07 am

#73 A place to call home on 06.26.17 at 10:25 pm

Why wouldn’t you rent in Okanagan?

I don’t live in YVR but I come from a banking background, if interest rates really do rise even a little over the next 5 years, you may have a mortgage that is underwater by the time you are ready to renew.

If that happens, your bank/lender will take advantage of you as the new mortgage rules put in place late 2016, give banks more power to stop you from leaving to go to another lender with a better mortgage rate, by making you qualify under the new rules to get the other lender’s mortgage.

You could be forced to pay a higher interest rate that wipes away your “smallish” savings and could put a serious financial strain on your family that will weigh heavily on you mentally and physically.

Remember your bank doesn’t care if you will ever have a standard of living that allows for money to be spent on vacations, entertainment, restaurants or saving for retirement; they don’t make more money if you are happy with the terms of your mortgage agreement.

Access to their mortgage, LOC and credits cards is privilege not a right. If things nose dive like they are starting to in Toronto, your bank/private lender will throw you under a bus to save their own skin.

You should stress test yourself and make sure you qualify for that mortgage and can make the payments if mortgage rates went up to 3% to 5% and the LOC goes up past 7%.

#121 windjammer on 06.27.17 at 8:19 am

First off let me say that I feel I have benefitted from this blog in a lot of ways and I thank you for that.

It seems though that your opinions are moving towards the ones that this blog was a counterpoint to.
What I mean is that the Casey point of view where we are in the eye of the storm and when that moves on we will be in devastating times. Dare I say a time where gold is the only real money.

Nope. Gold is a distraction and Casey is a washed-up rock salesguy. Just follow the correct principles of investing and you can ignore any storm. — Garth

#122 crowdedelevatorfartz on 06.27.17 at 8:23 am

@#109 Ed the Sock
“Our PM spends more time choosing socks than worrying about the economy – what can go wrong?”
******

Ah yes, Preem Minister Trudeau pulled out all the stops at the pride parade in TO last weekend.
Mugging with his trophy wife for the camera (“look everyone I’m wearing rainbow socks! Get it?Get it?”), dragging his poor kids along for the photo op, another future Prime Minister Trudeau in 2050? ……ugh.
Apparently grotesque deficit budgets and insane housing prices arent enough to keep his Wheezyness focussed but worrying what socks to wear while politically correct posturing wins every time
The next federal election cant come soon enough

#123 };-) aka Devil's Advocate on 06.27.17 at 8:37 am

NO PAIN, NO GAIN

Eventually, this Ponzi Scheme economic paradigm we adhere to will collapse. The question is do we wait and react to it or do we address it before it’s too late despite that doing so will cause us ALL to endure economic hard times but at least in a proactive controlled manner instead of economic Armageddon.

Raise the rates, for if you do not the bond markets eventually will.

#124 Kool Aid on 06.27.17 at 8:40 am

Civilization transforming equations like IOT(AI X ROBO) or (BIO X NANO)(QUANTUM) change it all, and it may all happen in an increasing interest rate landscape.

USD will again be the catalyst to change, the challenge is in the assumption that globalization reverses in totality, different countries will have different opportunities in a world with higher rates in place.

Interesting that the article touched upon the undeniable positive impact that globalization has achieved. Bringing people out of poverty should be the primary objective of capitalism.

#125 Here's The Deal on 06.27.17 at 8:46 am

Re: #118 SimplyPut7 on 06.26.17 at 10:23 am

” I know math is hard, but……”
——————————————————————-

Here’s the Deal:

Math is hard. It looks like spelling and grammar are harder for SimplyPut7.

The real estate tide raises and lowers all boats. A particular local real estate market moves home prices in tandem. All participants will face a simultaneous reality. Ergo, the banks will not realistically be able to pick and choose whom to lend to and whom not to. They become part of that reality. If the entire market moves lower, most of their client base (mortgagees) are in the same position. Nevertheless, that’s not the main point.

The point is that if you need a big mortgage, it means you can’t afford the house. iI you can AFFORD a house (i.e., are not subject to interest rate risk) you should buy it if you really want it, or need it to serve the purpose of enjoying it and living in it for the sake of practicality and stability and fun and peace of mind. It is NOT to ever be considered a financial asset or part of your net worth.

The house, as an “asset”, must be compartmentalized into its own little world, i.e., the real estate market. its value will free float independently from the world of financial assets. It will move up and down within its own market, and will maintain its relative worth among similar assets (i.e., other houses).

Just because a home appreciates in value doesn’t mean its owner has a higher net worth. The house is not money. It’s only an asset tradeable within its own market. The same idea applies if a house depreciates in value. So what? It’s just the place you live. If you have actual financial assets and are properly invested, the value of your house is irrelevant. Especially f you could afford to buy it in the first place. If you sell it in a down market and need another house, the new house will be relatively priced. It is SEPARATE from your balanced and diversified liquid asset financial portfolio.

Get it?

Most of the “homeowners” out there are posers. They’re living in a pretend world where everybody thinks they can afford homes because they can carry the monthly payment (for now). They do not own their homes. They are borrowing their homes. They are deluded fools if they believe otherwise. Time will tell.

#126 };-) aka Devil's Advocate on 06.27.17 at 8:47 am

#99 TWO FINGERS WATSON on 06.27.17 at 1:35 am
#73 A place to call home on 06.26.17 at 10:25 pm

I live in Kelowna. My advice to you is find good secure employment BEFORE you come to the Brokenogan. Good paying steady work is hard to find here. I have known lots of people over the years that moved here to live the dream but had to leave cuz they could not make a decent living here.

I have earned a decent living helping people move here and then helping them leave. Many from The Big Smoke, who figure they’ll teach the Local Yokels a thing or two about business only to find out the Local Yokels are really quite a sophisticated lot.

Everybody wants a piece of paradise, supply and demand. But few foresee the cost.

#127 A Reply to #20 Nonplused on 06.27.17 at 9:03 am

“Money isn’t real, it’s an abstraction used to keep track of who owes who how much.”

You downplay the importance of money in the economy. It’s not only a unit of account (as you correctly point out) but also a store of value, a medium of exchange, and sometimes a standard of deferred payment.

https://en.m.wikipedia.org/wiki/Money

Federal governments can also affect employment, interest rates, economic growth and other economic variables by changing the money supply (by, say, open-market operations or by raising or lowering bank reserve requirements).

http://www.investopedia.com/terms/o/openmarketoperations.asp

For more discussion of monetary policy and macroeconomics, see The General Theory of Employment, Interest and Money by John Maynard Keynes. (Recommended.)

#128 };-) aka Devil's Advocate on 06.27.17 at 9:03 am

#3 the other side of the Rubicon on 06.26.17 at 6:42 pm
The global scam that is BIS started as a collection agency for war reparations, that’s why we have never ending war.
‘normal’ interest rates?
Interest rates are abnormal
I’m not aware of any ‘crisis’ in 08, it was a transfer of wealth

#129 pBrasseur on 06.27.17 at 9:10 am

Portfolio fluctuations are not a problem when you own quality assets. To the contrary, fluctuations are opportunities, for you and for the quality companies you own.

If you insist to reduce fluctuations be aware that this (if it works at all…) will cost you money in the long run.

#130 Dharma Bum on 06.27.17 at 9:10 am

#103 The Totally Unbiased, Highly Intelligent, Rational Observer on 06.27.17 at 2:08 am

“……he humbled himself and descended from his palace among the clouds, and came down to live like an extraordinary man in the White House.”
——————————————————————

Yah. Trump is a real life Buddha.

A regular Bodhisattva!

What a moron.

https://www.youtube.com/watch?v=Y8GGpYFmkYI

#131 Ret on 06.27.17 at 9:16 am

#114 From the link – “Canadian officials have fanned out across the United States, meeting with mayors, governors, members of Congress and business leaders on matters from trade to the environment.”

I wondered why Kathleen Wynne and John Tory felt compelled to be in trade talks with every state and mayor in the USA. After all, trade is a federal responsibility. T2 is sending in the clown shows to get the audience warmed up from what I can see.

These endless pilgrimages and nebulous trade missions appear to taxpayers to be nothing more than big parties and taxpayer funded vacations for politicians.

Kathleen Wynne and her entourage are off to Rhode Island next. What’s that about? Nothing to do in Ontario?

#132 n1tro on 06.27.17 at 9:22 am

“Here’s the scenario. We never really solved the 2008 credit crisis, just papered it over with cheap money. After ten years the amount of new cash created by central banks to buy up bonds and try to stimulate growth is epic. The only way these banks – like families with giant mortgages and nations with big debts – can keep rolling along is if rates (and payments) stay low.”

With the above thought in mind, let’s remember that the US has over $20T in debt.

The biggest economy in the world can support it. — Garth

#133 CJBob on 06.27.17 at 9:36 am

#109 Ed the Sock on 06.27.17 at 4:35 am
Our PM spends more time choosing socks than worrying about the economy – what can go wrong?
_______________________
His message of inclusion for all Canadians is something I am very proud of as a Canadian.

#134 Wow on 06.27.17 at 9:42 am

Both Garth and Larry Berman becoming bearish ?

Every asset class has its day …..the precious metals day may be upon us

#135 pBrasseur on 06.27.17 at 10:07 am

Example of why socialist Europe is such an economic basket case!

http://www.msn.com/en-us/money/companies/eu-antitrust-regulators-hit-google-with-record-242-billion-euro-fine/ar-BBDkERp

#136 Xbox Economist on 06.27.17 at 10:17 am

“How credible is all this doomer talk?”

Not very. The BIS is promoting its services. Fear sells, even in central banking circles.

This blog is wrong about a lot of things (interest rates, foreign capital, politics, etc.) but right about diversification and balance. Follow Garth’s advice, which means investing defensively and ignoring his predictions.

#137 People burning their homes on 06.27.17 at 10:18 am

Looks like the house fires are starting again. Why do these types of fires happen when sales slow and prices drop?
http://www.cbc.ca/beta/news/canada/toronto/leslieville-fire-1.4179274

#138 InvestorsFriend on 06.27.17 at 10:31 am

Why Do Banks Leverage Themselves to the Hilt? And is this the reason for massive debt?

Today Bank of England increased capital requirements for banks by 0.5%. He (Mark Carney) raised a counter cyclical buffer. From nothing! to 0.5%.

I find it strange that banks run with equity down near the absolute minimum. It seems without rules they would leverage themselves to infinity.

As of its recent 2016 annual report Royal Bank of Canada has common equity of just 10.8% of risk-weighted assets. To me, but not to bank analysts, this nine times leverage seems very high. But wait, there’s more. In terms of actual balance sheet assets, Royal Bank’s equity is only 5.4% of assets. That’s a stunning 18.5 times leverage!

I am not making this up. See pages 9, 121 and 124 of the annual report (deduct preferred equity to get common equity).

Worse yet some of the assets are goodwill, deducting that and with some other little adjustments, Royal Bank reports a leverage ratio of 4.4%. If they wanted to actually be candid they might describe this as being leveraged almost 23 times!

So by any normal business measure, banks are massively leveraged. Would they lend money to any other business that had under 11% common equity, much less 5.4% or 4.4%?

Yet, with risk management and low risk assets (CMHC insured mortgages) Canadian banks have been safe.

Still, they are running with massive leverage and this increases their return on equity and profits and therefore executive pay which is why they do it.

And the massive leverage allows for massive lending (massive debt of customers)

But with that kind of leverage is there not some non-zero chance of going bust? It certainly has happened in the U.S.

Banks are not allowed to have major owners. No one can own more than 10% of Royal Bank by law.

If some rich family had most of their wealth tied up in owning and controlling a bank would they risk this incredible leverage?

J.P. Morgan’s Jamie Dimon calls for even lower capital requirements saying something like the higher capital rules prevent banks from doing god’s work of supporting the economy by facilitating more debt.

An easy way to lower debt in society is to raise the very low capital requirements that banks face. And maybe allow majority owners who could impose some discipline as they would be leveraging their own money instead of (as now) that of faceless nameless share holders.

#139 InvestorsFriend on 06.27.17 at 10:36 am

Risk and reward

#128 pBrasseur on 06.27.17 at 9:10 am
Portfolio fluctuations are not a problem when you own quality assets. To the contrary, fluctuations are opportunities, for you and for the quality companies you own.

If you insist to reduce fluctuations be aware that this (if it works at all…) will cost you money in the long run.

*****************************************
Agreed. To a good extent the market transfers wealth from those unwilling or unable (financially or emotionally) to take risks and fluctuations to those willing (and hopefully able) to take risks and fluctuations.

But remember, theory states that risks that could be easily diversified away are NOT rewarded.

Diversification and some balance has its place.

#140 Mark on 06.27.17 at 10:37 am

Oil in the doldrums. No love for gold either. The Canadian dollar continues to go up. How’s that trade of yours doing Smoking Man? Where’s those people who were shouting me down a few weeks ago when I said that the Canadian dollar would surge in response to falling RE prices, tightening credit and falling Canadian consumer consumption, not fall to 50 cents like some suggest?

Will we make it to 1.25 by the next BoC meeting? Doubtful. But things could be setting up for a rate cut in the fall.

#141 HaHaHa on 06.27.17 at 10:38 am

Trumpocolypse or whatever your handle is. Despot? Really? You can despise Trump if you want but do you even understand what a despot is? Castro was one. But Canadians flock there to get cheap beach vacations without a thought at the human rights violations that went on. Can you still voice your opinion? Your not in jail right now along with all the meathead Hollywood elite who continually bash the president. So no Despot does not work as a description. And if a war does break out here is some financial advice….. buy oil now it is cheap. Time to grow up and quit sucking on the socialist tit

#142 Mike in Edm on 06.27.17 at 10:40 am

#13 Guy in Calgary on 06.26.17 at 7:00 pm…….
We saw a mild correction in housing prices here in Calgary but nothing drastic. Most of it was due to the high end homes losing significant value. The high end homes will never sell but the more modest homes continue to sell quick if they are quality homes and priced right. It may be slow here in Calgary but Banff campsites and hotels sell out a year in advance…..

***********************************
The craziness of the mountains right now are because of 3 things…
1) The weak cdn $ means more foreigners are playing tourist because it’s cheap for them
2) It’s Canada’s 150 so park passes are free… Amazing how much traffic you can generate if you tell ppl they’ll save $10/day.
3) Albertan’s are tapped out and aren’t going on as many fancy (ie Mexico) vacations anymore (compounded by our weak dollar)… Instead, they’ve all decided to stay closer to home and take a trip to the mountains this year. Unfortunately, with everyone thinking the same thing, the town of Banff will literally be gridlocked on long weekends, and overall it’s not going to be a cheap vacation for them unless they booked a camping site. I’m playing tour guide for some friends in a couple weeks, and mid week, the Drake in Canmore is $250/night. Ooooof. And for those of you that don’t know, that’s maybe a 3* at best hotel, in a town 15-20min from Banff (cheap as we could find).

#143 3s on 06.27.17 at 11:00 am

So it has taken 10 years to realize that the world cannot borrow it’s debt away.

I’ll give Wall street some (actually a lot) of credit. They know that you can monetize stupidity ;)

#144 Mark on 06.27.17 at 11:01 am

“So by any normal businesss measure, banks are massively leveraged. Would they lend money to any other business that had under 11% common equity, much less 5.4% or 4.4%?”

I probably should know better than to respond to rhetorical questions from you InvestorsFriend, but the reason why Canadian banks run such extreme leverage is because a good chunk of their asset base is the equivalent of risk-free government bonds. Covered by CMHC subprime mortgage insurance.

Under the current regulatory regime, a government bond (or an obligation guaranteed by the Government of Canada) has a risk weight approaching zero. Not literally zero, but almost zero.

There are two profound implications to this:

1) Government and government-backed credit with any spread over the cost of funding will be eagerly devoured by banks. Thus, there will be abnormal growth in government, as well as in any sector that the government chooses to protect with its guarantee. Such as the housing market which they guarantee to the tune of $900B+ through the CMHC subprime mortgage insurance program.

2) Any hint that the government might not honour its guarantees on CMHC-insured subprime mortgages, through the institution of a retroactive deductible for example, would instantly create an enormous amount of instability in the Canadian financial system, ie: a credit crisis. Which in turn would destroy lending, and in turn, reduce Canadian housing to all-cash valuations. So the government and the banks are locked in what I have compared to the cold war nuclear theory of “mutually assured destruction”.

The risk to the common equity holders of Canada’s big banks is not bail-ins, or anything like that. It is Trudeau opening his mouth when the CMHC needs an appropriation in Parliament and him saying, “we’re going to impose a surcharge on the banks, ‘because its 2019’“. Just those words, uttered by Trudeau or some other similarly powerful politician, would likely instantly crash the bank’s common equity.

#145 NoName on 06.27.17 at 11:08 am

Interesting read.

I wonder how this will affect commercial real estate.

http://www.businessinsider.com/fred-destin-artificial-intelligence-will-wipe-out-white-collar-jobs-2017-6

#146 mike23 on 06.27.17 at 11:11 am

There is no wrong time to buy the big 6 banks. They never cut their Divs. They have cash every quarter to buy more growth assets. They are diversified!. They buy back their shares and are a few are getting ready to split shares. Lets recap: They pay YOU to own the shares (Divs). They increase their Divs (most years. and for the years they did not – they made up for it by making two increases each year ther after). They will spit and buy back their own shares. They will buy USA banks and diversify. (More TD branches in the USA than Canada). They offer capital gains and are safe!. For those of you that hold bonds – you could do much better holding our banks! Just look at all the etfs on the market, their top holdings are our banks. NA is a buy :)

#147 Cheap condos on 06.27.17 at 11:15 am

500k condo or 8M sfh?

https://twitter.com/vancouvermrkt/status/879386865505247232

#148 SimplyPut7 on 06.27.17 at 11:15 am

#124 Here’s The Deal on 06.27.17 at 8:46 am

Just because a home appreciates in value doesn’t mean its owner has a higher net worth. The house is not money. It’s only an asset tradeable within its own market. The same idea applies if a house depreciates in value. So what? It’s just the place you live. If you have actual financial assets and are properly invested, the value of your house is irrelevant.
————————

I’m a product of the Ontario education system, so yes, grammar and spelling is hard.

You underestimate what mortgage brokers have done to get people into the homes they have bought. They told homeowners that rates will never go up because no one would be able to afford the mortgage payment; thus, the Bank of Canada will never do it. I have met mortgage brokers at big banks who have told me that.

Many homeowners are financially illiterate, they did not treat their homes like shelter. They acted like it was a free credit card for expensive renovations, luxury cars and down payments on investment property or homes they intended to flip. They did this because they believed that homes only go up in value, so when they sell, the debt on the home equity line of credit would be paid off and they would pocket a bit of money from the tax free transaction.

A significant drop in value is a big deal. All of the debt sitting on the credit lines will have to be paid back when the banks demand them to be paid off. Even if they didn’t use the home equity line of credit, a significant drop in value would affect homeowners as they could have waited and bought a cheaper home rather than being saddled with debt that will take decades to pay off, in places they really didn’t hope to be stuck in for more than 5 years before moving into the home they really wanted.

#149 NoName on 06.27.17 at 11:53 am

Interesting read (year old)

http://buzzsumo.com/blog/most-shared-headlines-study/

#150 Johnny Boy on 06.27.17 at 11:58 am

#80 Smoking Man on 06.26.17 at 11:15 pm

#77 Silent the people on 06.26.17 at 10:40 pm
Smoking Man is an idiot
………………………….
You have idea how good that post makrs me feel.
_________________________________________

Ha, ha ha, I thought at least that you were some old hard core rocker guy but the truth comes about you Smoking Man. You are a Queen! A dancing queen, rainbow hugs to you. Ha, ha, ha still laughing, ABBA, ha ha. I’m glad I was born after that disco crap era.

#151 Johnny Boy on 06.27.17 at 12:00 pm

Rates have to rise, or ‘normalize’, or the problem grows continually worse. And that’s what the Fed has also concluded. So up she goes. Three pops in the last six months.
_____________________________________
Wasnt the last one a fizzle………………….

#152 Sideshow Rob on 06.27.17 at 12:02 pm

This is funny. Kind of. I came to all these conclusions more than 5 years ago. As did a few other losers in the steerage section of this block. We recognized that the laws of gravity were never repealed. Only suspended for a bit. Our very own Wiley E Coyote moment.
Make no mistake, the BIS knows that a public and private solvency sh*t storm is on the horizon. They always knew it. But now they think it’s imminent so they have to say something. When it hits they can puff up their chests and arrogantly pronounce “See! We told you! We are so wise! Next time listen to us!” This is nothing more than simple butt coverage.
Unfortunately the warning is far too late. 5 years ago it may have been possible to skate through this with minimal damage. Not now. As a society we will soon be forced to face the music. 10 years from now we may well loathe debt as much as our great grandparents did after the great depression.

#153 Ace Goodheart on 06.27.17 at 12:05 pm

RE: #135 Xbox Economist on 06.27.17 at 10:17 am:

“This blog is wrong about a lot of things (interest rates, foreign capital, politics, etc.) but right about diversification and balance. Follow Garth’s advice, which means investing defensively and ignoring his predictions.”

Totally agree with this. Your best defense against the usual and recurring boom and bust cycles of a capitalist free market economy is diversification.

With very few exceptions, an asset class on a downturn is a buying opportunity and an asset class at a peak should be sold or at least your holdings should be reduced and re-balanced.

Yes this goes against human nature. Once you re-program yourself to act like this, you can make a lot of money.

Keeping your money involves not having all your eggs in one basket. The more diversification, the better.

#154 For those about to flop... on 06.27.17 at 12:35 pm

Here’s one for the bored daytime crew.

The Rising Cost of Senior Care in America.

https://howmuch.net/articles/cost-of-senior-care-usa

Also, thanks Sour Lemonade, I put it in my Pink folder and will show it when it becomes CONFIRMED PINK SNOW…

M43BC

#155 Karma on 06.27.17 at 12:37 pm

5-year Canada bond yields are up quite a bit today, to 1.20%, highest since Feb.

This is an important read:
https://www.bloomberg.com/view/articles/2017-06-27/no-fed-didn-t-make-a-mistake-by-hiking-rates

#156 pBrasseur on 06.27.17 at 12:38 pm

How credible is all this doomer talk? – Garth

The BIS makes some valid points no doubt, plus we all know humans do crisis, that will never change.

But that doesn’t mean overall things are going from bad to worse, there are many positives out there and they far outweigh the negatives, beginning by the fact that billions of people are getting up to go to work every day, trying the best they can to be productive. The world has never seen a more powerful force, never before in history more people have been more free to own stuff and more encouraged and enabled to work hard and innovate. Innovation is booming like never, even the socialist Eurocrats can’t stop it!

Sure there will be crisis, just like there were many in the past, but just like you shouldn’t bet against the US don’t ever bet against capitalism.

#157 Joe2.0 on 06.27.17 at 12:46 pm

Been saying that for years.
Chickens are coming home to roost…
Time to stop kicking the can down the road…
Can’t put a fire out with gasoline…
People would call me a doomer…
Actual terms a realist.

#158 Sierts on 06.27.17 at 1:02 pm

https://gsc-3ffa.kxcdn.com/attachments/unnamed-png.224730/

#159 45north on 06.27.17 at 1:11 pm

A Place to call home: any advice: Im from the YVR and living here with my family of 6 and scraping by.

I would sign up with Ross Kay. Pay him for his advice.

Both Option 1 and Option 2 are one-way streets. There’s no way back.

#160 John on 06.27.17 at 1:16 pm

136 People burning their homes

Yup , speakers burning houses down again.

#161 NoName on 06.27.17 at 1:16 pm

#153 For those about to flop… on 06.27.17 at 12:35 pm

Veri interesting, years (2002) back I did few fire alarms and nursing call security systems for some of long term retirement homes, back then I was told that semy private room and food we’re 750, 1bd room was 1500 plus house keeping and food… I wonder how much they are charging now.

In a few years my daughter will go to university (I hope she will) for a past little while I was vondering how much it will cost us to take care of our son, considering that he need 24/7 supervision, owe have nly two option, for one of us to quit and loose 1/2 income or to hire live in nanny that will cost to tune of 40k of after tax money, what basically is loss of one after tax income…

But on a brighter note lcbo strike is averted.

Cheers

#162 Joe2.0 on 06.27.17 at 1:24 pm

Check it out now.
Media admits to fabricating Russian Trump propaganda.
Time for the sheeple to think outside the box(TV)

http://www.zerohedge.com/news/2017-06-27/cnn-exposed-undercover-sting-producer-admits-russia-story-fake-news-pushed-ratings-0

#163 Calgary Vortex on 06.27.17 at 1:30 pm

It is difficult to invest if most of your income goes to rent or mortgage, and that is the main difficulty. As far as stocks go, not reliable. I took my $3K in 2000 and bought 50 shares of Microsoft. Its now worth around $9, 17 years later. Will I sell it? Nope. Have the TFSA maxed and some GIC’s. Other than that, nada. Most of the cash goes to house expenses and my kid. Will I requalify come mortgage renewal when interest rates go up? Yes because I didnt overleverage and get greedy.

Keep saying on here, rent, and invest. If your rent is the same as a mortgage, good luck investing.

#164 paul on 06.27.17 at 1:43 pm

Things change fast six weeks from holding back offers, no conditions, bring bank draft deposits. To offers anytime.
To just sending out the new listings like old times.

#165 Lahdeedah on 06.27.17 at 1:51 pm

Not gonna lie, husband and I, instead of looking to upgrade to a ridiculously overpriced house we can’t afford right now thanks to the 3-yr boom, from a 2012 condo purchase, we are now seriously considering selling it and moving into a rental for $2,500/mo. (Don’t tell the greater fools!) By doing that, we’ll erase all our debt, and stash the remaining cash into an investment portfolio, a la Garth, and wait for the housing market to level out. In the meantime, we’ll have the space to raise a family without feeling overwhelmed.

#166 For those about to flop... on 06.27.17 at 2:00 pm

CONFIRMED PINK SNOW.

This happens occasionally,I am documenting current cases and I stumble upon a case that is back on the market and the next owner is now trying to cash out.

The details…

1801-6055 NELSON AVE BURNABY

Paid 362k Aug. 2015

Sold 299k Jan.2016

And so you can see that person took quite the hit.

It is now assessed at 463 and the current owner although just reducing the price is still holding out for 525k.

Kim tried to sharpen my numbers the other day ,which I’m o.k with,but even with the basic numbers this was over a 20% loss on a condo…

Also April ,this is about as low as I can go on the real estate ladder for you.
This person clearly should not have bought.
No millionaires that can afford to take a hit involved in this one…

M43BC

https://evaluebc.bcassessment.ca/Property.aspx?_oa=QTAwMDAzV1RNQg==

#167 InvestorsFriend on 06.27.17 at 2:05 pm

Mark on bank leverage

#143 Mark on 06.27.17 at 11:01 am responded to me quoting me.

“So by any normal business measure, banks are massively leveraged. Would they lend money to any other business that had under 11% common equity, much less 5.4% or 4.4%?”

I probably should know better than to respond to rhetorical questions from you InvestorsFriend, but the reason why Canadian banks run such extreme leverage is because a good chunk of their asset base is the equivalent of risk-free government bonds. Covered by CMHC subprime mortgage insurance.

***************************************
Yeah I ALREADY mentioned that some of the assets were low risk and included CMHC insured mortgages. But if it makes you feel smart to mention it again…

Not all their assets are zero risk. Long government bonds have huge capital loss risk in the short term even though they mature at par. And some of their other uninsured loans surely have some risk.

Do banks leverage 23 to one because heads the executives win and tails the share holders and possibly government lose?

How much leverage is enough? Without capital rules would the banks leverage 50 to one? Should they not have more discipline on their own not to use extreme leverage.

Is it not ironic that no bank would lend to any other business with that kind of leverage?

I am VERY familiar with regulated monopoly utilities and they run with equity around 30 to 50%. Ultra low risk assets. Monopoly on an essential service. The difference? Their ROEs are capped by regulators and would not increase with leverage. Customer rates would go down with leverage. Profits (and executive pay) would be the same . Incentives matter a great deal.

Extreme bank leverage has also greatly lowered the cost of borrowing. That is probably one reason that regulators have allowed it despite the risks. And there are risks. See USA circa 2008 which also had federally insured mortgages.

#168 InvestorsFriend on 06.27.17 at 2:55 pm

High Bank leverage, low utility leverages both with low-risk assets.

At 166 I compared the high equity ratios of ultra-low risk regulated cost of service utilities to the very low equity ratios of banks. I refer to electricity and natural gas distribution utilities.

I said:

I am VERY familiar with regulated monopoly utilities and they run with equity around 30 to 50%. Ultra low risk assets. Monopoly on an essential service. The difference? Their ROEs are capped by regulators and would not increase with leverage. Customer rates would go down with leverage. Profits (and executive pay) would be the same . Incentives matter a great deal.

**********************************
To clarify if these utilities used extreme leverage like banks their ROEs would be little changed. (They already bamboozled regulators into giving around 9% which is pretty high.) Actual profits in dollars would go way down even if the ROEs went up a bit. Customer rates would go way down due to use of 3% cost debt in place of 9% equity. (12% equity cost when income tax, which customers also cover is accounted for)

So fully regulated cost of service utility companies unlike banks have no incentive at all to use high leverage.

Regulators tend to go along with what the industry wants since their salaries are no different whatever they do.

Banks executives have huge incentives to leverage to the hilt. Incentives always matter.

#169 Financial Samurai on 06.27.17 at 2:55 pm

I am honestly wondering though, whether it is a good idea to hold SF real estate to SEE if it has a CHANCE of getting bubblicious like in Vancouver and Toronto? We actually have a massive paying industry here.

#102 – I think that’s a good call you made to de-risk.

Sam

#170 Asterix1 on 06.27.17 at 3:45 pm

This real estate market is like a loaded trailer (full of debt), driven by a drunk driver, heading full speed down a hill without any functioning breaks. Brick wall waiting at the bottom.

How else could this end?

– PBO forecasts rates at 3% in 2020.

– BIS forecasts our “Debt Service Ratio” will hit critical level if rates rise by 250 basis points. Since we are presently at 0.5%, that would mean 3%.

#171 Johnny Boy on 06.27.17 at 4:11 pm

#168 Financial Samurai on 06.27.17 at 2:55 pm

I am honestly wondering though, whether it is a good idea to hold SF real estate to SEE if it has a CHANCE of getting bubblicious like in Vancouver and Toronto? We actually have a massive paying industry here.

#102 – I think that’s a good call you made to de-risk.

Sam
________________________________________
Yes agreed, been there done that. Once upon a time when I was young and dumb my brother and I became landlords. Two condos. Hated it, our tenants were relentless with their party’s, smoking and general apathy to pay the bill each month. Here you have a stupid tenant law where you can not dump them in the cold. We made money in the sense that they paid for the mortgage. Definitely not worth it with the neighbors constantly call us at midnight complaining about the tenants noise or heavy smoking. Eventually had to change phone number and slink around for inspections hoping not to run into a neighbour. No thanks not investing in SF real estate unless its my home.

#172 IronMike on 06.27.17 at 4:35 pm

#162 Calgary Vortex
“I took my $3K in 2000 and bought 50 shares of Microsoft. Its now worth around $9, 17 years later.”
————————————————————–
Uhhh no, that didn’t happen at all. If you held on to MSFT, you made money over the last 17 years. Microsoft is trading at or near all-time highs, not including all the dividends that you would have made.

We will ignore the other errors in this post, but that one I just have to call you out on.

#173 For those about to flop... on 06.27.17 at 4:38 pm

#160 NoName on 06.27.17 at 1:16 pm
#153 For those about to flop… on 06.27.17 at 12:35 pm

Veri interesting, years (2002) back I did few fire alarms and nursing call security systems for some of long term retirement homes, back then I was told that semy private room and food we’re 750, 1bd room was 1500 plus house keeping and food… I wonder how much they are charging now.

In a few years my daughter will go to university (I hope she will) for a past little while I was vondering how much it will cost us to take care of our son, considering that he need 24/7 supervision, owe have nly two option, for one of us to quit and loose 1/2 income or to hire live in nanny that will cost to tune of 40k of after tax money, what basically is loss of one after tax income…

But on a brighter note lcbo strike is averted.

Cheers

/////////////////////////

Hey NoName,yes you are going to have some interesting decisions to make down the line.

If you offer free rent and all expenses related to looking after your son that could make it a bit more manageable.

Don’t know what else to say except your son will always love you regardless of your choices and I hope everything works out.

Yes,we are still blog buddies…

M43BC

#174 NoName on 06.27.17 at 5:11 pm

#168 Financial Samurai on 06.27.17 at 2:55 pm

#168 Financial Samurai on 06.27.17 at 2:55 pm
I am honestly wondering though, whether it is a good idea to hold SF real estate to SEE if it has a CHANCE of getting bubblicious like in Vancouver and Toronto? We actually have a massive paying industry here.
#102 – I think that’s a good call you made to de-risk.
Sam

what are the chances that you will start posting date and tame stamp on blog posts?

#175 k on 06.27.17 at 5:31 pm

#171 IronMike

He left out a ‘K’ character.
3k to 9k sounds pretty reasonable.

#176 Sean on 06.27.17 at 6:01 pm

@ #136 People burning their homes on 06.27.17 at 10:18 am

Interesting observation. Vancouver had a bunch of fires this winter in vacant homes waiting for permits.

#177 Rexx Rock on 06.27.17 at 11:24 pm

#73
Come to Broketoria.Lots of minimum wage jobs and you can live in a van by the sea.City just passed a bylaw that you can sleep in your cars because there is no place to rent,0.5% vacancy rate.You can eat your KD while in a nice park and watch all the homeless drug addicts scrounge around.Life is grand in Victoria!

#178 A Reply to #103 The Observer on 06.28.17 at 6:18 am

“Trump was … right … to ban the Muslim extremist terrorists of [Syria, Iran, Yemen, Sudan, Somalia and Yemen] from entering the USA and destroying property for 90 days.

“[Trump] could not help noticing that the two World Trade Center towers were suddenly missing after Tuesday, September 11, 2001.”

I can never tell if you’re being satirical, ironic, or rapturously adoring, so I never know if I should bother replying.

The hijackers in the September 11 attacks were 19 men affiliated with al-Qaeda. Fifteen of the 19 were citizens of Saudi Arabia, and the others were from the United Arab Emirates, Egypt, and Lebanon. None of these Muslim-majority countries are on Trump’s travel ban, because Trump has business interests there.

Timothy McVeigh was not, and Eric Rudolph is not, a Muslim.

Your arguments are completely illogical and fact-free (just like those of your beloved Donny Trump). To observe, one has to regard with attention, especially so as to see or learn something. You have seen and learned nothing, and probably never will!

#179 Skip Breakfast on 06.28.17 at 8:14 am

So now Garth is sounding just like Zero Hedge.

It took some hot air from the BIS (always late to the party) to convince Garth just how big the problem across the global economy really is.

Garth even used the word “Doom” without a hint of irony.

Oh well, better late than never.

Global growth is now 3% and the world is inflating again. My conviction we will not see another 2008 in this lifetime stands. Those who are over-leveraged in one asset, however, have lots of pain ahead. Guess that includes you. — Garth

#180 Trump's Travel Ban on 06.28.17 at 8:18 am

In its ruling, the Supreme Court said Trump’s blanket 90-day ban on travelers from Iran, Libya, Somalia, Sudan, Syria and Yemen could proceed, but only for foreigners with no “bona fide relationship” with an American person or entity.

The court gave examples of what might qualify some travelers for exemptions from the ban, including close family ties in the United States, admittance to a U.S. university, or offers of employment from an American company.

Many advocates for immigrants say they are hopeful that the vast majority of people from the six targeted countries applying for U.S. visas will qualify for such exemptions.

https://www.reuters.com/article/us-usa-court-immigration-visas-idUSKBN19I2VJ

#181 Glenn Taylor on 06.28.17 at 11:00 am

“It comes right back to Bob Farrell, invest in the new paradigm or invest in the old paradigm. We are still in the mid part of that new paradigm, of deflation trumping in inflation, aging demographics, excessive debt burdens, which is why rates can’t go up. ”

‘…which is why rates can’t go up.’

From David Rosenberg…I think you’re still working in the old paradigm Garth – Bob Farrell’s rule #11

If I had to choose who to believe, I’d go with Rosie which isn’t to say I advocate buying real estate in Van or TO. Rate hikes or not, they are vastly over priced markets.

https://www.cmgwealth.com/wp-content/uploads/2017/06/David_Rosenberg_SIC_2017_Transcript.pdf

#182 OrangeCat on 06.28.17 at 1:53 pm

This article presents an interesting way of looking at what a “record low number of late payments on homes” really means. And it is not a positive sign (if you want the house market to keep going uppa uppa). This is exactly what happens just prior to a housing market correction/crash.

“Despite soaring home costs, Ontario residents are approaching a record low number of late payments on their homes. The Canadian Bankers Association (CBA), the mouthpiece for the banking industry, has published statistics showing late mortgage payments have fallen to its lowest level in almost three decades. The industry is about to tout this as a good thing, but it really isn’t….

It’s all about liquidity. In highly liquid market, a.k.a. a market where buyers outnumber sellers by a large margin, there’s little reason to fall behind on your payments. Things get tough, list your home and a buyer will buy it before you fall behind. When buyers become irrationally exuberant, start engaging in bidding wars and waving inspections, there’s absolutely no reason you should fall into arrears….

Eventually a market factor convinces buyers that they’ve been acting irrational. Buying slows down, but doesn’t necessarily stop. Prices start to pull back a little, and sales take a little longer to close. This is when liquidity starts to dry up, and homeowners might find themselves in a sticky situation where they can’t unload their property before the payments become late. This is when people start falling behind in their payments. ”

https://betterdwelling.com/late-mortgage-payments-in-ontario-fall-to-the-lowest-since-the-1990-crash/#_

#183 OrangeCat on 06.28.17 at 1:55 pm

And as one commenter to the article I posted says: “Don’t forget bankruptcies are also at all time lows because… more people are refinancing debt using their home equity. So defaults are being hidden by increasing debt. “

#184 OrangeCat on 06.28.17 at 2:04 pm

I am just an angry cat because I bought my first home in 1989 for 167K in Hamilton, sold it for 217K in 2001 and made a lateral move to Brantford (paid 220K for a house there), then sold Brantford house in 2012 for 320K (job relocation to Ottawa) but did not buy into Ottawa real estate market. Now I am having to move back to southern Ontario (job relocation again) and my Brantford house is pushing 600K. I can’t afford to buy it back.

grumble….grumble….not all of us older gen x/younger boomers who got into the housing market as a young adults made out like bandits. After 23 years never made a dime….bought into the market high and sold low. If only I had kept the Brantford house and rented out while living in Ottawa I would have make 250K. The 300K I invested sure did not come anywhere close to that. Crappy luck or what….

#185 Skip Breakfast on 06.28.17 at 8:06 pm

No, Garth, you’re wrong about my leverage, as you’re wrong about a few other things (as much as you’re also right about a few too).

I have 0 (zero) leverage. Nil. Zilch. I don’t even have a credit card balance. I’ve been in US dollars for the past 4 years and also own blue chip US stocks. Along with some precious metals and cryptos. Happily outrunning inflation (and deflation) so far. It’s exhausting being a doomer, but a diversified doomer is beating your portfolio at this point. Not that it’s a competition…until it is.