Entries from January 2018 ↓

How to stop worrying

Love him or hate him (even his wife can’t decide), Trump’s been catnip to the markets. Last year the Dow romped 25% higher with the S&P not far behind. More than 5,000 points piled on the DJIA and it’s recently pushed through the 26,000 mark. Historic.

There’s more.

  • America added 2,000,000 jobs last year.
  • The unemployment rate, at just 4.1%, is considered, technically, to be full employment.
  • The economy grew enough for the Fed to start unwinding monetary policy. Interest rates have increased four times in about a year. More to come.
  • Corporate taxes were pummelled, down a stunning 40%.
  • Companies are making serious money. Profits for S&P companies have risen 9.5%, the best performance in six years.
  • Consumer confidence recently hit the highest level in 16 years. Since over 70% of the economy is the result of consumer spending, it’s big news. Car sales and real estate show it.

This is partly the Trump legacy. Partly the Obama hangover. It’s what happens after a long and protracted recovery when the switch is finally flipped. The current president may be an utter whackjob, misogynist, xenophobe and liar, but he represents something craved by a populace tired of moany whimpers. As this blog pointed out when the Trump rally began, he’s the bridge from a low-growth, low-rate, low-inflation, low-return world to one of expansion and excess. And more to come.

Danger looms, of course. Cutting taxes without cutting spending is a pox on the young. Fatter profits, rising markets and surging rates mean more volatility. Tweets, bad judgment, hubris, Mueller – Trump could succumb to any of them. Camelot could be done, fast.

But Trump is not the economy, nor the fundamental reason investors have made out famously in the past year. The world’s growing again, which is why commodity prices are way up. Central banks everywhere are weaning people off the teat of easy money. Deflation has been supplanted by inflation. Innovation and technological advance are at a fevered pitch. The green shoots we strained to see after the credit crisis are now thriving trees. Trump just found the path there.

So how to invest?

Simple. Build a balanced, diversified portfolio of low-cost, tax-efficient exchange-traded funds and ignore it. Hold safe stuff as well as growth stuff. Don’t speculate or gamble. No weed or crypto. Unless you have seven figures of more, don’t buy individual stocks. But don’t overload on low-yield bonds, either. Don’t flip, time the market or – especially – be motivated by emotion.

There was a good reminder of that this week. For the first time in ages stock markets went down. Hard down. The Dow shed 400 points during Tuesday for the first significantly crappy day in months. This was after an astonishing 6% rise in a single month, and things started shooting higher again when trading started the next day.

But it was enough to stimulate the little hairs on the necks of unconfident men.

Should a one-day drop on the markets scare you?

“Absolutely you should be worried,” one Canadian advisor blogged to his clients on Wednesday morning. “Especially if you are over-weight equities in your portfolio… We have been telling anyone who will listen that we have thought and continue to think that stocks are expensive on a number of metrics.”

Obviously someone believing markets “are just too expensive” for the last two years has cost herself a little over 40%. And there is more to come, for all the reasons mentioned above. The Dow at 26,000 is far from being finished, as the Trump tax cuts have not even yet taken effect. The TSX is actually entering an oversold condition and has a ton of upside. Big value in Europe. Emerging markets have been star performers, and higher commodity values are likely to push them higher.

No investor whose growth assets are correctly balanced with safe ones or who has proper diversification between asset classes, currencies and countries need lose sleep. Just make sure you don’t have an advisor who tells you to worry every time markets shed a few hundred points.

Volatility is okay. Market turmoil is actually normal. Lately we’ve been spoiled without the usual 10% annual correction to separate the cowboys from the cows. As bond yields spike, you should expect stocks to wobble more, since investors can collect good interest with less risk. The key to good investing, as in the rest of life is to stay calm, balanced, and keep your pants on. Especially that.

The Trump effect will certainly survive Trump.


The unloved

Over the next few days and weeks expect lots of ink on what a mess real estate’s turned into. Once the media gets tired of manshaming, it’ll be houseshaming time. Bad sales numbers, falling prices, moisters moaning they paid too much last spring and wrinklies trapped in properties they were too dumb to sell in prime time.

But nowhere will the heartache be felt as acutely as within the bosom of the 50,010 men and women in the GTA who carry around business cards saying “realtor.”

Yeah, I know realtors are as popular on this pathetic blog as politicians, cat-owners, Adele, MERs or financial advisors, but you might be shocked at just how tough their lives have become. New data provided to an industry real estate publication suggests it’s a short trip from a leased Audi to cardboard under a bridge for many of these commission-only dudes.

Yes, 92,394 properties changed hands in the Big Smoke last year and prices soared to the highest-ever level amid a feeding frenzy that consumed the first half of the year. But, sheesh, 2017 turned out to be an unmitigated disaster for agents. So far, it seems 2018 may be even worse. (By the way, the real estate board does not publish this data. They hate it. Do not want you to know.)

Of the 50,010 realtors, turns out 34.6% sold nothing. Zero. Nada. They weren’t involved in the sell side or the buy side of a single transaction. That’s 17,313 agents taking home no income.

Another 8,344 realtors, or 17%, sold a single property, and earned enough to live for a month or two. So more than half of all agents – 51.3% – sold one or less houses, with an income massively below the poverty line.

How many sales does it take to make a decent living?

– REM online

Realtor and blogger David Fleming suggests four transactions. After fees, commission-splits with the brokerage and marketing costs he figures that would result in a pre-tax income of $44,000. Last year there were 2,738 agents who achieved that.

“So now the big reveal,” writes Fleming, “how many agents are doing MORE than four transactions per year? It’s 24.8 per cent. One in four agents licensed by the Toronto Real Estate Board is netting more than $44,000 per year. Or if you’re an aspiring Realtor, you can say, “I have a one-in-four chance of making more than $44,000 per year; do I like those odds?”

By the way, 90% of realtors did less than ten deals in the year. Ouch.

Of course, this all seems certain to grow worse.

The five-year mortgage rate at all of the big banks has climbed above 3.3% – or a full point higher than deals done at this time a year ago. The stress test imposed by the bank regulator is just a few weeks old, and its impact uncertain. But it’s expected to carve 10% to 20% off the borrowing power of most buyers, knocking at least 50,000 of them clean out of the market (according to the Bank of Canada).

– Bloomberg

The bottom line from both those developments: fewer qualified buyers, with less to spend. That’s exactly why the pricey detached portion of the market has plopped while condos have been hot – in the GTA as well as the Van market. But while buyers may be hard to find, so are quality listings. Little blue dots on the realtor.ca site have been few and far between for hoods that are traditionally in demand. Seems buyers are on the sidelines itching for prices to crash, while owners hide behind the curtains waiting for the market to strengthen – hungry for last April’s bidding wars.

Meanwhile, it’s the worst of both worlds if you’re a commissioned realtor, eating what you kill. The number of properties to flog is pathetic while many buyers are denied financing or stand back, waiting to vultch. As sales slag, cash flow dries. Thus, 2018 could be the year in which droves of people decide there’s a more promising future driving for Uber or throwing frozen Timbits into the grease.

Mama, don’t let your babies grow up to be realtors.