Entries from May 2018 ↓

The mess

If you ever wonder why bother with a balanced portfolio, Tuesday was a good study. Italy kinda blew up (it does that occasionally) raising fears the Eurozone is pooched, which tanked stocks, roiled the currency markets and ensured a new election there just three months after the last one. The result may not be pretty.

So if you were a stock-only investor, especially with heavy US exposure, you lost about 2% of your dough. But if you also had a fixed-income component, including a variety of bonds ETFs, then things weren’t so bad. For example, corporate bonds popped higher (an ETF like XCB tracks those), as did short-term government debt (tracked by funds like XSB).

Why? Because when investors go risk-off, they dump equities and look for safe places to scuttle off to. Bonds do the job, so demand pushed debt prices higher and tanked bond yields (they move in opposite directions). Yields actually plopped everywhere, which threw into question some Fed interest rate hikes impacting the US dollar, which helped tank stuff priced in greenbacks, like oil and gold.

As for Canada? While the Dow was shedding 400 points, Bay Street was off just a quarter of that (in point terms), thanks in party to the fact we now own a pipeline, whether we want it or not. That jolted the energy sector, and helped make up for the fact we’re about to be screwed-over nicely on NAFTA by the Trumpster. (T2 issued a dire warning about many lost jobs late in the day.)

As for keeping your money safe in the bank, did you hear about BMO and CIBC’s spelling-challenged offspring, Simplii? Seems hackers made off with the personal data of tens of thousands of customers, which they intend on publishing unless a bribe is paid. Seriously. It sounds like a bad episode of a TV cop show – but it’s real. The stock of both banks didn’t like that much, down the better part of 2% on the session.

The last 24 hours have demonstrated what a weird world we have created. Now Trump says he’s going to meet with Mr. Bad Haircut in Singapore. The NDP is in danger of eating Ontario. May threatens to be the worst rutting season month in memory for Canadian real estate. Air conditioners in Toronto are croaking with summer is a month away, while Newfies shovel and the eastern seaboard is swamped. Roseanne was cancelled. And Alberta seems poised to invade BC, now that it’s won the backing of the federal Libs and a pipeline will be rammed through to the sea.

Yes, companies are making fat profits these days, equity markets are close to record highs and the global economy is expanding the most since the credit crisis. But the world has turned more volatile as protectionism (Trump), populism (Brexit), nationalism (alt right) and tribalism (now Italy) swing politics and whack economies. Little Canada is being caught in the swirl, which is one reason Ottawa took the dramatic and dangerous action of buying a pipeline company with $4.5 billion in publicly-backed money with the creation of a new crown corporation. Trade or die, baby. You can’t build an economy by selling each other condos.

Probable consequences include more equity market volatility, stronger bond prices and central banks backing off for a while. But the global macroeconomics look positive, so this is likely all noise. In sell-offs it’s usually the brave people out Hoovering bargains in the aftermath who do well. Retail investors who bail with the first glimpse of blood normally regret it. And the calm, disciplined people with balanced, globally-diversified portfolios snooze right through chaos. Remember that during the worst three years of our financial lives (2008-10) investors with a balanced 60/40 portfolio ended up making a positive 5% per year (on average), while all-stock investors suffered a 55% market decline and needed seven years to recover.

Italy could well turn into Greece and this could be 2001 all over again. Trump could just abrogate the trade deal with Canada and impose his 25% auto tariff, shutting down a lot of southern Ontario. Two-thirds of the Canadian economy could come to be indirectly controlled by big-spending/big-taxing Dippers who then cause a lot of 1%ers to take their money (and jobs) and split. Canada could descend into an internecine spat between the feds and the provs, with nothing getting built. All of these are reasonable threats. You can cower and embrace [email protected] with her lovely brain-dead, no-grow, high-tax GICs, or invest for the world in which we live.

Easy choice.

Insatiable

Lost in the fog of taxes, ageism, generational warfare, eat-the-rich, house lust and moister-bashing is the reality of debt. If we should all worry about one thing (other than drowning polar bears and who the hell mows Kim Jung Un’s hair) it would be this. Debt accumulation has the potential to wreck families and governments. Yet, nobody cares.

The Ontario election is a case in point. The poor province has the largest sub-national debt on the planet at over $340 billion, and taxpayers fork out $12 billion a year paying only the interest. But, nah, nobody cares. The Dippers are on the rise promising ‘free’ child care, ‘free’ pharmacare and vastly more spending on health and education. The NDP says it would add to the debt in order to pay for this stuff, plus “make the richest pay a little more.”

In fact the top tax bracket would rise 2%. So, would that cover the extra billions?

There are 272,000 1%ers in Canada (earning over about $220,000). In the GTA, about 1.6% of the population falls into this cohort – about 95,000 people in six million residents. Two-thirds of Ontario’s population lives in the region, so in all of the province there might be 150,000 rich guys. The average 1% income is $380,000, and the average tax they pay is $170,000. So if they all pay 2% more (not all of that would go to the province) the grand total is $510 million. In other words, this is enough to pay the interest on the existing debt for 15 days.

Hmm. The Dippers, however, plan to spend $5.3 billion more annually, rising to $15.8 billion extra (per year) in five years. So where does the money come from? Well, up to $670 million of that shortfall within a few years, the party says, will come annually from new taxes on real estate – a copy of BC’s ‘speculation’ tax, which is not about speculation at all, but a tax on people with more than one property. If you think raising taxes on houses will lower their cost, then go ahead and vote NDP. You are a perfect match.

Anyway, let’s forget the fools running the place and worry about ourselves. The bottom line of the current drift left in Canada will be more services, higher taxes, lower disposable incomes and no change in housing affordability. The wealth gap will grow. As the funky little chart in yesterday’s blog showed, it’s those at the bottom 90% of the income scale who carry the lion’s share (74%) of the debt. As taxes and interest rates rise, guess who is whacked most?

This week a new survey from the financial consulting company MNP helps answer that rhetorical question. Almost 60% say their income would have to rocket higher to get along without relying on debt. The average raise required: 37%, which ain’t gonna happen in this economy.

“It used to be that people would save for big purchases and have some money tucked away for emergencies. Now Canadians look straight to HELOCs or credit cards or other forms of debt when it comes to paying for unexpected car repairs, home maintenance, and even basic household expenses,” the company concludes.

But, alas, most people don’t save. They just spend, and a growing number finance that with debt. The household total is over $2.1 trillion, bigger than the whole economy. Two-thirds of that is mortgages and another big hunk is HELOCs. Speaking of mortgages, it’s interesting to note that a fifth of Canadians bought their houses prior to 1990 and still haven’t paid them off – almost 30 years later. And in 1990 the average place cost $147,000. Now imagine how long it will take someone putting down $970,000 for a slanty semi and starting a family to surface, as interest rates drift higher at every renewal. Financial illiteracy is apparently alive and well.

These days more than two million households have home equity lines of credit, and almost all of them are demand loans. As TD showed the other week, a lender can send a letter any time informing you the rate’s rising – sometimes dramatically – regardless of what the Bank of Canada’s doing. You have three options: pay up; don’t pay and have your debt grow larger until it tops out; or give all the money back.

Speaking of HELOCs, this thing from the National Bank is interesting…

Now we find out that the number of households over the age of 65 with HELOCs has quadrupled. Meanwhile the proportion of younger households (to age 44) with debt has increased to just under 90%. The median debt has doubled in recent years. And half of Canadians tell pollsters they probably can’t get through the next year without increasing their level of debt.

See? The NDP got its inspiration from us.

Did I ever mention how this ends?