Entries from August 2018 ↓

It’s political

RYANBy Guest Blogger Ryan Lewenza

In my opinion the political environment has never been as partisan and divisive as it is right now. This is particularly true in the assessment of the economy and stock market. For example, many of those on the left believe that President Trump simply inherited a strong economy and that his policies have done little to influence the strength seen in the last year and a half. While many of those on the right believe that President Trump is their economic saviour and that his policies are the sole driver of the recent strength. As I’ll show in this blogpost both of these viewpoints are flawed and stem more from one’s political beliefs than of a sound and unbiased assessment of the facts and statistics. At Turner Investments we believe strongly in balance. Both in one’s investment portfolio and in one’s political beliefs.

Let me begin by stating that people often give too much credit or blame to presidents (or Prime Ministers with washboard abs) when it comes to the economy and stock market. The reality is there are many factors at play, such as interest rates, the business cycle, corporate profits etc. that help drive the economy and markets. A president’s policies can definitely have an impact but it’s arrogance to believe that he/she has that much control over a US$20 trillion economy.

Having said that let’s compare the first 19 months of Trump’s presidency with the last 19 months of Obama’s and see what the hard data says.

Since President Trump took office the US economy and stock market have clearly accelerated. For example, US GDP growth has averaged 2.4% Y/Y under Trump’s leadership versus the 1.8% Y/Y average under President Obama in his final 19 months. The US stock market has also benefited under President Trump with the S&P 500 returning 17.3% annualized versus 8.8% under Obama. Two gold stars for Trump!

However, one important area where things have not significantly improved under Trump is in job growth. He may not want to hear this given that he once boasted “I will be the greatest jobs president that God has ever created.” Modesty is clearly not one of Trump’s strengths! Since 2017 the US economy has added a solid 3.7 million jobs, slightly below the 3.8 million jobs created under Obama in the preceding 19 months.

As I’ll cover shortly Trump definitely benefitted from inheriting a strong US economy but the facts are, the US economy and stock market have improved under his leadership, which shouldn’t be a surprise given his pro-growth policies of lower taxes and deregulations. As much as it might pain those on the left to hear this, it is demonstrably true that the economy has improved under his leadership and for that I believe Trump deserves some credit.

Now before readers jump to conclusions and claim that I have a lovefest with Trump, this is definitely not the case as I disagree with him plenty. Also I believe that he’s had some real luck on his side (unlike his casinos, university and airlines etc.) with the US economy already doing quite well when he took over.

President Obama became president just as the US economy was enduring its most challenging downturn in nearly a century. The economy was teetering on the edge of a complete financial meltdown and he along with congress made some bold policy decisions that helped rescue the US economy. This is largely why we are where we are today. The Obama administration implemented policies like the American Recovery and Reinvestment Act, bailed out the US car companies saving hundreds of thousands of jobs, and enacted critical financial reforms that helped restore confidence in the finance sector. Most importantly, he helped lead the US economy out of the doldrums and into the second longest economic expansionary period (now its 110th month) since 1950.

Those on the right who dislike President Obama and his leadership are clearly entitled to their views but they are not entitled to their own facts. Over President Obama’s two terms the US economy created over 10 million jobs, which helped drive down the unemployment rate from a high of 10% in 2009 to 4.7% at the end of his presidency. And over this period the S&P 500 rallied an incredible 193% or 14.4% annualized. Not a bad economic legacy if you ask me!

Below you can see how the unemployment rate steadily declined under President Obama and how it has continued under President Trump. This illustrates why I believe President Trump inherited a strong economy. Yes, Trump’s policies have contributed to the gains, but to say it’s been solely due to him and his policies is not supported by the data. Nonetheless, I believe both deserve some credit for this great achievement.

US Unemployment Rate Under Both Presidents

Source: Bloomberg, Turner Investments

Now before you anti-Obama readers slam me for missing half the story, my one key complaint with Obama has been the doubling of US government debt over his tenure. Below I chart out US government debt, which doubled under President Obama from roughly US$10 trillion to US$20 trillion by the end of his term. As a percentage of GDP, debt increased from roughly 60% to over 100% currently. Sure some of this can be blamed on the financial crisis, but Obama (and congress) made little attempts to rein in spending and balance the books.

That said, the Republicans cannot take a victory for being parsimonious as US debt doubled under President Bush and deficits are skyrocketing under Trump and the current Republican congress. Basically, neither party is willing to address the excessive spending and deficits since that’s now how politicians get elected these days.

US Government Debt Levels

Source: Bloomberg, Turner Investments

Look I’m not trying to sway anyone’s political views with this blogpost. Whether you stand on the left or the right, that’s not the point. What I am trying to do is highlight the hypocrisy and partisanship behind many political views, particularly in the assessment of the economy. As a financial analyst I try to remove my political biases in assessing the economy and making forecasts, which I have found has led to better financial outcomes and performance. That’s the key point.

Ryan Lewenza, CFA,CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

 

The scent of disaster

News from the Trenches:

It was listed in mid-February of 2017, when all the realtors, house-pumpers and misguided moisters who come to this pathetic blog (for unknown reasons) told us GTA houses were going up forever. Buy Now or Buy Never. Endless FOMO. Get in now before some Iranian dude pulls up in an S-class to outbid you. The new normal was 30% gains year/year, month after month.

So 28 Bobmar sold in five days. The ugly little East End bung with the squalid basement suite went for fifty grand over the asking price of $849,000. With double Toronto land transfer tax and a few closing costs the proud new owner paid about $940,000.

Well, so much for ‘investment’ real estate. Since then – despite what the realtor cartel tells you – housing has deflated faster than FB. The owners tried a flip and failed. After months on the market, with the place finally listed down at $749,900, it sold for $708,500. After commission that amounts to $673,075. The loss: about $266,000. The house went for 21% less than it commanded eighteen months ago, and the hapless investor took a 28% loss.

“These folks bought this place, tried to flip it and got crushed for 200k plus, plus,” says realtor (and blog dog) Dan, who watched the saga unfold.

The big news: this is not an isolated event. Never, ever believe those who tell you that the melt is over, that the market has restored or more losses do not lie ahead.

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Everything will be exacerbated, elevated, irritated and exaggerated as mortgage rates rise. Your friends, co-workers and idiot BIL probably have zero idea how the cost of money could surprise. As this blog’s been telling you for a while, the influence of the Inflation President is inescapable. Home loans will cost at least 1% more at this time next year, which is a 30% increase. And if you think the Mills are hurling over the mortgage stress test now, just wait.

So on Friday bond yields jumped with the latest inflation number. At 3%, it’s huge. We’re at the very top end of the 1-3% range which the Bank of Canada has had as its guiding principle since the GFC. It means your HISA is losing money, bigly. Meanwhile the odds of a central bank increase next month have jumped. The betting is two hikes in 2018 and another two in the first half of 2019. It’s even conceivable one of those could be a half point (not the usual quarter) since our bankers are so far behind the curve. Remember – the US Fed has hiked seven times to our bank’s four.

By the way, our dollar surged on the inflation news. It was pushed higher on the near-universal expectation our steamy, expanding mountain of $1.8 trillion in mortgage debt will soon cost more. Higher rates, of course, benefit the wealthy while sucking more disposable income from the middle.

The rich hold assets. The rest hold debt. The sooner you cross that divide, the sweeter your life will become.

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Finally, in the trenches, is Adam. We heard from him some months ago when his rented apartment went up for sale, making him wonder about buying it. Naturally, we talked him off the cliff. The tale continues….

Just wanted to give you an update.  Our landlord put up our unit for sale almost 3 months ago, and the place hasn’t sold.  Earlier this year, there were units in this building selling within a week. The owner first listed at $450, relisted at $500, and finally came down to $399k, but still no takers.  Each time, the realtor terminated and relisted the property, generating new interest with each relisting.  I’ve seen this happen for so many units in the buildings throughout our trendy east end hood.  Funny that TREB doesn’t include these terminated listings in their DOM stats.  Some of the realtors didn’t even know themselves (or wouldn’t admit it).

We’ve had to put up with over 100 showings (it’s been hell meeting that many realtors), and the owner only received one serious offer.  Can you imagine that, just one?  After that single offer, we thought it was finally time to begin packing up, but we were wrong – the deal fell through.  CMHC refused to offer mortgage insurance on the loan.  The reason?

Have you heard of the “condo blacklist”?  Apparently, there are properties that CMHC, Genworth, and Canada Guaranty refuse to insure due to any number of concerns, including outstanding construction liens against the building, poor financial management by the condo board, lacklustre reserve funds, or the condo’s involvement in pending lawsuits.  In the case of my condo, each of these issues apply.  There are numerous other examples in Toronto I’ve learned about, but unsavvy buyers wouldn’t know it, and the inaccurate DOM data sure doesn’t help.

To help pay for these financial hardships, the condo board has issued special levies for all owners of a few hundred a month.  Condo fees have also recently gone up 10%, the 5th increase in the 5 year history of the building.  The building is notorious with realtors, who advise their clients to stay away (the good ones at least).  After real estate lawyers read the status certificates, they also advise their clients to stay away.  For those foolish enough to try, CMHC refuses to play game.

It’s still possible somebody comes through with a 20% down payment, avoiding CMHC insurance and thus satisfying their lender.  Until then, I’m going to continue renting, saving money, and waiting these rate increases out.

Smart boy. We have only just begun.