Entries from September 2018 ↓

M&V

Despite the efforts of modern politicians to fuzzify genders and blur sexes, men and women are different. For one thing, the females last longer. That might have something to do with 55-year-old guys playing hard hockey after doing nothing but watching it for half a decade, operating heavy equipment in flip-flops or learning how to wire a 220-volt outlet on YouTube.

Men roll the dice, too. It’s why the dudes can’t help buying penny mining stocks, putting their entire life savings into Tesla shares or loading up with four pre-con condos they can’t possibly afford to close on. It’s about winning. Scoring. Dominance. The Smartest-Guy-in-the-Room syndrome. Lots of men simply can’t see the difference between investing and gambling. They want instant gratification, big returns, fat cap gains – even when it means bloated risk and heavy borrowing.

But for women (to keep on wildly generalizing), risk is the enemy, to be avoided, shunned, diminished and escaped from at all costs. It’s why, if you frequent female-dominated websites like those of Gail Alphabet, the No. 1 goal is simple and dominant: pay off debt. The focus isn’t on multiplying money, but escaping obligations – that’s the path to financial independence and freedom.

After that, as this blog can attest, the big life goal of females seems to be securing a home. So real estate – rather than being wealthy – is the prize. And once you get some, paying down the mortgage (no matter how cheap the interest rate may be) is the driving reason to be employed. Real estate equals security, a nest for a family, a shelter from external forces and, lately, all the financial plan anybody needs.

I can’t count the times Mars and Venus have sat across the desk. One economic unit, forever and inextricably intertwined, romantically and emotionally embraced, mutually-dependent yet with secretly competing agendas about how to achieve common goals. Sometimes the result is conflict, but usually one partner yields a little more. Too often it’s the woman.

Lately catering to women and girls is the Big New Thing in the financial business. There are efforts to recruit women advisors, special programs for women entrepreneurs, unique courses, lectures, seminars and even products for women. At the heart of it is a belief women come at money in a disadvantaged way, because they earn less and are expected to rear kids, keep homes, tend aging parents and put up with dodgy husbands. The wage gap may be related to leaving the workforce more often for family reasons, but over time it can be crippling. So women need to work harder at investing to close that gap.

And therein may lie a problem.

By focusing on risk, not reward, and real estate rather than retirement, the advice a lot of women are getting is bunk. It leads them to embrace GICs and those awful HISAs instead of equities and ETFs. They strive to retire home loans with sub-3% rates with money that could earn twice that amount if conservatively invested. They chose to collect interest, and pay tax at their marginal rate on every dollar, rather than halve the tax bill by collecting dividends or capital gains. For too many, investing means “not losing money” instead of making it.

Okay, but wait. Women live longer. They earn less. So they require more.

My mother outlived my father by eight years. Dorothy’s mom survived Vic by over a decade. Without a doubt the most challenging years for them both, financially, came when alone. Granted, they were from a Leave-it-to-Beaver generation when being a stay-at-home mom was the norm and Guys Knew Everything, but their final years attested to a lack of planning. Both had real estate to sell. Both found that was not enough. When you’re old, you need cash flow.

These days it’s fashionable to blame men for society’s ills. Much of it’s deserved. We can be dorks. As mentioned, many guys have horrible investing and money management skills, not to mention leaving the seat up and buying stupid cars. But both genders have serious money handicaps to overcome. The seeds of failure are planted deep. Embracing reckless risk or fleeing from any of it are both lousy strategies.

The greatest threat, after all, is not losing money in a failed investment. It’s running out.

Mars and Venus have much to teach each other.

May not end well

As debt-pickled, financially illiterate Canadians get set to spend an estimated $1 billion on weed in the first few months it’s legal, the odds rise that things will not end well. First, this is money that should be chucked away for future needs or retire fat loans, not inhaled. Second, given what’s coming, it’s no time to further addle your brain.

But, wait. This post is not about cannabis, since the last time the subject was (b)roached we were overrun by potheads. It felt like one of those creepy scenes from The Walking Dead. They just kept coming. Who knew a blog about economics, finances and canines would attract so many tokers? Scarier still, is a pro-ganja attitude now so pervasive in society (thanks to T2) that casual and recreational drug use is mainstream – and so reflected in the audience of a pathetic, boring blog penned by a spent paleo? Yikes.

Anyway, here’s why this is happening at a bad time.

It appears NAFTA is dead since Ottawa can’t agree to a deal in which the dairy trade is gutted just before the election in Quebec. That’s where the cows live. If Trudeau throws the farmers under the tractor, he has a big electoral problem. Of course if we don’t sign on with Trump, then he’s made it clear auto tariffs are coming. Good bye to jobs in Oshawa, Windsor, Woodstock, Barrie and Bramalea. (Did you notice Ontario preem Doug Ford spend a day last week at the plowing match? Yes, he’s already running for PM.)

However you cut it, no trade deal with the States – even for a year or two – is awful news for the economy. While it would be absurd not to pen one, the gang in Ottawa has been unable to do so after months of negotiations. It sure increases the odds of a recession here, which brings us to the asset class almost everybody owns.

Residential real estate in most markets is under attack by family debt levels, higher taxes (especially in silly BC), tighter lending regs, economic uncertainty and rising interest rates. Given the fact more of our GDP is hooked to housing than ever before, the inexorable plop in sales and prices could have a big impact on confidence, and spending. In turn, two-thirds of our entire economy depends on that consumer spending, so the implications are clear.

Now, Trump. He has spent his entire presidency so far throwing gas on the American economy. The deep corporate tax cut has plumped corporate bottom lines, fueled equity stock prices and triggered waves of buybacks and M&A activity. The unemployment rate is so low economists call it full employment. We haven’t see this kind of number for half a century. Inflation has jumped to the highest level in 22 years. The White House is building protectionist walls around the States designed to create even more jobs and profits, albeit in an environment of rising wages and prices. And the rolling back of regulations, especially costly environmental ones, has richly rewarded corporate America.

Meanwhile the tax cuts have blown a yuge hole in federal finances, so Trump is on track to preside over a $1-trillion annual deficit – never before seen during a period of economic expansion. This has started to drive the bond market nuts. Yields are rising as the world’s biggest economy piles on the debt while the president pours on the fuel.

So what? So interest rates are going to go up. Maybe a lot.

The Fed’s benchmark rate will increase on Wednesday for the eighth time in a year and a half. The current odds of another increase on December 19th are more than 70%. There are two more anticipated in the first six months of next year, bring the number of hikes to 11. If Trumpenomics is still in evidence then, and Republicans do well in the November mid-term elections, the US central bank will continue to tighten.

Our guys have a 92% track record of following the Fed. Rates have increased here steadily, and three more jumps are expected by next summer. But that could be a best-case scenario. As mortgage expert, Ratespy owner and financial columnist Rob McLister puts it: “If these things did come to pass, inflation and deficit-averse investors would conceivably dump U.S. Treasuries en masse, particularly foreign investors. With that intensity of selling pressure, North American interest rates (which move inversely to bond prices) could blast off like a SpaceX rocket.”

In fact, look at what’s already happening in the bond market. Here’s the yield on five-year Government of Canada bonds, which closely influence fixed mortgage rates.

This is a big deal. Adds McLister: “Given that, and the fact that there’s a 95% correlation between U.S. and Canadian 5-year bond yields, there is at least a chance that Canada’s 5-year yield could exceed 4% for the first time in over a decade. That could result in:

* discounted 5-year fixed rates near 5.50%, a whopping two points higher than today
* the stress-test rate near an unthinkable 7.34%.”

A 2% jump in mortgages is something few people have contemplated or prepared for. Not only would it make renewing a home loan a painful experience and seriously cut into family cash flow, but housing in general could go catatonic. After all, the reason prices soared was cheap money (not Chinese dudes). A whole generation of people is about to learn that real estate is negatively correlated to interest rates.

So, you can prepare, or not. Be the ant or the grasshopper. Fill your TFSA or your lungs.