Entries from October 2018 ↓

Going, going…

Is it over? Finally?

Quietly last Friday our central bank released stats showing a dramatic, almost historic, drop in family borrowing. It’s plunged by more than half in the last few years, and tumbled topsy-turvy in the last 12 months. In fact, we’ve cut our borrowing level back to what it was in 1983.

The bankers and the mortgage brokers know this. That’s why they were lobbying their pants off in Ottawa a couple of weeks ago, trying to gut the universal house-buying stress test. They failed. Since then interest rates have popped again, and the stress test bar will likely be rising again.

So, when the annual growth in debt falls from plus-8% into the 3% range, isn’t this good?

You bet. The steaming pile of debt – now at more than $2.1 trillion (two-thirds is mortgages) grows a little more slowly. That pile, by the way, is larger than the entire Canadian economy, and explains why 75% of all properties in Vancouver are now assessed at over $1 million. The damage our debt-appetite has wrought is epic.

But here’s the thing. Real estate – which secures most of this debt – is now retreating. At the same time interest rates are rising. Tighter lending regs means credit growth is withering. So a new report this week from Morgan Stanley lumps us in with Australia as “facing a critical juncture as housing markets weaken, forcing a reappraisal of leverage and wealth, as global financial conditions tighten, increasing the consumption drag from debt service and rising savings.”

Huh? This means rates are going up across the planet (as global growth creeps forward, inflation returns and protectionism spreads), causing people to borrow less while rising debt costs eat into their spending. There’s more to come, as the Bank of Canada told us. The current central bank rate of 1.75% will be rising at least a full 1% before it reaches ‘neutral.’Thus, a bank prime of about 5% and a stress test over 6%. Given that, there’s no way places like Vancouver will escape a market correction. Yeah, probably a big one, given the Dipper tax assault now taking place.

Now, speaking of Australia, we could be importing more than homeowner misery from them.

In a recent post we brought you the breaking news that blind housing auctions will soon come to an end. No more submitting an offer in a multiple-bid situation and having no idea what you actually need to pay. The real estate regulator in Ontario is revamping the act covering the industry, giving full disclosure to all parties. An open auction, in other words. Just like Down Under – where they’ve also done a fine job at screwing up the property market. But at least it’s all beentransparent.

To date, auctions are rare in Canada and have only happened with bow-wow listings that failed to sell through traditional MLS exposure. But open auctions are inherently fairer than forcing buyers to guess what price they should offer in competing against unknown parties – while being equally blinded to other important details, such as conditions and closing dates. In order to ‘win’ people are encouraged to inflate bids and strip them of important protections. At the end of the process, unsuccessful bidders walk away without knowing exactly why they lost while the triumphant one always wonders if she overpaid. The system sucks.

Of course, if you’ve ever been to a country auction of furniture or tractors, or a fine art auction selling valuable works, you know what can happen. Bidding fever, competition, testo and adrenalin can cause prices to pop. But it all happens in the light of day, in real time. So when your spouse starts breaking your ribs with her elbow, you know it’s time to stop.

On Monday afternoon, Bloomberg reported this:

White House officials are largely resigned to losing Republican control of the US House and are bracing for an exodus of staff worried about a torrent of subpoenas from Democratic congressional investigators.

President Donald Trump’s team still sees a possible path to victory. But talk of a “red wave” has ceased, advisers inside and outside the White House said. Trump last uttered the boast in public in August. The mood around the president has darkened as many challengers continue to out-raise seasoned Republican incumbents and Democratic enthusiasm surpasses that of the GOP.

Yes, next Tuesday will be a biggie. It’s the first comprehensive referendum on the Trump presidency in a nation deeply polarized. Recent events (Supreme Court, pipe bombs) have only increased the fissure. Left against right, con vs lib, nationalists against free marketers – American politics have gone toxic. And because Trump is the poster boy for populism around the world, what happens next week has implications from Brexit to the creep Brazil just elected.

Markets will be watching this intensely, as you might imagine. Trump poured gas on equities with a big tax cut, laxer regulations and protectionist tariffs. But he’s scared markets with his one-man trade war, worsening relations with China and now a runaway budget deficit. (It happened again Monday – stocks sold off on word Trump will impose duties on remaining Chinese goods).

Will a Democratic win on the 6th cheer investors? Or might it pave the way towards reversal of the tax cut and maybe even impeachment – killing off what’s left of the Trump Bump? Is a red wave in the midterms a signal to the world the America is great again, and ignite more gains? Or will investors just be happy it’s over, whatever the result, making October look like it was a big buying opp?

Without a doubt, this is a Trump moment. And there will be a market reaction.

My suspender-snapping fancy portfolio manager buddies Doug Rowat & Ryan Lewenza will be joining me for a private conference call to analyze all this tomorrow night. That call will be available Wednesday morning here. Whatever happens, don’t blame us.

The sleeper

Jason (not his own name, mercifully) bought a load of weed stocks with the money in his TFSA. Made a bundle. So, I said when he called me to gloat three weeks ago, sell. The point of investing is to make money. You did. Tax-free. Dump it.

He didn’t, of course. Human nature clicked in. After all, since he’d just made out like a bandit he wanted to do it again. More. He was a freaking stock genius.

Since then it’s been all downhill, as I told him it would be. Bubbles always burst, and the weed stocks were highly speculative. Canopy Growth has lost over 30% of its value, for example, and Aurora is down 40% while Jason’s small-cap puppies have been scorched. His six-figure TFSA has lost half its value. Yes, there are some lessons…

Buying individual stocks massively increases volatility and risk (and sometimes the return), compared to index ETFs. So it’s called ‘gambling’ instead of ‘investing.’ Second, when you make money, take it. Isn’t that the point, especially when the gains are free of tax? Finally, Jason had an opportunity to move a huge whack of money out of his TFSA while retaining the ability to replace it in the future. In effect he created years and years’ worth of new contribution space, but let it dissipate as his sheltered investments fizzled.

That’s a huge advantage of a TFSA over an RRSP. When you make a retirement plan withdrawal, that money’s gone forever. You cannot put it back into the account. Not so with a TFSA. In this case Jason could have removed fifty grand in profit from his plan and left that space open for new money in the future. Not only would be have scored by crystallizing his gain, but created an equal future opportunity. This element of flexibility is one reason everybody should have a TFSA, fully fund it and load it up with growthy stuff.

The second big advantage comes when you turn paleo and start collecting government pogey. A $500,000 TFSA (more on that in a minute) can generate $3,000 a month which is not counted as income, allowing the full CPP and OAS without tax on cash flow of about $54,000. Add in $37,000 in dividends which can be earned sans tax (if you have a low income), and this amounts to a retirement stipend of $91,000 – no tax.

All totally legit. Within the rules.

So how do you get half a mill in your TFSA?

Simple. If you’re 35 (for example) and have saved diddly, start with $100 this week then add a hundred weekly until 65. Invest in a nice B&D portfolio averaging 7% a year over the next three decades (to be consistent with the last 30 years), and on your 65th birthday you’ll have $532,000 in the account, $376,000 of which was tax-free growth. Keep it invested, skim off the monthly gain and tell the CRA to go and harass the poor people who have pensions.

Of course, if you invest this way from 20 until 65, your sleeper TFSA will contain $1.67 million, paying close to $10,000 a month. With CPP, OAS and dividend income added, that would create an income of over $170,000. Yeah, still no tax.

Now imagine a couple doing this, both filling their tax-free accounts over the course of decades. You can easily see why the very first dollars you have should go into your TFSA. Unlike a million-dollar RRSP, the income flowing out is not forced upon you, not added to your taxable income, does not push you into a higher tax bracket and the withdrawals can be replaced. Of course, you get a temporary tax break for making RRSP contributions, but that’s like sex. You’ll pay later.

By the way, looks like the TFSA limit will be increased in a couple of months.

You will recall when T2 gained power one of his first acts was to gut the TFSA limit, scaling it back by half in a politically-motivated, highly questionable move. The justification was that Canadians were not using the space, so it benefited only the wealthy. That was specious, of course, since we don’t use 90% of our RRSP room, and the richer people are the bigger the tax break they score for contributing. But, alas, logic isn’t a strong point in politics these days.

Anyway, the contribution is now CPI-adjusted and given the fact inflation has returned, that $5,500 limit we’ve had for a couple of years will be migrating higher, to six grand. Good news. But only if you use it – faithfully, religiously, consistently. Plus, don’t forget what I told you a few days ago about the ‘successor holder’. Oh yeah, and don’t be a Jason. Bulls make money. Bears make money. Pigs get slaughtered.

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Note: Always bear in mind returns fluctuate. There’s no guarantee, but the longer a person stays invested the better the odds of a positive outcome. Over the past eight years our 60/40 portfolio (equity ETFs, preferred shares, a variety of bonds and REITs) had a total return of 7% (before fees, which may be tax-deductible). This year it will likely be less. Over the past 20 years the TSX gained an average of 7% annually. The S&P 500 averaged 6.7%. Below is a chart (US) showing how a balanced portfolio has performed relative at an all-stock one. What is not shown here is the lower level of risk and volatility that the balanced investor experienced. – Garth