Entries from February 2020 ↓

Virus. Oil sands crisis. Pipeline constipation. Pop-up FN blockades. Tumbling oil prices. Vanishing capital. A timorous federal government. Oy. The news lately has been dire.

Well, for all you people in Alberta, stranded by illegal protests, watching real estate equity fade, seeing energy jobs snuffed by the Forces of Greta, feeling alienated and wondering why people burning tires on railway lines are getting more attention than you, stop being so darn selfish. I mean, sheesh, there are people in Toronto who actually can’t afford a nice, seven-figure house.

Seriously, the divide is growing. Yawning. Covid-19’s impact on the price of crude is just the latest assault, as the black stuff heads south of fifty bucks, and Canadian oil drops through $29 – down 6% on Tuesday. Ouch. As global economic activity is impacted, energy consumption takes a hit, with Calgary and our oil patch along with it.

Now the FN protests have turned a structural problem into an intractable mess. They’re not about just a pipeline anymore. It’s land. Residential schools. Missing aboriginal women and girls. Unceded land. Treaty rights. A thousand years of injustice and colonialism. Plus climate change. Just as crazy Bernie has mobilized America’s young in favour of wealth redistribution, endless tax and more government control, so have indigenous activists in the land of maple co-opted the kids who want climate revolution. Behold the faces on the urban protest lines.

Meanwhile it looks like the virus will end up pushing Canadian mortgage rates into the ditch. As stocks swoon and viral fears mount, money slides into bonds, driving prices higher and yields lower. Look at the return on a five-year Canada bond – down below 1.2% on Tuesday.

Lenders fund fixed-rate mortgages in the bond market, so a drop there of this size pretty much guarantees the cost of a home loan may be dropping again. Says mortgage blogger-brokerguy Rob McLister: “There’s now no doubt that this global outbreak has the potential to take fixed rates down another 1/4 to 1/2 point, if not more.”

You bet. And remember that the mortgage stress test was recently diddled by the finance minister, under direct order from T2. This means the anticipated new rate of 4.89% (a drop from 5.19%) could turn into something even juicier for newbie borrowers, increasing their ability to more easily slip beneath the waves of debt.

Therefore get ready for a five-year fixed at 2.5%. And don’t be surprised if some hopped-up CU comes out with a buck-ninety-nine offering for the prime rutting season. Combined with the current paucity of listings in the GTA (as in Vancouver and Montreal), it means more price pressure. More bidders. More borrowing. More unaffordability.

By the way, nobody seems to be enjoying this. A Zillow/Ipsos poll just found 77% of GTA residents are concerned they can’t afford the real estate they want. Also 70% of sellers/owners fret that they can’t either – which is exactly why listings have taken a kick. When people figure they can’t afford to move, they don’t sell.

The same survey found 84% of people think Toronto’s in a bubble, at risk of correction. Compare that with just 61% in YVR or a dribble of 8% in Cowtown. Like I said, we’re drifting into two economic solitudes. Worse, the very concept of our nation is being shafted and disrespected by the #ShutDownCanada movement, the FN rebels and their dewey-eyed young altruistic, Twitter-fed disciples.

Well, let’s see what the virus news is in a week, a month and a season. So far it appears poised to exacerbate tensions in the land of the beaver. Low oil, lost investment, pipeline gridlock and environmental rebellion on one side. Cheap money, FOMO and exploding household debt on the other.

It’s interesting an entire Calgary downtown tower is now standing empty – 600,000 square feet, no tenants. (The overall commercial vacancy rate is a withering 30%). In 416 these days kids are paying $1,200 to $1,400 for a single square foot of space. A 500-foot condo can fetch $650,000, which is 50% more than a nice detached house on real dirt in Edmonton.

Outside the GTA on Tuesday activists shut down commuter train lines. On the west coast they blocked access to the Port of Vancouver. Elsewhere in BC, Ontario and Quebec roads and rails were rendered useless to traffic. And in Toronto there are apparently heavy casualties from the bidding wars.

Remember what this blog told you about being liquid and living quietly among the masses? Dancing with your dog? It’s time.

After roaring through 2019 and romping to new record highs in past weeks, stocks markets have gone into a funk. Yup, the Dow shed over a thousand points Monday. Guts everywhere. A global plop. Bonds soared. Gold advanced. Oil sunk. The US dollar jumped.

First, let’s have context. The drop Monday didn’t even make it into the Top 20 days for losses on the Dow. Not even close. The granddaddy was a 22.6% rout in 1987, and the worst day during the GFC was 7.8%. So the current drop of  3% was like shutting the car door on your foot. Painful but not fatal.

Having said that, there’s no covering over the fact Mr. Market is upset. The virus is a tricky little bugger, and has now made unwelcome inroads into Europe and the Middle East after munching its way through Asia. It’s not that Covid-19 will kill millions of people – thankfully the mortality rate is low – but it’s kicking the hell out of local economies because of massive quarantine efforts.

More than a million companies in China might fail. Supply chains for behemoths like Apple are starting to break down. The cruise business is dead. Travel is massively disrupted. Q1 GDP in China will be a disaster. Global economic activity has started to decline. That’s cratered oil and commodity prices as investors anticipate weak demand.

In response equity markets – at record levels – have shed froth. That money has coursed into the usual safe havens, especially government bonds. As demand boosted their prices, yields plunged. The return on a 10-year US Treasury is close to its all-time low. Government of Canada five-year bond yields crashed 7%, back down to just 1.2%. Unless things spike it pretty much guarantees lower mortgage rates are coming.

In fact, events of Monday increased the odds central banks will cut rates more than anticipated, and battle the virus with a big shot of chicken soup and liquidity. Look for major stimulus from the Chinese bank, the ECB in Europe and the American Fed. By the way, Canada seems okay in the context of this evolving mess. Despite the Teck decision and the goofball railway blockades, our CB has kept rates at tolerable levels, giving the Bank of Canada more room to soft-land things.

Well, the deplorables cry, how bad is this? Are we doomed the way all the web sites selling gold bullion and ammo claim?

Nah. It’s noise.

The virus is real, spreading, unpredictable and will take months to overcome. But it’s not the plague. A vaccine will emerge. The flu kills way, way, way more people every year, and markets totally ignore it. This has the hallmarks of a temporary crisis. Like Y2K.

So it’s wise to focus on what drove markets higher before some moron somewhere ate a bat and puked on his neighbour. Markets have risen on a tide of robust corporate profits thanks to the power of the US economy, where unemployment is at a 50-year low, consumer confidence is on a roll and an 11-year-long expansion is firmly in place. Virtual full employment has fueled an economy which is 70% powered by consumer spending.

Says fancy portfolio manager (and second-rate blogger) Ryan: “No one should be surprised by this sell off. Since October markets are up huge leaving the equity markets extremely overbought and vulnerable to a pullback. This sell off should be expected and welcomed as it will work off the overbought technical condition and reset expectations. While the news updates on the Coronavirus are scary this should not derail the global economy and bull market.”

Yeah, but what about Trump?

No doubt his corporate tax cut helped ignite the spending which created jobs, as did deregulation and protectionism. Under this president inflation has returned, government deficits have exploded and expansion has been startling. Markets love that. They want more. And Bernie’s giving it to them.

  The victory of Democratic presidential contender Bernie Sanders in Nevada on the weekend was all Trump could have hoped for. The 78-year-old socialist has a good shot at being the orange guy’s rival in November, and radical enough to keep millions of Dems at home for the vote. Unless Super Tuesday changes everything – launching little Mike Bloomberg or resuscitating Joe Biden – then Bernie’s the guy. And Trump wins again.

As you know, Trump takes the market and the economy as proxies for his presidency. He thinks the Fed should seriously chop rates again. He’s busy doing trade deals around the world (India this week). He thinks climate change is an expensive hoax and the energy business should have free reign. Moreover it’s hard to imagine he’d let the US transportation system be shut down for weeks because of a few FN radicals in a snowplow pickup truck.

So, the virus will likely get worse, then better. Central banks will intervene. Economies will spike back in the midst of pent-up demand. Markets will recover as the American election cycle draws to a conclusion. Corporate profits will continue. Interest rates will drop. People who ignore things will sail through. Those who panic and sell will regret it.

“If the US November Election follows the UK results where the Socialists get the worst defeat since 1935,” says one Bay Street vet, “then markets will like that. Markets will probably like another 4 years of 45. The confusion and chaos are set against the background of solid economic growth. Not so bad.”